U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-10416
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INFODATA SYSTEMS INC.
(Exact name of Small Business Issuer in its charter)
VIRGINIA 16-0954695
(State of Incorporation) (I.R.S. Employer Identification No.)
12150 MONUMENT DRIVE, FAIRFAX, VIRGINIA 22033
(Address of Principal Executive Office) (Zip Code)
(703) 934-5205 (Issuer's Telephone Number)
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SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- ---------------------
None Not applicable
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT:
COMMON STOCK-$.03 PAR VALUE
---------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
As of August 7, 1998, there were 4,493,442 common shares outstanding. As of
August 7, 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 $12,701,439.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
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INFODATA SYSTEMS INC. AND SUBSIDIARIES
INDEX
<TABLE>
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Page(s)
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statement of Operations 3
Three Months Ended June 30, 1998 and 1997
Condensed Consolidated Statements of Operations 4
Six Months Ended June 30, 1998 and 1997
Condensed Consolidated Balance Sheet 5
June 30, 1998 and December 31, 1997
Condensed Consolidated Statements of Cash Flows 6
Six Months Ended June 30, 1998 and 1997
Notes to Condensed Consolidated Financial Statements 7 - 8
Item 2. Management's Discussion and Analysis 8 - 15
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 16
</TABLE>
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PART I -- FINANCIAL INFORMATION
INFODATA SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
--------------------------
1998 1997
--------- --------
<S> <C> <C>
Revenues $ 3,666 $ 1,956
Cost of revenues 2,461 1,066
-------- --------
Gross profit 1,205 890
-------- --------
Operating expenses:
Research and development 518 578
Selling, general and administrative 1,404 1,295
-------- --------
1,922 1,873
-------- --------
Operating income (loss) (717) (983)
Interest income 65 15
Interest expense (1) (5)
-------- --------
Income before income taxes (653) (973)
Provision for income taxes - -
-------- --------
Net income $ (653) $ (973)
======== ========
Net income available to common shareholders $ (653) $ (973)
======== ========
Per share:
Net income (loss) per common and equivalent share:
Basic $ (0.15) $ (0.42)
======== ========
Diluted $ (0.15) $ (0.42)
======== ========
Weighted average shares outstanding 4,460 2,319
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
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INFODATA SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------
1998 1997
--------- --------
<S> <C> <C>
Revenues $ 6,576 $ 3,997
Cost of revenues 4,234 2,416
-------- --------
Gross profit 2,342 1,581
-------- --------
Operating expenses:
Research and development 1,122 945
Selling, general and administrative 2,679 2,502
-------- --------
3,801 3,447
-------- --------
Operating income (loss) (1,459) (1,866)
Interest income 114 40
Interest expense (14) (7)
-------- --------
Income before income taxes (1,359) (1,833)
Provision for income taxes - (5)
-------- --------
Net income $(1,359) $(1,828)
======== ========
Net income available to common shareholders $(1,359) $(1,828)
======== ========
Per share:
Net income (loss) per common and equivalent share:
Basic $ (0.34) $ (0.79)
======== ========
Diluted $ (0.34) $ (0.79)
======== ========
Weighted average shares outstanding 3,965 2,300
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
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INFODATA SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
(Unaudited)
--------- ---------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 1,524 $ 284
Short term investments 2,990 4
Accounts receivable, net of allowance of $140 and $43, respectively 3,116 2,772
Other current assets 325 174
--------- ---------
Total current assets 7,955 3,234
--------- ---------
Property and equipment, at cost:
Furniture and equipment 2,844 2,817
Less accumulated depreciation and amortization (2,339) (2,220)
--------- ---------
505 597
Goodwill, net of accumulated amortization of $581 and $296 3,085 3,371
Other assets 117 309
Software development costs, net of accumulated amortization
of $2,115 and $2,094 21 42
--------- ---------
Total assets $ 11,683 $ 7,553
========= =========
</TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
(Unaudited)
--------- ---------
<S> <C> <C>
Current Liabilities
Current portion of capital lease obligations $ 18 $ 26
Current portion of note payable - 880
Accounts payable 1,146 1,482
Accrued expenses 913 928
Deferred revenue 1,437 1,592
Current portion of deferred rent 3 19
--------- ---------
Total current liabilities 3,517 4,927
--------- ---------
Capital lease obligations - 6
--------- ---------
Total liabilities 3,517 4,933
--------- ---------
Shareholders' equity
Common stock 134 82
Additional paid-in capital 19,521 12,670
Accumulated deficit (11,489) (10,132)
--------- ---------
Total shareholders' equity 8,166 2,620
--------- ---------
Total liabilities and shareholders' equity $ 11,683 $ 7,553
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
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INFODATA SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------
1998 1997
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,359) $ (1,828)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation 119 156
Software amortization 21 21
Goodwill and other intangible amortization 285 24
Changes in operating assets and liabilities:
Accounts receivable (344) 446
Other current assets (151) (123)
Other assets 192 (25)
Accounts payable (336) 53
Accrued expenses (15) 57
Deferred revenue (155) (9)
Deferred rent (16) (16)
--------- ---------
Net cash used in operating activities (1,759) (1,244)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (27) (221)
Purchases of short term investments (2,986)
Proceeds from maturity of short term investments - 528
--------- ---------
Net cash provided by (used in) investing activities (3,013) 307
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations (14) (23)
Proceeds from short-term borrowing 116 176
Payments of notes payable (996) -
Issuance of common stock 6,906 147
--------- ---------
Net cash provided by financing activities 6,012 300
--------- ---------
Net increase (decrease) in cash and cash equivalents 1,240 (637)
Cash and cash equivalents at beginning of period 284 1,266
--------- ---------
Cash and cash equivalents at end of period $ 1,524 $ 629
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
6
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INFODATA SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310(b)
of Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and six month
periods ended June 30, 1998, are not necessarily indicative of the results for
the year ending December 31, 1998. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-KSB for the year ended December 31, 1997.
NOTE B - SIGNIFICANT ACCOUNTING POLICIES
1) 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 if there is no contract in place.
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 was implemented during the Company's
quarter ended March 31, 1998. It did not have a significant impact on
the Company's financial statements.
2) 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.
3) EARNINGS PER SHARE - The Company implemented Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share," as of
December 31, 1997. SFAS No. 128 replaces the presentation of primary and
fully diluted earnings per share with basic and diluted earnings per
share. The 1997 earnings per share amount has been restated in
accordance with SFAS No. 128. Earnings per share have been computed
using the weighted average number of common shares outstanding.
4) 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 report
items of other comprehensive income separately from retained earnings
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and additional paid-in-capital in the equity section of a statement of
financial position. The Company adopted SFAS No. 130 starting in the
first quarter of 1998, however, the Company did not have other
comprehensive income for either the first quarter of 1998 ended March
31, 1998 or the second quarter ended June 30, 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 in its year-end reporting as of December
31, 1998. The Company is currently evaluating the impact of SFAS No. 131
on its financial statements.
NOTE C - LINE OF CREDIT
The Company maintains a line of credit with Merrill Lynch Business Financial
Services, Inc. for up to $1,000,000 based upon eligible receivables at a per
annum rate equal to the sum of 2.9% plus the 30 day commercial paper rate.
Currently, this per annum rate approximates prime. The facility expires in
March 1999, and management expects that the line will be renewed at that time.
The Company did not have any borrowings under the line of credit as of June
30, 1998.
NOTE D - SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest expense was $1,000 and $5,000 for the three-month
periods ended June 30, 1998 and June 30, 1997, respectively. No cash was paid
for income tax in either period.
NOTE E - RISKS AND UNCERTAINTIES
In 1997, the Company introduced VFC(R), the virtual file cabinet family of new
proprietary software products. The Company has incurred significant
development and marketing costs related to these products. Revenue for VFC
products commenced during July 1997. There can be no assurance as to the
amount of VFC revenues in the future. The Company has begun to implement
certain cost control measures during the second quarter of 1998 related to
VFC. The Company's operations are subject to certain other risks and
uncertainties. This includes the uncertainty of future operating results,
fluctuations in quarterly results, a change in the mix of products, a decline
in INQUIRE/Text sales, lengthy sales and implementation cycles, rapid
technological changes and product obsolescence, both technical hiring and
market competition, risks associated with sales channels, and a dependence on
government contracts and security clearances.
NOTE F - SUBSEQUENT EVENTS
On July 8, 1998, Richard T. Bueschel, the Company's Chairman of the Board was
named Acting Chief Executive Officer (CEO) of the Company replacing James A.
Ungerleider who resigned.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMPANY OVERVIEW
The Company provides electronic document management software, systems and
solutions to corporate and government workgroups, departments and enterprises.
Prior to 1994, the strength of the Company was in the sales, support, and
maintenance of INQUIRE(R)/Text, one of the most respected full-text retrieval
products used for storing, indexing, retrieving and managing large collections
of documents on IBM and IBM-compatible mainframes. In 1994, the Company began
to broaden its focus to provide a wider range of document and information
management solutions deliverable through client/server, internet and intranet
technology, in addition to INQUIRE/Text-based solutions. As part of this
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effort, the Company acquired Merex, Inc., a systems integrator and software
company in 1995 and AMBIA(R) Corporation ("AMBIA"), a software products
company in 1997. In addition, the Company made a significant investment in new
software products. As a result, the Company believes it is well-positioned to
address the requirements of the electronic document market. In 1997, the
Company's revenue derived from consulting, client/server software, and
internet and intranet technologies increased by $1,242,000 or 18% from
$6,778,000 in 1996 to $8,020,000 in 1997. In the six months ended June 30,
1998, revenue from these sources increased $2,910,000 or 112% compared to the
first six months of 1997. As a percentage of total revenue, these sources have
increased from 46% in 1994, to 71% in 1996, to 75% in 1997 and to 84% during
the first half of 1998.
The Company's current mix of products includes VFC, the virtual file cabinet
family of intranet-based software products that, together, enables users to
easily retrieve, organize and share desktop files across organizations;
Compose(R), a suite of plug-in tools for Adobe Acrobat Exchange that automate
and streamline a variety of document production tasks; Re:mark(R), a plug-in
product for Adobe Acrobat software that enables users to mark up and review
documents electronically in a workgroup setting; Aerial(TM), a plug-in that
enables Adobe Acrobat to print any document that needs to be formatted for
printing on multiple pages which are then pieced together to form one page,
such as a large spreadsheet or a CAD drawing; Signet(TM), a security solution
for Web or CD-ROM publishers who want to permit only authorized users to read
their documents; INQUIRE(R)/Text, a full-text retrieval product used for
storing, indexing, retrieving and managing large collections of documents on
IBM and IBM-compatible mainframes; and WebINQUIRE(TM), an extension product
that provides Web browser access to INQUIRE/Text collections. In addition, the
Company offers document systems solution services, training, and customer
support for its own products, and those of other vendors, including Adobe,
Verity, and Documentum, Inc., for each of whom the Company is a value-added
reseller.
Given the mix of products and services that the Company offers and the demands
of the market, the Company has concluded that its best path is to provide a
total document solution to our customers. Most of these solutions will be
based on corporate intranets or the Web. As a total document solutions
company, the Company will provide customers with both consulting services and
products such as VFC, Compose, and products from third party vendors. The
Company believes this positioning will enable it to better control the entire
customer relationship and lead to more opportunities.
In December 1997, the Company entered into an agreement with Adobe Systems
Incorporated to cross license and co-market certain technologies (the
"Cross-License Agreement"). Based on the most recent extensions, the Company
expects to receive approximately $940,000 in consulting fees pursuant to an
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. Through June 30, 1998,
the Company recognized approximately $768,000 of the total expected contract
amount in revenue under the Consulting Agreement. The Company recognizes
revenue from these services in both 1997 and 1998 on a percentage of
completion basis. 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 has not and
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 fourth quarter of 1998 or the first quarter of 1999.
As a result of the Agreement, certain Adobe products will display a "VFC
Button" that will provide a direct link to VFC or to VFC marketing information
9
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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.
On July 22, 1997, the Company acquired all of the common stock of AMBIA in
exchange for 400,000 shares of the Company's Common Stock with a fair value of
$7.75 per share, which was 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's revenues were $835,000, and its net loss was
$676,000. AMBIA is now a wholly-owned subsidiary of the Company.
On February 20, 1998, the Company completed an underwritten public offering of
its common stock. The gross proceeds of the offering were $8,000,000, which
consisted of 1,600,000 shares priced at $5.00 per share. After the expenses of
the offering including the underwriters' fees, legal fees, accounting fees,
blue sky fees, registration costs, printing and engraving costs, and other
miscellaneous fees, the resultant net proceeds were approximately $6,600,000.
On April 7, 1998, the underwriters exercised an over-allotment option they had
been granted to the extent of 50,000 shares. As a result of this transaction,
the Company received an additional $250,000 in gross proceeds. After expenses,
the additional net proceeds were estimated to be $220,000. Thus, the total net
proceeds of the offering were approximately $6,820,000.
At June 30, 1998, the Company had a net operating loss ("NOL") aggregating
approximately $9,805,000 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 or software licenses that traditionally have high
margins. Most of the Company's maintenance revenue pertains to INQUIRE/Text.
The Company's costs under maintenance contracts associated with this product
are generally low and consequently, the gross margin is typically 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.,
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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,
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 and services, 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.
Many computer systems in use today were designed and developed using two
digits, rather than four, to specify the year. As a result, such systems will
recognize the year 2000 as "00". This could cause computer applications to
fail or to create erroneous results unless corrective action is taken. The
Company develops and markets its own software products and utilizes software
and related computer technologies that are essential to its operations
(including its accounting system). These systems will be affected by the year
2000 issue. Programming changes have been made to make the Company's own
software compliant with the year 2000. The Company has begun to upgrade its
software from vendors and anticipates that all company software will be year
2000 compliant well before the year 2000. The Company has been notified by all
of its software vendors that changes have either been made already, or that
changes will be made shortly to ensure that their software is year 2000
compliant. The Company expects that this will cost it no more than $15,000.
Any failure or delay by the Company or its vendors to make its software year
2000 compliant may result in significant costs associated with resolutions of
such issues. Although the Company does not anticipate any problems, the lack
of year 2000 compliance could have a material adverse effect on the Company's
business, financial condition and results of operations.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1997
REVENUES
Total revenue increased by $1,710,000, or 87%, from $1,956,000 for the three
months ended June 30, 1997 to $3,666,000 for the three months ended June 30,
1998. The Company derived revenues from consulting services, sales from the
Company's VFC family of software products, sales of INQUIRE/Text-related
products and maintenance related thereto, and sales of third party products.
Revenues from consulting services and third party products increased by
$1,429,000, or 109%, from $1,313,000 for the three months ended June 30, 1997
to $2,742,000 for the three months ended June 30, 1998. This was due to an
increase in the size and number of consulting engagements and a significant
increase in the number of third party sales. The VFC family of products which
includes the Company's VFC and AMBIA software products were introduced during
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1997 and produced $376,000 in revenue during the second quarter of 1998. No
comparable sales figures exist for 1997 since the first sale of these products
was not recorded until the third quarter of 1997. Revenue generated primarily
from INQUIRE/Text-related products and maintenance decreased by $99,000, or
15%, from $642,000 for the three months ended June 30, 1997 to $543,000 for
the three months ended June 30, 1998. Of this decrease, $129,000 came from
recurring maintenance revenue. Some of this decrease was offset by an increase
in new INQUIRE/Text sales which actually increased $30,000 during this period.
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 $315,000, or 35%, from $890,000 for the three months
ended June 30, 1997 to $1,205,000 for the three months ended June 30, 1998.
The increase in gross profit was due primarily to increased revenue. In
addition, the VFC family of products helped the Company's gross profit, but
this was generally offset by the decline in INQUIRE/Text-related revenues.
Gross margin as a percent of revenues decreased by 13% from 46% for the three
months ended June 30, 1997 to 33% for the three months ended June 30, 1998.
The decrease was due to the significant growth in third party sales, which
have a much smaller gross margin than consulting, product sales or
maintenance.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses decreased $60,000, or 10%, from $578,000 for
the three months ended June 30, 1997 to $518,000 for the three months ended
June 30, 1998. The principal cause of the decrease was the maturation of VFC's
development. The Company expects that quarterly research and development
expenses during the remainder of 1998 will also be less than research and
development expenses for the similar period in 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased $109,000, or 8%, from
$1,295,000 for the three months ended June 30, 1997 to $1,404,000 for the
three months ended June 30, 1998. The increase was due primarily to the
increase in goodwill amortization associated with the acquisition of AMBIA.
For the quarter ended June 30, 1998, goodwill amortization increased $141,000
over the quarter ended June 30, 1997. The remainder of selling, general and
administrative expenses decreased over the same period. Management expects
selling, general and administrative expenses to increase moderately as
revenues increase.
INTEREST INCOME AND EXPENSE
Net interest income increased $54,000, or 540%, from $10,000 for the three
months ended June 30, 1997 to $64,000 for the three months ended June 30,
1998. The increase was due to higher balances of cash, cash equivalents, and
short-term investments during the three months ended June 30, 1998. These
balances increased significantly during the second quarter of 1998 as a result
of the Company's public offering. The Company invested only in short-term,
highly liquid money market instruments.
NET LOSS
Net loss decreased $320,000, from $973,000 for the three months ended June 30,
1997 to a net loss of $653,000 for the three months ended June 30, 1998. The
decrease was due to the factors discussed above. For the three months ended
June 30, 1997, the Company's net loss was $973,000, or $0.42 per share, on
both a basic and diluted basis. For the three months ended June 30, 1998, the
net loss was $653,000, or $0.15 per share, on both a basic and diluted basis.
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SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1997
REVENUES
Total revenue increased by $2,579,000, or 65%, from $3,997,000 for the six
months ended June 30, 1997 to $6,576,000 for the six months ended June 30,
1998. Revenues from consulting services and third party products increased by
$2,264,000, or 87%, from $2,594,000 for the six months ended June 30, 1997 to
$4,858,000 for the six months ended June 30, 1998. This was due to an increase
in the size and number of consulting engagements and a significant increase in
the number of third party sales. The VFC family of products which includes the
Company's VFC and AMBIA software products were introduced during 1997 and
produced $640,000 in revenue during the first two quarters of 1998. No
comparable sales figures exist for 1997 since the first sale of these products
was nor recorded until the third quarter of 1997. Revenue generated primarily
from INQUIRE/Text-related products and maintenance decreased by $331,000, or
24%, from $1,403,000 for the six months ended June 30, 1997 to $1,072,000 for
the six months ended June 30, 1998. Of this decrease, $212,000 was related to
a decrease in recurring maintenance revenue. The remainder came from a
decrease in new INQUIRE/Text sales of $119,000 during this period. 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 $761,000, or 48%, from $1,581,000 for the six months
ended June 30, 1997 to $2,342,000 for the six months ended June 30, 1998. The
increase in gross profit was due primarily to increased revenue. In addition,
the VFC family of products helped the Company's gross profit, but this was
generally offset by the decline in INQUIRE/Text-related revenues.
Gross margin as a percent of revenues decreased from 40% for the six months
ended June 30, 1997 to 36% for the six months ended June 30, 1998. The
decrease was due to the significant growth in third party sales, which have a
much smaller gross margin than consulting, product sales or maintenance.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased $177,000, or 10%, from $945,000
for the six months ended June 30, 1997 to $1,122,000 for the six months ended
June 30, 1998. The increase was due to the continued development of the VFC
family of products during the first quarter of 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased $177,000, or 7%, from
$2,502,000 for the six months ended June 30, 1997 to $2,679,000 for the six
months ended June 30, 1998. The increase was due primarily to the increase in
goodwill amortization associated with the acquisition of AMBIA.
INTEREST INCOME AND EXPENSE
Net interest income increased $67,000, or 203%, from $33,000 for the six
months ended June 30, 1997 to $100,000 for the six months ended June 30, 1998.
The increase was due to higher balances of cash, cash equivalents, and
short-term investments during the six months ended June 30, 1998. These
balances increased significantly during the first two quarters of 1998 as a
result of the Company's public offering. The Company invested only in
short-term, highly liquid money market instruments.
NET LOSS
Net loss decreased $469,000, from $1,828,000 for the six months ended June 30,
1997 to a net loss of $1,359,000 for the six months ended June 30, 1998. The
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decrease was due to the factors discussed above. For the six months ended June
30, 1997, the Company's net loss was $1,828,000, or $0.80 per share, on both a
basic and diluted basis. For the six months ended June 30, 1998, the net loss
was $1,359,000, or $0.34 per share, on both a basic and diluted basis.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company had cash, cash equivalents and short-term
investments of $4,514,000 and a working capital surplus of $4,438,000. The
Company had no borrowings as of June 30, 1998. 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 30-day
commercial paper rate. Currently, this per annum rate approximates prime. The
facility expires in March 1999, and the Company expects to renew it at that
time. 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. During the first quarter of 1998,
the Company paid off the line of credit in full.
Net cash used in operating activities for the six months ended June 30, 1998
of $1,759,000 was due to the Company's net loss for the period of $1,359,000,
a increase in accounts receivable of $344,000, an increase in other current
assets of $151,000, and a decrease in accounts payable of $336,000, partially
offset by an decrease in other assets of $192,000 and depreciation and
amortization expense of $406,000.
Net cash used in investing activities of $3,013,000 for the six months ended
June 30, 1998 was due to the investment of $2,986,000 in short term
investments.
Net cash provided by financing activities of $6,012,000 was due to the
proceeds received from the public offering of $6,906,000 and proceeds from
short-term borrowing of $116,000, offset by $996,000 used to pay off the
Company's line of credit in full.
Net cash flow from operating activities for the six months ended June 30, 1998
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 completed on February 20, 1998, management believes that
available and projected resources will be sufficient to meet its working
capital requirements through December 31, 1998 and beyond.
On 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. On April 7, 1998, an additional 50,000 shares were sold at a
price of $5.00 per share for a total of $250,000 upon the underwriters'
exercise of their over-allotment option. The Company plans to use the
approximately $5.6 million of net proceeds from the offering to expand the
Company's sales and marketing activities, for research and development, and
for working capital and general corporate purposes. Approximately $1.0 million
of the proceeds were used to pay off institutional debt.
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 expects to operate on a positive cash flow basis beginning in the
fourth quarter of 1998, as a result of increased revenues and improved
consulting margins.
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
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of the Company's distribution channels, the technological advances and
activities of competitors, and other factors. If the Company is not successful
in its operations, the Company's cash flow will be materially and adversely
affected, and the Company may need to implement further 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.
FORWARD-LOOKING STATEMENTS CONTAINED IN THIS FORM 10-QSB 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 MATERIALLY 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.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Shareholders was held on May 28, 1998.
Messrs. Alan S. Fisher, Laurence C. Glazer, Harry Kaplowitz, Robert M.
Leopold, Isaac M. Pollak, Millard H. Pryor, Jr., Richard M. Tworek and James
A. Ungerleider were nominated and elected to serve as members of the Board of
Directors for one year or until their successors are elected and qualified by
a vote of 4,123,003 shares for, with 20,551 shares abstaining. Mr. Richard T.
Bueschel was nominated and elected to serve as a member of the Board of
Directors for one year or until his successor is elected and qualified by a
vote of 4,122,837 shares for, with 20,717 shares abstaining. (Mr. Ungerleider
resigned as a director and officer on July 8, 1998).
Shareholders approved an amendment to the Company's 1995 Stock Option Plan
that permits the Company to grant options with durations of up to 10 years.
The amendment was approved by a vote of 2,129,560 shares for and 161,951
shares against, with 21,315 shares abstaining.
Shareholders also approved an amendment to the Company's 1995 Stock Option
Plan that reserves 500,000 additional shares of the Company's common stock for
issuance thereunder. The amendment was approved by a vote of 2,114,536 shares
for and 166,776 shares against, with 31,218 shares abstaining.
Shareholders approved an amendment to the Company's Articles of Incorporation
that increases the total number of shares of common stock the Company has
authority to issue from 6,666,666 to 12,000,000. The amendment was approved by
a vote of 4,045,326 shares for and 65,905 shares against, with 34,170 shares
abstaining.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8 - K
(a) EXHIBITS
EXHIBIT NO. DOCUMENT
2 Amendment to Articles of Incorporation
10 1995 Stock Option Plan, as amended
27 Financial Data Schedule
(b) REPORTS ON FORM 8 - K. No reports on Form 8-K were filed during
the three month period ended June 30, 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
INFODATA SYSTEMS INC.
BY: /s/RICARD T. BUESCHEL
---------------------
Richard T. Bueschel
Chairman of the Board and CEO
Date: August 12, 1998
BY: /s/CHRISTOPHER P. DETTMAR
--------------------------
Christopher P. Dettmar
Chief Financial Officer
EXHIBIT 2
ARTICLES OF AMENDMENT OF
ARTICLES OF INCORPORATION OF
INFODATA SYSTEMS INC.
The undersigned, pursuant to Chapter 9 of Title 13.1 of the Code of
Virginia, states as follows:
1. The name of the corporation (hereinafter referred to as the
"Corporation") is INFODATA SYSTEMS INC.
2. On May 28, 1998, the Corporation's Board of Directors approved and
the Corporation's shareholders adopted the following amendments to the
Corporations Articles of Incorporation:
(a) ARTICLE 2 of the Corporation's Articles of Incorporation is
hereby amended to read as follows:
"2. The total number of shares of capital stock which the
Corporation has authority to issue is 12,340,000 shares."
(b) The first two sentences of ARTICLE 3 of the Corporation's
Articles of Incorporation are hereby amended to read as follows:
"3. The Corporation shall be authorized to issue two classes of
capital stock to be designated Common Stock, par value $.03 per
share, and Preferred Stock, par value $1.00 per share. There shall
be 12,000,000 authorized shares of Common Stock and 340,000
authorized shares of Preferred Stock."
3. The foregoing amendments were adopted on May 28, 1998, by the
Corporation's Board of Directors and shareholders pursuant to Section 13.1-707
of the Code of Virginia.
The undersigned, being the President of the Corporation, declares that
the facts herein stated are true as of this 28th day of May, 1998.
INFODATA SYSTEMS INC.
By: /s/JAMES A. UNGERLEIDER
-----------------------
James A. Ungerleider
President and Chief
Executive Officer
EXHIBIT 10
INFODATA SYSTEMS INC.
1995 STOCK OPTION PLAN,
AS AMENDED MAY 28, 1998
1. PURPOSE
Infodata Systems Inc. (the "Company"), by means of this 1995 Stock
Option Plan (the "Plan"), desires to afford certain of its directors, officers
and certain selected employees, consultants and the officers and certain
selected employees of any subsidiary thereof now existing or hereafter formed
or acquired, an opportunity to acquire a proprietary interest in the Company,
and thus to create in such persons an increased interest in and a greater
concern for the welfare of the Company and any subsidiary. The Plan is the
successor to the Company's Incentive Stock Option Plan and Non-Qualified Stock
Option Plan that were approved by the Company's shareholders in 1991 and 1992,
respectively (the "Prior Plans"). As used in the Plan, the term "subsidiary"
shall mean any entity in which the Company, directly or indirectly, owns a
controlling interest.
The stock options described in Sections 6 and 7 hereof (the "Options"),
and the shares of common stock, par value $.03 per share, of the Company (the
"Common Stock") acquired pursuant to the exercise of such Options are a matter
of separate inducement and are not in lieu of any salary or other compensation
for services.
The Options granted under Section 6 hereof are intended to be either
incentive stock options ("Incentive Options") within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended (the "Code"), or options
that do not meet the requirements for Incentive Options ("Non-Qualified
Options"), but the Company makes no warranty as to the qualification of any
Option as an Incentive Option.
2. ADMINISTRATION
The Plan shall be administered by the Compensation Committee, or any
successor thereto, of the Board of Directors of the Company or by such other
committee as determined by the Board (the "Committee"). The Committee shall
consist of not less than two members of the Board of Directors of the Company,
each of whom shall qualify as a "disinterested person" to administer the Plan
within the meaning of Rule 16b-3, as amended, or other applicable rules under
Section 16(b) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). The Committee shall administer the Plan so as to conform at
all times with the provisions of Rule 16b-3 promulgated under the Exchange
Act. A majority of the Committee shall constitute a quorum, and subject to the
<PAGE>
provisions of Section 5 hereof, the acts of a majority of the members present
at any meeting at which a quorum is present, or acts approved unanimously in
writing by the Committee, shall be the acts of the Committee.
The Committee may delegate to one or more of its members, or to one or
more agents, such administrative duties as it may deem advisable, and the
Committee or any person to whom it has delegated duties as aforesaid may
employ one or more persons to render advice with respect to any responsibility
the Committee or such person may have under the Plan. The Committee may employ
attorneys, consultants, accountants, or other persons and the Committee, the
Company and its officers and directors shall be entitled to rely upon the
advice, opinions or valuations of any such persons. All actions taken and all
interpretations and determinations made by the Committee in good faith shall
be final and binding upon all persons who have received grants under the Plan,
the Company and all other interested persons. No member or agent of the
Committee shall be personally liable for any action, determination or
interpretation made in good faith with respect to the Plan and all members and
agents of the Committee shall be fully protected by the Company in respect of
any such action, determination or interpretation.
3. SHARES AVAILABLE
Subject to the adjustments provided in Section 9 hereof, the maximum
aggregate number of shares of Common Stock which may be purchased pursuant to
the exercise of Options granted under the Plan shall not exceed 2,011,000.
Such amount includes the 777,776 shares (giving effect to the one-for-three
reverse split of the Common Stock effected April 27, 1994, the one-for-six
stock dividend effected May 17, 1996 and the two-for-one stock split effected
August 26, 1996) previously authorized for possible issuance under the Prior
Plans. If, for any reason, any shares as to which Options have been granted
cease to be subject to purchase thereunder, including without limitation the
expiration of such Options, the termination of such Options prior to exercise
or the forfeiture of such Options, such shares thereafter shall be available
for grants to such individual or other individuals under the Plan. Options
granted under the Plan may be fulfilled in accordance with the terms of the
Plan with either authorized and unissued shares of Common Stock or issued
shares of such Common Stock held in the Company's treasury or both, at the
discretion of the Company.
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4. ELIGIBILITY AND BASES OF PARTICIPATION
Grants under the Plan (i) may be made, pursuant to Section 6 hereof, to
certain selected employees and officers (but not to any director who is not
also an employee) of the Company or any subsidiary thereof who are regularly
employed on a salaried basis and who are so employed on the date of such grant
(the "Officer and Certain Selected Employee Participants"); (ii) may be made,
pursuant to Section 6 hereof, to directors of the Company, other than
Committee Participants (as defined below), who are not employees and who are
retained by the Company in such capacity on the date of such grant (the
"Director Participants"); (iii) may be made, pursuant to Section 6 hereof, to
consultants or advisors, provided that the services rendered by such
consultants or advisors shall not be in connection with the offer or sale of
securities in a capital-raising transaction (the "Consultant Participants")
(the Officer and Certain Selected Employee Participants, Director Participants
and Consultant Participants are hereinafter collectively referred to as the
"Grant Participants"); and (iv) may be made, pursuant to Section 7 hereof, to
individuals who serve on the Committee or have been named to serve on the
Committee in the future (the "Committee Participants").
5. AUTHORITY OF COMMITTEE
Subject to and not inconsistent with the express provisions of the Plan
and the Code, the Committee shall have plenary authority, in its sole
discretion, to:
a. other than with respect to Committee Participants, determine the
persons to whom Options shall be granted, the time when such
Options shall be granted, the number of shares of Common Stock
underlying each Option, the purchase price or exercise price of
each Option, the restrictions to be applicable to Options and the
other terms and provisions thereof (which need not be identical);
b. provide an arrangement through registered broker-dealers whereby
temporary financing may be made available to an optionee by the
broker-dealer for the purpose of assisting the optionee in the
exercise of an Option;
c. establish procedures for an optionee to pay the exercise price of
an Option in whole or in part by delivering that number of shares
of Common Stock owned by such optionee; or for the collection of
any taxes required by any government to be withheld or otherwise
deducted and paid by the Company or any subsidiary in respect of
the issuance or disposition of Common Stock acquired pursuant to
the exercise of an Option granted hereunder, which procedures may
include payment in whole or in part through the delivery of shares
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<PAGE>
of Common Stock owned by the optionee valued on the basis of the
Fair Market Value (as defined in Section 11 hereof) on the date
preceding such exercise;
d. prescribe, amend, modify and rescind rules and regulations
relating to the Plan;
e. make all determinations specified in or permitted by the Plan or
deemed necessary or desirable for its administration or for the
conduct of the Committee's business; and
f. establish any procedures determined to be appropriate in
discharging its responsibilities under the Plan.
6. STOCK OPTIONS FOR GRANT PARTICIPANTS
The Committee shall have the authority, in its sole discretion, to grant
Incentive Options or Non-Qualified Options or both Incentive Options and
Non-Qualified Options to Grant Participants (any such Options are hereinafter
collectively referred to as the "Participant Options") during the period
beginning on the date on which the Plan is approved by the holders of a
majority of the Company's outstanding shares of Common Stock and Preferred
Stock, voting as a class (the "Effective Date") and ending on the tenth
anniversary of the Effective Date (the "Termination Date"). Notwithstanding
anything contained herein to the contrary, Incentive Options may be granted
only to Officer and Certain Selected Employee Participants. As a condition to
the granting of any Option, the Committee shall require that the person
receiving such Option agree not to sell or otherwise dispose of any Common
Stock acquired pursuant to such Option for a period of six months following
the date of the grant of such Option. The terms and conditions of the
Participant Options shall be determined from time to time by the Committee;
PROVIDED, HOWEVER, that the Participant Options granted under the Plan shall
be subject to the following:
a. EXERCISE PRICE. The exercise price for each share of Common Stock
purchasable under any Participant Option granted hereunder shall
be such amount as the Committee, in its best judgment, shall
determine to be not less than 100% of the Fair Market Value (as
defined in Section 11 hereof) per share on the date the
Participant Option is granted; PROVIDED, HOWEVER, that in the case
of an Incentive Option granted to a person who, at the time such
Incentive Option is granted, owns shares of capital stock of the
Company, or of any subsidiary of the Company, having more than 10%
of the total combined voting power of all classes of shares of
capital stock of the Company or of such subsidiary, the exercise
price for each share shall be not less than 110% of the Fair
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Market Value (as defined in Section 11 hereof) per share on the
date the Incentive Option is granted. In determining the stock
ownership of a person for purposes of this Section 6, the rules of
Section 424(d) of the Code shall be applied and the Committee may
rely on representations of fact made to it by such person and
believed by it to be true. The exercise price of the Participant
Options will be subject to adjustment in accordance with the
provisions of Section 9 hereof.
b. PAYMENT. The exercise price per share of Common Stock with respect
to each Participant Option shall be payable at the time the
Participant Option is exercised. Such price shall be payable in
cash, which may be paid by wire transfer in immediately available
funds, by check, by a commitment by a broker-dealer to pay to the
Company that portion of any sale proceeds receivable by the
optionee upon exercise of a Participant Option or by any other
instrument acceptable to the Company or, in the discretion of the
Committee, by delivery to the Company of shares of Common Stock.
Shares delivered to the Company in payment of the exercise price
shall be valued at the Fair Market Value (as defined in Section 11
hereof) of the Common Stock on the business day immediately
preceding the date of the exercise of the Participant Option.
c. EXERCISABILITY OF PARTICIPANT OPTIONS. Subject to this Section 6
and Section 8 hereof, each Participant Option shall vest and
become exercisable on the dates and in the amounts set forth in
the particular stock option agreement between the Company and the
optionee; PROVIDED, HOWEVER, that a Participant Option shall
expire not later than ten years from the date such Option is
granted. The right to purchase shares shall be cumulative so that
when the right to purchase any shares has accrued, such shares or
any part thereof may be purchased at any time thereafter until the
expiration or termination of the Participant Option.
d. DEATH. In the event of the death of an optionee, all Participant
Options held by such optionee on the date of such death shall vest
in full and become immediately exercisable. Upon such death, the
legal representative of such optionee, or such person who acquired
such Participant Options by bequest or inheritance or by reason of
the death of the optionee, shall have the right for one year after
the date of death (but not after the expiration or termination of
the Participant Options), to exercise such optionee's Participant
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Options with respect to all or any part of the shares of Common
Stock subject thereto.
e. DISABILITY. If the employment of an optionee is terminated because
of Disability (as defined in Section 11 hereof), all Participant
Options held by such optionee on the date of such termination
shall vest in full and become immediately exercisable. Such
optionee shall have the right for one year after the date of such
termination (but not after the expiration or termination of the
Participant Options), to exercise such optionee's Participant
Options with respect to all or any part of the shares of Common
Stock subject thereto.
f. RETIREMENT. In the event the employment of an Officer and Certain
Selected Employee Participant is terminated by reason of the
Retirement (as defined in Section 11 hereof) of the optionee, all
Participant Options held by such optionee on the date of such
termination shall vest in full and become immediately exercisable.
Such optionee shall have the right for three months after the date
of such termination (but not after the expiration or termination
of the Participant Options), to exercise such optionee's
Participant Options with respect to all or any part of the shares
of Common Stock subject thereto. The Committee, in its discretion,
shall determine whether an optionee's employment was terminated by
reason of Retirement and whether such optionee is entitled to the
treatment afforded by this subsection f.
g. OTHER TERMINATION. If the employment of an Officer and Certain
Selected Employee Participant is terminated for any reason other
than those specified in subsections d, e, and f of this Section 6,
such optionee shall have the right for 30 days after the date of
such termination (but not after the expiration or termination of
the Participant Options), to exercise such optionee's Participant
Options with respect to all or any part of the shares of Common
Stock which such optionee was entitled to purchase immediately
prior to the time of such termination.
h. CESSATION OF DIRECTORSHIP. In the event a Director Participant
shall cease to be a director of the Company, such optionee shall
have the right for 90 days after the date of such cessation (but
not after the expiration or termination of the Participant
Options), to exercise such optionee's Participant Options with
respect to all or any part of the shares of Common Stock subject
thereto.
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i. MAXIMUM EXERCISE. To the extent the aggregate Fair Market Value
(as defined in Section 11 hereof) of Common Stock (determined at
the time of the grant) with respect to which Incentive Options are
exercisable for the first time by an optionee during any calendar
year under all plans of the Company or any subsidiary, exceeds
$100,000, or such other amount as may be prescribed under Section
422 of the Code or applicable regulations or rulings from time to
time, the excess thereof shall be treated as Non-Qualified Options
and not as Incentive Options.
7. STOCK OPTION GRANTS TO COMMITTEE PARTICIPANTS
During the term of the Plan, on the date that a director of the Company
commences service on the Committee (which in the case of the initial members
of the Committee shall be deemed to be the Effective Date), and on the date of
any subsequent annual meeting of the holders of the Common Stock at which a
director is elected and appointed or reappointed to serve on the Committee,
such Committee Participant automatically shall be granted a Non-Qualified
Option to purchase 4,666 shares of Common Stock (giving effect to the
one-for-six stock dividend effected May 17, 1996 and the two-for-one stock
split effected August 26, 1996), which Non-Qualified Option, except as
otherwise provided in this Section 7 or Section 8 hereof, shall become fully
exercisable immediately upon grant as to all of the shares covered thereby. (A
Non-Qualified Option granted to a Committee Participant pursuant to this
Section 7 is referred to as a "Committee Option".) As a condition to the
granting of any Committee Option, the person receiving such Committee Option
shall agree not to sell or otherwise dispose of any Common Stock acquired
pursuant to such Option for a period of six months following the date of the
grant of such Option. The terms and conditions of the Committee Options shall
be as follows:
a. OPTION PRICE. The exercise price of each share of Common Stock
purchasable under any Committee Options shall be such amount as
the Committee, in its best judgment, shall determine to be 100% of
the Fair Market Value (as defined in Section 11 hereof) per share
at the date the Committee Option is granted.
b. PAYMENT. The exercise price per share of Common Stock with respect
to each Committee Option and any withholding tax due in connection
with such exercise may be paid by any of the methods described
under Section 6b hereof.
c. EXERCISABILITY. Except as provided in subsection d of this Section
7, no Committee Option shall be exercisable after the earlier of
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(i) the expiration of five years from the date such Committee
Option is granted and (ii) 90 days after such Committee
Participant ceases for any reason to be a director of the Company.
d. DEATH. In the event of the death of any Committee Participant, the
estate of the Committee Participant shall have the right for one
year after the date of death (but not after the expiration or
termination of such Committee Options), to exercise such Committee
Participant's Committee Options with respect to all or any part of
the shares of Common Stock subject thereto.
e. AMENDMENT. The provisions of this Section 7 shall not be amended
more than one time in any six-month period, other than to comport
with any amendments to the Code, the Employee Retirement Income
Security Act of 1974, as amended, or the rules and regulations
thereunder.
8. CHANGE OF CONTROL
Notwithstanding any provision herein to the contrary, upon the
occurrence of an event constituting a Change of Control (as defined in Section
11 hereof), all Options granted under the Plan immediately shall become fully
exercisable.
9. ADJUSTMENT OF SHARES
In the event the outstanding shares of Common Stock shall be increased
or decreased or changed into or exchanged for a different number of kind of
shares of stock or other securities of the Company or another corporation by
reason of any consolidation, merger, combination, liquidation, reorganization,
recapitalization, stock dividend, stock split, split-up, split-off, spin-off,
combination of shares, exchange of shares or other like change in capital
structure of the Company, the number or kind of shares or interests subject to
an Option and the per share price or value thereof shall be appropriately
adjusted by the Committee at the time of such event. Any fractional shares or
interests resulting from such adjustment shall be eliminated. Notwithstanding
the foregoing, (i) each such adjustment with respect to an Incentive Option
shall comply with the rules of Section 424(a) of the Code and (ii) in no event
shall any adjustment be made that would result in an Incentive Option failing
to be treated as an "incentive stock option" for purposes of Section 422 of
the Code. In addition, in such event the Board of Directors of the Company
shall appropriately adjust the number of shares of Common Stock for which
Options may be granted under the Plan.
8
<PAGE>
10. MISCELLANEOUS PROVISIONS
a. ASSIGNMENT OR TRANSFER. No grant of any "derivative security" (as
defined by Rule 16a-1(c) under the Exchange Act) made under the
Plan or any rights or interests therein shall be assignable or
transferable by an optionee except by will or the laws of descent
and distribution or, except as to Incentive Options, pursuant to a
qualified domestic relations order as defined in the Code. During
the lifetime of an optionee, Options granted hereunder shall be
exercisable only by the optionee or the optionee's guardian or
legal representative.
b. INVESTMENT REPRESENTATION. If a registration statement under the
Securities Act of 1933, as amended (the "Securities Act"), with
respect to the Common Stock issuable upon exercise of an Option is
not in effect at the time such Option is exercised, the Company
may require, for the sole purpose of complying with the Securities
Act, that prior to delivering such Common Stock to the exercising
optionee such optionee must deliver to the Secretary of the
Company a written statement (i) representing that such Common
Stock is being acquired for investment only and not with a view to
the resale or distribution thereof, (ii) acknowledging that such
Common Stock may not be sold unless registered for sale under the
Securities Act or pursuant to an exemption from such registration
and (iii) agreeing that the certificates evidencing such Common
Stock shall bear a legend to the foregoing effect.
c. COSTS AND EXPENSES. The costs and expenses of administering the
Plan shall be borne by the Company and shall not be charged
against any Option nor to any person receiving an Option.
d. FUNDING OF PLAN. The Plan shall be unfunded. The Company shall not
be required to make any segregation of assets to assure the
satisfaction of any Option under the Plan.
e. OTHER INCENTIVE PLANS. The adoption of the Plan does not preclude
the adoption by appropriate means of any other incentive plan for
officers, directors or employees.
f. EFFECT ON EMPLOYMENT. Nothing contained in the Plan or any
agreement related hereto or referred to herein shall affect, or be
construed as affecting, the terms of employment of any Grant
Participants except to the extent specifically provided herein or
therein. Nothing contained in the Plan or any agreement related
9
<PAGE>
hereto or referred to herein shall impose, or be construed as
imposing, an obligation on (i) the Company or any subsidiary to
continue the employment of any Grant Participant or (ii) any Grant
Participant to remain in the employ of the Company or any
subsidiary.
g. TERMINATION OR SUSPENSION OF THE PLAN. The Board of Directors may
at any time suspend or terminate the Plan. The Plan, unless sooner
terminated under Section 12 of the Plan or by action of the Board
of Directors, shall terminate at the close of business on the
Termination Date. Options may not be granted while the Plan is
suspended or after it is terminated. Rights and obligations under
any Option granted while the Plan is in effect shall not be
altered or impaired by suspension or termination of the Plan,
except with the consent of the person to whom the Option was
granted. The power of the Committee to construe and administer any
Option granted prior to the termination or suspension of the Plan
nevertheless shall continue after such termination or during such
suspension.
h. SAVINGS PROVISION. With respect to persons subject to Section 16
of the Exchange Act, the transactions under the Plan are intended
to comply with all applicable conditions of Rule 16b-3 or its
successors under the Exchange Act. To the extent any provision of
the Plan or action by the Committee fails so to comply, it shall
be deemed null and void to the extent permitted by law.
i. PARTIAL INVALIDITY. The invalidity or illegality of any provision
herein shall not be deemed to affect the validity of any other
provision.
11. DEFINITIONS
a. "Fair Market Value", as it relates to the Common Stock, shall mean
the average of the high and low sale prices of such Common Stock
on the date such determination is required herein, or if there
were no sales on such date, the average closing bid and asked
prices, as reported on the national securities exchange on which
the Company's Common Stock is listed or, in the absence of such
listing, on the Nasdaq National Market or Small Cap Market or, if
such Common Stock is not at the time listed on a national
securities exchange or traded on the Nasdaq National Market or
Small Cap Market, the value of such Common Stock on such date as
determined in good faith by the Committee.
b. "Disability" shall have the meaning set forth in Section 22(e)(3)
of the Code.
10
<PAGE>
c. "Change of Control" shall be deemed to have occurred if,
subsequent to the Effective Date of this Plan, any "person" (as
such term is defined in Section 13(d) of the Exchange Act) becomes
the beneficial owner, directly or indirectly, of either (x) a
majority of the Common Stock or (y) securities of the Company
representing a majority of the combined voting power of the
Company's then outstanding voting securities.
d. "Retirement" shall mean the date upon which a Grant Participant,
having attained an age as may be determined by the Committee in
its sole discretion, terminates his employment with the Company or
any subsidiary, provided that such Grant Participant has been
employed by the Company or any subsidiary.
12. AMENDMENT OF PLAN
The Board of Directors of the Company shall have the right to amend,
modify, suspend or terminate the Plan at any time, provided that no amendment
shall be made without shareholder approval which shall (i) increase the total
number of shares of the Common Stock of the Company which may be issued and
sold pursuant to Options granted under the Plan (except for increases due to
adjustments in accordance with Section 9 hereof), (ii) materially increase the
benefits accruing to participants under the Plan, (iii) decrease the minimum
exercise price in the case of an Incentive Option or (iv) materially modify
the provisions of the Plan relating to eligibility with respect to Options. In
no event may the Plan be amended in any way that would retroactively impair
the Committee's discretion. The Board of Directors shall be authorized to
amend the Plan and the Options granted thereunder (A) to qualify such Options
as "incentive stock options" within the meaning of Section 422 of the Code or
(B) to comply with Rule 16b-3 (or any successor rule) under the Exchange Act.
No amendment, modification, suspension or termination of the Plan, without the
consent of the holder thereof, shall adversely alter or impair any Options
previously granted under the Plan.
13. EFFECTIVE DATE
The Plan shall become effective on the Effective Date. Subject to the
right of the Board of Directors to terminate the Plan at any time pursuant to
Section 12 hereof, the Plan shall remain in effect until the earlier of (i)
the date that Options covering all shares of Common Stock issuable under the
Plan have been granted or (ii) the Termination Date.
11
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<NAME> INFODATA SYSTEMS INC.
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