<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 9, 1998
REGISTRATION NO. 333-42611
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
INFODATA SYSTEMS INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
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<S> <C> <C>
VIRGINIA 7372 16-0954695
(STATE OR JURISDICTION (PRIMARY STANDARD (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) INDUSTRIAL CLASSIFICATION CODE IDENTIFICATION NUMBER)
NUMBER)
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12150 MONUMENT DRIVE
FAIRFAX, VIRGINIA 22033
(703) 934-5205
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
12150 MONUMENT DRIVE
FAIRFAX, VIRGINIA 22033
(ADDRESS OF PRINCIPAL PLACE OF BUSINESS OR INTENDED PRINCIPAL PLACE OF BUSINESS)
JAMES UNGERLEIDER, PRESIDENT
INFODATA SYSTEMS INC.
12150 MONUMENT DRIVE
FAIRFAX, VIRGINIA 22033
(703) 934-5205
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
COPIES TO:
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<S> <C>
MONICA LORD, ESQ. DAVID ALAN MILLER, ESQ.
KRAMER, LEVIN, NAFTALIS & FRANKEL GRAUBARD MOLLEN & MILLER
919 THIRD AVENUE 600 THIRD AVENUE
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10016
(212) 715-9100 (212) 818-8800
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APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
------------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
------------------------
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
------------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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====================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE AMOUNT OF
REGISTERED REGISTERED(1) SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock.............................. 1,150,000 $11.00 $12,650,000.00 $ 3,731.75
- --------------------------------------------------------------------------------------------------------------------
Underwriters' Purchase Option............. 1 $100.00 $ 100.00 (3)
- --------------------------------------------------------------------------------------------------------------------
Common Stock Underlying Underwriters'
Purchase Option......................... 100,000 $13.20 $ 1,320,000.00 $ 389.40
- --------------------------------------------------------------------------------------------------------------------
Total..................................... -- -- -- $ 4,121.15
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(1) Includes 150,000 shares of Common Stock issuable upon exercise of the
Underwriters' over-allotment option.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) promulgated under the Securities Act, based on the average of
the high and low prices for the shares reported on the Nasdaq SmallCap
Market on December 11, 1997.
(3) Pursuant to Rule 457(g), no registration fee is payable.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JANUARY 9, 1998
PROSPECTUS
INFODATA SYSTEMS INC.
1,000,000 SHARES OF COMMON STOCK
(INFODATA LOGO)
All of the shares of Common Stock offered hereby ("Offering") are being sold by
Infodata Systems Inc. ("Infodata" or "Company"). The Common Stock is currently
traded on the Nasdaq SmallCap Market under the symbol "INFD." On January 5,
1998, the closing sale price of the Common Stock was $10.00 per share.
------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK AND SUBSTANTIAL
DILUTION. SEE "RISK FACTORS" AT PAGE 7 HEREOF AND "DILUTION" AT PAGE 17 HEREOF.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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================================================================================================
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share......................... $ $ $
- ------------------------------------------------------------------------------------------------
Total(3).......................... $ $ $
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(1) Does not include a 2% nonaccountable expense allowance which the Company has
agreed to pay to Southeast Research Partners, Inc. and GKN Securities Corp.
("Underwriters"). The Company also has agreed to sell to the Underwriters an
option to purchase up to 100,000 shares of Common Stock ("Underwriters'
Purchase Option") and to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933. See
"Underwriting."
(2) Before deducting expenses payable by the Company, including the
nonaccountable expense allowance, estimated at approximately $ .
(3) The Company has granted the Underwriters an option, exercisable within 45
business days from the date of this Prospectus, to purchase up to an
additional 150,000 shares of Common Stock on the same terms as set forth
above, solely for the purpose of covering over-allotments, if any. If such
over-allotment option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."
The shares of Common Stock are being offered by the Underwriters subject to
prior sale, when, as, and if delivered to and accepted by the Underwriters and
subject to the approval of certain legal matters by counsel and certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify the
Offering and to reject any order in whole or in part. It is expected that
delivery of certificates representing the shares of Common Stock will be made
against payment therefor at the offices of GKN Securities Corp. in New York City
on or about , 1998.
SOUTHEAST RESEARCH PARTNERS, INC. GKN SECURITIES CORP.
, 1998
<PAGE> 3
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT COVERING
TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
------------------------
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS
MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE
NASDAQ SMALLCAP MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE IN
ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
This Prospectus includes references to trademarks of entities other than the
Company, which have reserved all rights with respect to their respective
trademarks.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended ("Exchange Act"), and in accordance therewith
files reports and other information with the Securities and Exchange Commission
("Commission"). Reports, proxy statements and other information filed by the
Company can be inspected and copied at the principal office of the Commission,
Public Reference Room, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the regional offices of the Commission located at Northwestern Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60651-2511 and at 7 World
Trade Center, Suite 1300, New York, New York 10048. Copies can be obtained from
the Commission at prescribed rates by writing to the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549. The Commission maintains a Web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The address
of such Web site is http://www.sec.gov. The Common Stock of the Company is
quoted on the Nasdaq SmallCap Market (Symbol: INFD) and such reports, proxy
statements and other information concerning the Company also can be inspected at
the offices of the Nasdaq Stock Market, 1735 K Street, N.W., Washington, D.C.
20006.
The Company has filed with the Commission a registration statement
("Registration Statement") under the Securities Act of 1933, as amended
("Securities Act"), with respect to sales of the shares of Common Stock offered
hereby. This Prospectus omits certain information contained in the Registration
Statement. For further information, reference is made to the Registration
Statement, the exhibits and financial statements filed as a part thereof, which
may be examined without charge at the office of the Commission, and photocopies
of which, or any portion thereof, may be obtained upon payment of the prescribed
fee.
Statements contained in this Prospectus as to the contents of any agreement
or other document referred to are not complete, and where such agreement or
other document is an exhibit to the Registration Statement, each statement is
deemed to be qualified and amplified in all respects by the provisions of the
exhibit.
2
<PAGE> 4
PROSPECTUS SUMMARY
This summary is qualified in its entirety by the more detailed information
and Consolidated Financial Statements, including the Notes thereto, appearing
elsewhere in this Prospectus, including the information set forth under "Risk
Factors." Each prospective investor is urged to read this Prospectus in its
entirety. Certain statements contained in this Prospectus regarding matters that
are not historical facts, such as statements regarding expected future sales
cycles for the Company's products and expected revenues from licensing
arrangements, are forward-looking statements (as such term is defined in the
Securities Act). Since forward-looking statements include risks and
uncertainties, actual results may differ materially from those expressed or
implied by such statements. Factors that could cause actual results to differ
materially include, but are not limited to, those discussed herein under "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," as well as those discussed elsewhere in
this Prospectus.
Unless otherwise indicated, all share information in this Prospectus gives
effect to: (i) a two-for-one stock split in the form of a 100% share
distribution on the Company's Common Stock effected in August 1996; (ii) a
one-for-six Common Stock dividend paid in May 1996; and (iii) the conversion of
all outstanding shares of Preferred Stock and all accrued unpaid dividends
thereon into 199,883 shares of Common Stock effected in 1996. Except as
otherwise specified, the information in this Prospectus does not give effect to
exercise of the Underwriters' over-allotment option or the Underwriters'
Purchase Option. Unless the context otherwise requires, references herein to the
"Company" or "Infodata" refer to Infodata Systems Inc. and its subsidiaries.
THE COMPANY
Infodata provides electronic document management software and systems to
corporate and government workgroups, departments and enterprises. Infodata's
newest product, Virtual File Cabinet(TM) ("VFC(TM)"), has been designed to
address what DataPrOpinion 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. The VFC Document Web Server 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 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
provide the capability to bridge multiple document management systems or
repositories. The first enablers are expected to be available for shipment in
the second quarter of 1998.
The Company's VFC technology has been endorsed 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 for Information and Imaging Management ("AIIM") trade
show, with more than 35,000 attendees and 325 exhibitors, Imaging World Magazine
identified VFC as "#1 TO WATCH." VFC has been sold to large organizations with
significant document processing requirements, such as the Department of Energy,
AT&T Corp. ("AT&T"), State Street Bank and Trust Company ("State Street Bank")
and the U.S. Army Signal Corps.
3
<PAGE> 5
In December 1997, the Company and Adobe Systems Incorporated ("Adobe"), a
major software company with reported 1996 revenues of more than $750 million,
entered into an agreement to cross license and co-market certain technologies.
Adobe has 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 $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 sales of
VFC arising out of this marketing arrangement, and will also receive commissions
for any VFC sales that it makes directly.
The Company's other products include Re:mark(R), a plug-in product for
Adobe Acrobat(TM) software that enables users to mark up and review documents
electronically in a workgroup setting; Compose(R), a suite of plug-in tools for
Adobe Acrobat Exchange that automate and streamline a variety of document
production tasks; 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
consulting services, training and customer support for its own products and
those of other vendors, including Adobe, Verity, PC DOCS and Documentum, Inc.
("Documentum"), for each of whom it is a value-added reseller ("VAR").
For nearly thirty years, the Company has developed and sold its own
products and acted as a VAR of client/server and Internet/intranet document
systems products. Recently, 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 targets both commercial and government markets. The Company's
products and consulting services are used by many major companies, including
Ford Motor Company ("Ford"), Allen-Bradley Co., Inc. ("Allen Bradley"), The
Boeing Company ("Boeing"), RJR Nabisco, Inc. ("Nabisco"), AT&T, Chase Manhattan
Bank ("Chase"), State Street Bank and The Riggs National Bank ("Riggs"), 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 39% for the first nine
months of 1997; however, no one customer accounted for more than 10% of the
Company's revenues in either period. 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
complements VFC product sales. Developing custom solutions for customers keeps
the Company's technical professionals abreast of client needs, facilitating the
conception and development of new products, such as VFC, and the improvement of
existing products.
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 also provided to the Company by the 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.
4
<PAGE> 6
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 information management software and systems. To accomplish these
objectives, the Company intends to (i) maintain its technological leadership,
(ii) add strategic relationships (iii) expand its sales and marketing
capabilities, and (iv) pursue acquisitions of businesses, products or
technologies that complement the Company's existing business. As of the date of
this Prospectus, the Company has no agreement, arrangement or understanding with
respect to any acquisition.
In 1996, the Company's revenues were $9,560,000 with net income of
$503,000. For the first nine months of 1997, revenues were $7,033,000. The
Company incurred losses of $2,579,000 for the first nine months of 1997, due
primarily to the continuing investment in VFC technology and the expenses of
building the infrastructure to market VFC.
The Company was incorporated in the State of New York in May 1968 and
reincorporated in the State of Virginia in March 1995. The Company's principal
offices are located at 12150 Monument Drive, Fairfax, Virginia 22033. Its
telephone number is (703) 934-5205 and its fax number is (703) 934-7154.
THE OFFERING
Common Stock Offered................ 1,000,000 shares
Common Stock to be Outstanding after
the Offering(1)..................... 3,759,116 shares
Use of Proceeds..................... Sales and marketing; research and
development; repayment of institutional
debt; and working capital and general
corporate purposes. See "Use of
Proceeds."
Nasdaq SmallCap Market Symbol....... INFD
- ---------------
(1) Excludes: (i) 200,000 shares of Common Stock reserved for issuance under the
Company's 1997 Employee Stock Purchase Plan; (ii) 1,511,000 shares of Common
Stock reserved for issuance upon the exercise of stock options granted and
to be granted under the Company's 1995 Stock Option Plan, of which options
to purchase 1,086,023 shares of Common Stock have been granted; and (iii)
warrants to purchase 4,666 shares of Common Stock issued pursuant to the
Company's 1987 Stock Warrant Purchase Plan, which terminated on January 1,
1997. See "Management--1995 Stock Option Plan" and "--Stock Purchase Plan"
and "Principal Shareholders."
RISK FACTORS
An investment in the securities offered hereby involves a high degree of
risk, including, without limitation, risks relating to the Company's continued
losses and accumulated and working capital deficits, uncertainty of future
operating results and fluctuations in quarterly operating results, change in mix
of products, decline in INQUIRE/Text sales and reliance on VFC, lengthy sales
and implementation cycles, rapid technological change and product obsolescence,
competition, risks associated with sales channels, and dependence on government
contracts and security clearances. See "Risk Factors."
5
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SUMMARY CONSOLIDATED FINANCIAL DATA
The following summary consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements, including
the Notes thereto, included elsewhere in this Prospectus. The consolidated
statement of operations data for the years ended December 31, 1995 and 1996 and
the consolidated balance sheet data at December 31, 1996 are derived from the
Company's audited Consolidated Financial Statements, which have been audited by
Arthur Andersen LLP, independent auditors, included elsewhere in this
Prospectus. The consolidated statement of operations data for the nine months
ended September 30, 1996 and 1997 and the consolidated balance sheet data at
September 30, 1997 have been derived from unaudited interim financial statements
included elsewhere in this Prospectus and include all adjustments that the
Company considers necessary for a fair presentation of the financial position
and results of operations at that date and for such periods. The operating
results for the nine months ended September 30, 1997 are not necessarily
indicative of the results to be expected for the full year or for any future
period.
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YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------- ------------------
1995 1996 1996 1997(1)
------ ------ ------ -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................................... $7,049 $9,560 $7,355 $ 7,033
Cost of revenues....................................... 4,166 5,457 4,412 4,037
Gross profit........................................... 2,883 4,103 2,943 2,996
Operating expenses
Research and development............................. 187 816 537 1,696
Selling, general and administrative.................. 2,657 2,869 2,007 3,920
Operating income (loss)................................ 39 418 399 (2,620)
Net income (loss)...................................... $ 131 $ 503 $ 453 $(2,579)
Primary net income (loss) per common share............. $ 0.01 $ 0.20 $ 0.19 $ (0.92)
Weighted average number of shares outstanding.......... 1,694 2,162 2,085 2,796
</TABLE>
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<CAPTION>
DECEMBER 31,
1996 SEPTEMBER 30, 1997
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ACTUAL ACTUAL(1) AS ADJUSTED(2)
------------ -------------- --------------
(IN THOUSANDS)
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BALANCE SHEET DATA:
Cash and cash equivalents.............................. $1,266 $ 278 $ 7,770
Working capital........................................ 1,612 (892) 7,558
Total current assets................................... 3,920 3,156 10,648
Goodwill............................................... 274 2,624 2,624
Total assets........................................... 4,891 6,514 14,006
Current liabilities.................................... 2,308 4,048 3,090
Total liabilities...................................... 2,435 4,135 3,177
Shareholders' equity................................... $2,456 $2,379 $ 10,829
</TABLE>
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(1) Includes results of operations of AMBIA since July 22, 1997. The
Consolidated Financial Statements of AMBIA and the Notes thereto are
included elsewhere in this Prospectus.
(2) Gives effect to the sale of the shares of Common Stock offered hereby and
the application of the estimated net proceeds therefrom. See "Use of
Proceeds."
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<PAGE> 8
RISK FACTORS
The securities offered hereby involve a high degree of risk. Accordingly,
in analyzing an investment in these securities, prospective investors should
carefully consider, along with the other matters referred to herein, the
following risk factors. No investor should participate in this Offering unless
such investor can afford a complete loss of his investment.
CONTINUED LOSSES; ACCUMULATED AND WORKING CAPITAL DEFICITS; UNCERTAINTY OF
FUTURE OPERATING RESULTS; FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
For the nine months ended September 30, 1997, due primarily to the
continuing investment in VFC technology and the expenses of building the
infrastructure to market VFC, the Company reported a net loss of $2,579,000. In
addition, as of September 30, 1997, the Company had an accumulated deficit of
$9,246,000 and a working capital deficit of $892,000. The Company expects to
continue to incur net losses through at least the end of 1998. 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. As a result of these factors, revenues and
operating results for any quarter are subject to variation and are not
predictable with any significant degree of accuracy. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
CHANGE IN MIX OF PRODUCTS; DECLINE IN INQUIRE/TEXT SALES; RELIANCE ON VFC
The Company's historical consolidated financial statements include results
of operations relating to sales of its INQUIRE/Text products and maintenance
services related to INQUIRE/Text. INQUIRE/Text maintenance revenues represented
25% of the Company's revenues in 1996 and approximately 23% for the first nine
months of 1997. INQUIRE/Text-related revenues decreased 14% in 1996, as compared
to 1995, and a similar decline is expected in 1997. Declines are expected each
year as the market matures and customers either migrate off mainframe platforms
or opt not to renew maintenance contracts. The Company expects the VFC family of
products to account for a substantial part of its future revenues. As a result,
factors adversely affecting the pricing of or demand for VFC products, such as
competition or technological change, could have a material adverse effect on the
Company's business, operating results and financial condition. The Company's
future performance will depend, in significant part, on the successful
development, introduction and market acceptance of new and enhanced versions of
VFC products. The success of the Company's VFC family of products, the first
release of which was shipped in the second quarter of 1997, will depend upon the
acceptance of intranet and Web-based technologies. As the commercial market for
products for use on corporate intranets has only recently begun to develop,
there can be no assurance that the Company's new products or enhancements will
meet customer requirements or be compatible with emerging standards. There can
be no assurance that the Company will be successful in developing and marketing
VFC and its related products. As a result of the changing mix of products and
services offered by the Company, the Company's historical consolidated financial
statements may not be indicative of future operating results. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business--Products and Services," "--Sales and Marketing," "--Research and
Development" and "--Competition."
LENGTHY SALES AND IMPLEMENTATION CYCLES
The license of the Company's software products and the use of the Company's
systems solutions services generally require the Company to provide a
significant level of education to prospective customers regarding the use and
benefits of the Company's products, resulting in a lengthy sales cycle
(typically between three and six months). Additionally, the implementation by
customers of the Company's products may involve a
7
<PAGE> 9
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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business--Sales and Marketing."
RAPID TECHNOLOGICAL CHANGE; PRODUCT OBSOLESCENCE
The document management software market 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. There can be no assurance that the Company
will be successful in developing and marketing enhancements to its existing
products, or new products, on a timely basis or that any new or enhanced
products will adequately address the changing needs of the marketplace. If the
Company is unable to develop and introduce new products or enhancements to
existing products in a timely manner in response to changing market conditions,
technological changes or customer requirements, the Company's business and
operating results could be adversely affected. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations,"
"Business--Competition" and "--Research and Development."
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
Corporation ("Xerox"), Open Text Corporation ("Open Text"), Net-it Software
Corporation ("Net-it Software"), Hummingbird Communications Ltd. ("Hummingbird")
and Fulcrum Technologies, Inc. ("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. See
"Business--Competition."
RISKS ASSOCIATED WITH SALES CHANNELS
The Company's ability to achieve significant revenue growth in the future
will depend, in large part, upon its ability to establish and maintain
relationships with VARs and strategic alliances with systems integrators and
computer software and hardware distributors, its ability to attract qualified
sales personnel and the success of its direct sales campaigns and telemarketing
efforts. Furthermore, the Company's ability to market its products successfully,
including its new products under development, will depend on its ability to
adapt its sales channels to address the evolving markets for such products. The
failure of the Company to expand its VAR network, enter into new strategic
alliances and recruit and train its own sales personnel, and the failure of the
Company to adapt its marketing methods and sales channels to address market
needs, could have a material adverse effect on the Company's business, operating
results and financial condition. In addition, the gross profit margin on
indirect sales will be lower than gross profit margins on direct sales. See
"Business--Strategy" and "--Sales and Marketing."
Even if the Company is successful in expanding its sales channels, there
can be no assurance that its sales channels will be successful in increasing the
Company's revenue to a sufficient extent to cover the increased expenses
associated with such expansion. Moreover, the Company's agreements with its VARs
generally are nonexclusive and may be terminated by either party at any time
without cause. The Company's VARs are not
8
<PAGE> 10
within the control of the Company, are not obligated to purchase products from
the Company and may also represent or refer product lines of the Company's
competitors. VARs' sales tend to fluctuate based on their implementation
schedules and internal resources, which are beyond the control of the Company.
There can be no assurance that VARs will continue their current relationships
with the Company or that they will not give higher priority to the sale or
referral of other products, which could include products of the Company's
competitors. A reduction in sales efforts or discontinuance of sales or
referrals of the Company's products by its VARs could lead to reduced sales and
could materially adversely affect the Company's business, operating results and
financial condition. See "Business--Sales and Marketing."
DEPENDENCE ON GOVERNMENT CONTRACTS; SECURITY CLEARANCES
Sales to agencies of the United States Government account for a significant
portion of the Company's revenues. The Company believes that the success and
development of its business will continue to be dependent on its ability to
participate in government contract programs. Accordingly, the Company's
financial performance may be directly affected by changes in government
contracting policies. Among the factors that could materially adversely affect
the Company's government contracting business are budgetary constraints, budget
cycles, changes in fiscal policies or available funding, changes in government
programs or requirements, including curtailment of the government's use of
technology service firms, the adoption of new laws or regulations, technological
developments and general economic conditions.
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. 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, damages and/or debarment from award of additional
government contracts. The termination of the Company's government contracts or
the imposition of fines, damages or suspension and/or debarment from bidding on
additional government contracts could have a material adverse effect on the
Company. 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 Defense
Contract Audit Agency ("DCAA") and other government auditors. 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. If these clearances are lost, it could have a
material adverse effect on the Company. See "Business--Customers."
DEPENDENCE ON PROPRIETARY RIGHTS
The Company relies primarily on a combination of copyrights, 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. Although
the Company may apply for certain patents, the Company presently has no patents
or patent applications pending. 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. 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
9
<PAGE> 11
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 otherwise will continue to be
available to the Company on commercially reasonable terms. See
"Business--Proprietary Rights."
DEPENDENCE ON KEY PERSONNEL
The Company's success depends, in significant part, upon the continued
services of its key technical, marketing, sales and management personnel,
including James Ungerleider, its President and Chief Executive Officer, Richard
Tworek, its Chief Technology Officer and Executive Vice President, and Razi
Mohiuddin, its Vice President, and on its ability to continue to attract,
motivate and retain highly qualified employees. The loss of key personnel could
have a material adverse effect on the Company's business, operating results and
financial condition. Competition for technical, marketing, sales and management
employees is intense and the process of locating personnel with the combination
of skills and attributes required to execute the Company's strategy can be
difficult, time-consuming and expensive. There can be no assurance that the
Company will be successful in attracting, assimilating or retaining highly
skilled technical, management, sales and marketing personnel. The failure to
attract, hire, assimilate or retain such personnel could have a material adverse
effect on the Company's business, operating results and financial condition. See
"Management."
CONCENTRATION OF STOCK OWNERSHIP
Upon completion of this Offering, the present directors, executive officers
and principal shareholders of the Company and their affiliates will beneficially
own approximately 33.4% of the Company's Common Stock. As a result, these
shareholders will be able to exercise significant influence over all matters
requiring shareholder approval, including the election of directors and approval
of significant corporate transactions. Such concentration of ownership may have
the effect of delaying or preventing a change in control of the Company. See
"Principal Shareholders."
PRODUCT DEFECTS
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 condition. See "Business--Research and
Development."
PRODUCT LIABILITY
The Company's license agreements with its customers typically contain
provisions designed to limit the Company's exposure to potential product
liability claims. However, it is possible that the limitation of liability
provisions contained in the Company's license agreements may not be effective
under the laws of certain jurisdictions. Although the Company has not
experienced any product liability claims to date, the sale and
10
<PAGE> 12
support of products by the Company may entail the risk of such claims, and there
can be no assurance that the Company will not be subject to such claims in the
future. A successful product liability claim brought against the Company could
have a material adverse effect upon the Company's business, operating results
and financial condition. See "Business--Customers."
ACQUISITIONS
The Company may, from time to time, pursue acquisitions of businesses,
products or technologies that complement or expand its existing business and, in
fact, acquired Merex in 1995 and AMBIA in 1997. The Company evaluates potential
acquisition opportunities from time to time, including those that could be
material in size and scope. Acquisitions involve a number of risks, including
the diversion of management's attention from day-to-day operations to the
assimilation of the operations and personnel of the acquired companies and the
incorporation of acquired operations, customer bases, products or technologies.
Such acquisitions could also have adverse short-term effects on the Company's
operating results and could result in dilutive issuances of equity securities,
the incurrence of debt and the loss of key employees. In addition, many business
acquisitions must be accounted for as purchases and, because most
software-related acquisitions involve the purchase of significant intangible
assets, these acquisitions typically result in substantial amortization charges
and charges for acquired research and development projects, which could have a
material adverse effect on the Company's operating results. There can be no
assurance that any such acquisitions will occur or that, if such acquisitions do
occur, the acquired businesses, customer bases, products or technologies will
generate sufficient revenue to offset the associated costs or effects. See
"Business--Strategy."
BROAD DISCRETION IN ALLOCATION OF NET PROCEEDS; USE OF NET PROCEEDS TO REPAY
DEBT
Approximately $3,200,000, or 37.9% (assuming a $10.00 per share offering
price), of the estimated net proceeds of the Offering has been allocated to
working capital and general corporate purposes. Accordingly, the Company's
management will have broad discretion as to the application of these proceeds. A
portion of the proceeds allocated to working capital may be used by the Company
to pay salaries, including salaries of its executive officers, and for
acquisitions. Although the Company currently has no agreement, arrangement or
understanding with respect to any acquisition, should an acquisition opportunity
be identified by the Company, the Board may have the ability to approve the
acquisition without seeking shareholder approval. Approximately $1,000,000 of
the estimated net proceeds of the Offering has been allocated to repayment of
institutional debt and will not be available to be used for other purposes. See
"Use of Proceeds."
DILUTION
The public offering price is substantially higher than the net tangible
book value per share of the currently outstanding Common Stock. Investors
purchasing shares of Common Stock in the Offering will therefore experience
immediate dilution in net tangible book value of $7.84 per share (approximately
78%), assuming a public offering price of $10.00 per share. See "Dilution."
LACK OF DIVIDENDS
The Company has never declared or paid any cash dividends on its Common
Stock and does not anticipate paying any dividends in the foreseeable future.
See "Dividend Policy."
LOW TRADING VOLUME; POSSIBLE VOLATILITY OF STOCK PRICE
For the year ended December 31, 1997, the average daily trading volume of
the Common Stock was approximately 8,197 shares. This low trading volume may
have had a significant effect on the market price of the Common Stock and,
accordingly, historical prices may not necessarily be indicative of market
prices in a more liquid market. The trading price of the Company's Common Stock
is subject to significant fluctuations in response to variations in quarterly
operating results, the gain or loss of significant orders, announcements of
technological innovations or new products by the Company or its competitors,
general conditions in the
11
<PAGE> 13
software and computer industries and other events or factors, including factors
outside the Company's control. In addition, the stock market in general has
experienced extreme price and volume fluctuations which have affected the market
price for many companies in industries similar or related to that of the Company
and which have been unrelated to the operating performance of these companies.
These market fluctuations may adversely affect the market price of the Company's
Common Stock. See "Price Range of Common Stock."
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER, BYLAW AND STATUTORY PROVISIONS;
POSSIBLE ISSUANCE OF PREFERRED STOCK
The Company's Articles of Incorporation ("Articles") and Bylaws, as well as
Virginia corporate law, contain certain provisions that could have the effect of
making it more difficult for a third party to acquire, or discouraging a third
party from attempting to acquire, control of the Company. These provisions could
limit the price that certain investors might be willing to pay in the future for
shares of the Company's Common Stock. Certain of these provisions allow the
Company to issue, without shareholder approval, Preferred Stock having rights
senior to those of the Common Stock. Other provisions impose various procedural
and other requirements that could make it more difficult for shareholders to
effect certain corporate actions. See "Description of Securities--Virginia
Anti-Takeover Law and Certain Charter and Bylaw Provisions."
SHARES ELIGIBLE FOR FUTURE SALE; POTENTIAL EXERCISE OF OPTIONS AND WARRANTS
Sales of the Company's Common Stock in the public market after this
Offering could adversely affect the market price of the Common Stock or
outstanding warrants. See "Shares Eligible for Future Sale."
EFFECT OF OUTSTANDING OPTIONS AND WARRANTS
As of the date of this Prospectus, there are outstanding options to
purchase 1,086,023 shares of Common Stock and outstanding warrants to purchase
4,666 shares of Common Stock. In addition, in connection with this Offering, the
Company will issue the Underwriters' Purchase Option. The exercise of such
outstanding options and warrants would dilute the then-existing shareholders'
percentage ownership of the Company's stock, and any sales in the public market
of Common Stock underlying such securities could adversely affect prevailing
market prices for the Common Stock. Moreover, the terms upon which the Company
would be able to obtain additional equity capital could be adversely affected
since the holders of such securities can be expected to exercise them at a time
when the Company would, in all likelihood, be able to obtain any needed capital
on terms more favorable to the Company than those provided by such securities.
See "Description of Securities" and "Underwriting."
POSSIBLE DELISTING OF SECURITIES FROM NASDAQ SYSTEM
The Company's Common Stock is listed on The Nasdaq SmallCap Market
("Nasdaq"). In August 1997, the Company received a notice from Nasdaq that it
was not in compliance with Nasdaq's requirement that listed issuers maintain a
minimum of $1,000,000 in capital and surplus. In November 1997, the Company
appeared at a hearing before a Nasdaq Listing Qualifications Panel to
demonstrate compliance with the minimum capital and surplus requirement and to
request continued listing on Nasdaq. The panel agreed to allow the Company to
continue to be listed if (i) on or before February 16, 1998, the Company makes a
public filing with the Commission and Nasdaq evidencing the closing of this
Offering and a minimum of $5,500,000 in net tangible assets and (ii) the Company
is able to evidence compliance with Nasdaq's new standards for continued
listing, which go into effect in February 1998. Such public filing is a
condition to the closing of this Offering. Thereafter, the Company must continue
to meet Nasdaq's standards for continued listing. The failure to meet these
standards may result in the delisting of the Company's securities from Nasdaq
and trading, if any, in the Company's securities would thereafter be conducted
on the OTC Bulletin Board. If such delisting occurs, an investor may find it
more difficult to dispose of, or to obtain accurate quotations as to the market
value of, the Company's securities. In addition, if the Common Stock were to
become delisted from trading on Nasdaq and the trading price of the Common Stock
were to fall below $5.00 per share, trading in the Common Stock also would be
subject to the requirements of certain rules promulgated under the Exchange Act
that require additional disclosure by broker-dealers in connection with any
trades involving a
12
<PAGE> 14
stock defined as a penny stock (generally, any non-Nasdaq equity security that
has a market price of less than $5.00 per share, subject to certain exceptions).
Such rules require the delivery, prior to any penny stock transaction, of a
disclosure schedule explaining the penny stock market and the risks associated
therewith, and impose various sales practice requirements on broker-dealers who
sell penny stocks to persons other than established customers and accredited
investors (generally institutions). For these types of transactions, the
broker-dealer must make a special suitability determination for the purchaser
and have received the purchaser's written consent to the transaction prior to
sale. The additional burdens imposed upon broker-dealers by such requirements
may discourage them from effecting transactions in the Company's securities,
which could severely limit the liquidity of the Company's securities and the
ability of purchasers in this Offering to sell such securities in the secondary
market.
13
<PAGE> 15
USE OF PROCEEDS
The net proceeds to the Company from the sale of shares of Common Stock
offered hereby are estimated to be approximately $8,450,000 ($9,800,000 if the
Underwriters' over-allotment option is exercised in full), assuming a public
offering price of $10.00 per share, and after deducting the underwriting
discounts and commissions and estimated offering expenses payable by the
Company. The Company intends to apply the net proceeds as follows:
<TABLE>
<CAPTION>
APPLICATION OF PROCEEDS AMOUNT PERCENT
------------------------------------------------------------------- ---------- -------
<S> <C> <C>
Sales and Marketing................................................ $2,250,000 26.6%
Research and Development........................................... 2,000,000 23.7%
Repayment of Institutional Debt.................................... 1,000,000 11.8%
Working Capital and General Corporate Purposes..................... 3,200,000 37.9%
---------- ------
Total.................................................... 8,450,000 100.0%
========== ======
</TABLE>
Approximately $2,250,000 of the net proceeds of this Offering are expected
to be used to expand the Company's sales and marketing activities by hiring
additional sales and marketing personnel, increasing advertising, participating
in trade shows and other promotional activities, developing indirect sales
channels and enhancing the Company's customer service capabilities. See
"Business--Sales and Marketing."
Approximately $2,000,000 of the net proceeds of this Offering are expected
to be used for research and development, including enhancement of existing
features and development of new functions for the VFC family of products and the
salaries and related payroll costs for new and existing research and development
personnel. See "Business--Research and Development."
Approximately $1,000,000 of the net proceeds of this Offering are expected
to be used to repay institutional debt owed to Merrill Lynch Business Financial
Services, Inc. pursuant to a line of credit maintained by the Company 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
July 1998. The line of credit is contingent upon the Company continuing to meet
certain financial covenants. At November 28, 1997, the Company had outstanding
borrowings of approximately $986,000, including accrued interest, under this
line of credit. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
The balance of the net proceeds of this Offering are expected to be
allocated to working capital and general corporate purposes, including payment
of salaries, including salaries of its executive officers, and acquisitions. As
of the date of this Prospectus, the Company has no agreement, arrangement or
understanding with respect to any acquisition. If the Underwriters exercise the
over-allotment option in full, the Company will realize additional net proceeds
of $1,350,000, which will be added to working capital. Management will have
significant discretion regarding how and when such proceeds will be applied.
The allocation of the net proceeds of the Offering set forth above
represents the Company's best estimates based upon its current plans and certain
assumptions regarding industry and general economic conditions and the Company's
future revenues and expenditures. If any of these factors change, the Company
may find it necessary or advisable to reallocate some of the proceeds within the
above-described categories.
Proceeds not immediately required for the purposes described above will be
invested temporarily, pending their application as described above, in
short-term United States government securities, short-term bank certificates of
deposit, money market funds or other investment grade, short-term,
interest-bearing instruments.
The Company anticipates, based on currently proposed plans and assumptions
relating to its operations (including the costs associated with its growth
strategy), that the proceeds of the Offering, together with its existing
financial resources and cash flow from operations, should be sufficient to
satisfy its anticipated cash requirements through the end of the year 2000;
however, there can be no assurance that this will be the case.
14
<PAGE> 16
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, technological advances, activities of
competitors and other factors. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock.
The Company expects to retain all available earnings generated by its operations
for the development and growth of its business and does not anticipate paying
any cash dividends on its Common Stock in the foreseeable future.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is currently traded on the Nasdaq SmallCap
Market ("Nasdaq") under the symbol "INFD." The following table sets forth, for
each of the periods indicated, the high and low sale prices for the Common
Stock, as reported by Nasdaq, which is the principal trading market for the
Company's securities. These per share prices represent inter-dealer prices, do
not include retail markups, markdowns or commissions and may not represent
actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
------ -----
<S> <C> <C>
1995
First Quarter....................................................... $ 2.57 $1.29
Second Quarter...................................................... 1.82 1.45
Third Quarter....................................................... 2.57 1.39
Fourth Quarter...................................................... 2.03 1.50
1996
First Quarter....................................................... $ 3.27 $1.93
Second Quarter...................................................... 7.87 2.81
Third Quarter....................................................... 10.12 4.25
Fourth Quarter...................................................... 12.62 4.62
1997
First Quarter....................................................... $12.63 $6.75
Second Quarter...................................................... 8.63 6.00
Third Quarter....................................................... 10.38 7.00
Fourth Quarter...................................................... 12.75 8.50
</TABLE>
On January 5, 1998, the closing sale price of the Common Stock as reported
by Nasdaq was $10.00 per share. As of such date, there were 2,759,116 shares of
Common Stock outstanding, held of record by 630 holders. The Company believes
that as of such date there were more than 1,640 beneficial holders of its Common
Stock.
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<PAGE> 17
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of
the Company (i) as of September 30, 1997, and (ii) as adjusted to reflect the
consummation of the Offering (assuming a price of $10.00 per share) and the
application of the estimated net proceeds therefrom, after deducting the
underwriting discounts and commissions and estimated offering expenses. The
table should be read in conjunction with the Consolidated Financial Statements,
including the Notes thereto, appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt........................................................ $ 958 $ 0
Shareholders' equity:
Preferred Stock, par value $1.00 per share:
340,000 shares authorized, no shares issued and outstanding....... -- --
Common Stock, par value $.03 per share:
6,666,666 shares authorized, 2,742,377 shares issued and
outstanding; 3,742,377 shares issued and outstanding as
adjusted......................................................... 82 112
Additional paid-in capital........................................... 11,543 19,963
Accumulated deficit.................................................. (9,246) (9,246)
------- -------
Total shareholders' equity................................... 2,379 10,829
------- -------
Total capitalization (including short-term debt)....................... $ 3,337 $10,829
======= =======
</TABLE>
DILUTION
As of September 30, 1997, the Company's net tangible book value was
approximately ($357,000), or ($0.13) per share. Net tangible book value per
share represents the amount of tangible assets less total liabilities, divided
by the number of shares of Common Stock outstanding. After giving effect to the
consummation of the Offering at an assumed price of $10.00 per share (after
deducting the underwriting discounts and commissions and estimated offering
expenses payable by the Company), the net tangible book value of the Company as
of September 30, 1997 would have been $8,093,000, or $2.16 per share. This
represents an immediate increase in net tangible book value of $2.29 per share
to existing shareholders and an immediate dilution of $7.84 per share to new
investors purchasing the Common Stock in this Offering. Dilution is determined
by subtracting net tangible book value per share after the Offering from the
amount of cash paid by a new investor for a share of Common Stock.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Public offering price per share............................ $10.00
Net tangible book value per share as of September 30,
1997.................................................. (0.13)
Increase per share attributable to this Offering......... $ 2.29
-------
Net tangible book value per share after this Offering...... 2.16
------
Dilution per share to new investors........................ $ 7.84
======
</TABLE>
16
<PAGE> 18
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements, including
the Notes thereto, included elsewhere in this Prospectus. The consolidated
statement of operations data for the years ended December 31, 1995 and 1996 and
the consolidated balance sheet data at December 31, 1996 are derived from the
Company's Consolidated Financial Statements, which have been audited by Arthur
Andersen LLP, independent auditors, included elsewhere in this Prospectus. The
consolidated statement of operations data for the nine months ended September
30, 1996 and 1997 and the consolidated balance sheet data at September 30, 1997
have been derived from unaudited interim financial statements included elsewhere
in this Prospectus and include all adjustments that the Company considers
necessary for a fair presentation of the financial position and results of
operations at that date and for such periods. The operating results for the nine
months ended September 30, 1997 are not necessarily indicative of the results to
be expected for the full year or for any future period.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------- ------------------
1995 1996 1996 1997(1)
------ ------ ------ -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................................... $7,049 $9,560 $7,355 $ 7,033
Cost of revenues....................................... 4,166 5,457 4,412 4,037
Gross profit........................................... 2,883 4,103 2,943 2,996
Operating expenses:
Research and development............................. 187 816 537 1,696
Selling, general and administrative.................. 2,657 2,869 2,007 3,920
Operating income (loss)................................ 39 418 399 (2,620)
Net income (loss)...................................... $ 131 $ 503 $ 453 $(2,579)
Primary net income (loss) per common share............. $ 0.01 $ 0.20 $ 0.19 $ (0.92)
Weighted average number of shares outstanding.......... 1,694 2,162 2,085 2,796
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
1996 SEPTEMBER 30, 1997
------------ ----------------------------
ACTUAL ACTUAL(1) AS ADJUSTED(2)
------------ --------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................. $1,266 $ 278 $ 7,770
Working capital........................................ 1,612 (892) 7,558
Total current assets................................... 3,920 3,156 10,648
Goodwill............................................... 274 2,624 2,624
Total assets........................................... 4,891 6,514 14,006
Current liabilities.................................... 2,308 4,048 3,090
Total liabilities...................................... 2,435 4,135 3,177
Shareholders' equity................................... $2,456 $ 2,379 $ 10,829
</TABLE>
- ---------------
(1) Includes results of operations of AMBIA since July 22, 1997. The
Consolidated Financial Statements of AMBIA and the Notes thereto are
included elsewhere in this Prospectus.
(2) Gives effect to the sale of the shares of Common Stock offered hereby and
the application of the estimated net proceeds therefrom. See "Use of
Proceeds."
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion and analysis below should be read in conjunction with the
Consolidated Financial Statements of the Company, including the Notes thereto,
included elsewhere in this Prospectus.
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. 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 and third-party software product revenues increased
from 23% of the Company's revenues in 1995 to 51% in 1996 and to 55% for the
first three quarters of 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 to cross-license
and co-market certain technologies. The Company expects to receive more than
$700,000 in consulting fees for modifications to certain of its technology so
that it can be incorporated into future Adobe products. Upon acceptance of these
modifications by Adobe, the Company will earn a license fee of $1,000,000.
Although the Company has received approximately 50% of the licensing fees under
this agreement, any licensing 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 fees until the
product has been accepted and the fees are no longer refundable, which is
expected to occur in 1998. The Company will recognize revenue from its product
development services in both 1997 and 1998 on a percent 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.
As of the date of this Prospectus, 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 applications 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'
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 six
months. The Company believes that the sales cycle for repeat sales to customers
may be shorter. VFC is licensed at a price of $4,995 per server. The Company
plans to increase the price of VFC with its next release, which will have
additional features. 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.
On October 11, 1995, the Company purchased substantially all the assets and
assumed certain liabilities of Merex in consideration of 210,000 shares of the
Company's common stock with a fair value estimated by the Company's Board of
Directors at $1.125 per share. The total acquisition cost was approximately
$361,000, including the direct costs of acquisition. Approximately $60,000 was
allocated to identified acquired intangibles, $312,000 to goodwill, including
purchase accounting adjustments of approximately $25,000 relating to termination
of the Merex office lease, and $35,000 relating to costs the Company is
obligated to pay
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in connection with the registration of securities held by the former
shareholders of Merex. For the year ended December 31, 1994, Merex had revenues
of $2,174,000 and net income of $185,000.
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
as determined by the Company's Board of Directors of $5.425 per share. The total
acquisition cost was approximately $2,300,000, including the direct costs of the
acquisition. Approximately $25,000 was allocated to acquired tangible assets,
$60,000 to acquired intangible assets, and $2,213,000 to goodwill. The
acquisition was treated as a purchase. For the eight months ended December 31,
1996 (AMBIA was incorporated on May 1, 1996), AMBIA's revenues were $558,000,
and its net loss was $3,000. AMBIA is now a subsidiary of the Company.
At December 31, 1996, the Company had a net operating loss ("NOL")
aggregating approximately $5,347,000 available to effect 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 that a significant amount of NOLs will be
utilized by the Company.
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
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1996
Revenues increased by $535,000, or 21%, from $2,502,000 for the three
months ended September 30, 1996 to $3,037,000 for the three months ended
September 30, 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.
During the quarter, VFC sales were minimal. Revenues from consulting services
and third party products, as well as training, increased by $261,000, or 28%,
from $933,000 for the three months ended September 30, 1996, to $1,194,000 for
the three months ended September 30, 1997, due to an increase in product sales,
and, to a lesser extent, related consulting services. AMBIA contributed $253,000
to the Company's revenues for the quarter ended September 30, 1997.
Gross profit increased by $247,000, or 21%, from $1,168,000 for the three
months ended September 30, 1996, to $1,415,000 for the three months ended
September 30, 1997. The increase was due to the increase in revenue for the
quarter and the acquisition of AMBIA. Gross profit as a percentage of sales was
consistent for the three months ended September 30, 1997 compared to the same
period in 1996.
The Company continues to invest heavily in the development of VFC. This
resulted in an increase of $470,000, or 167%, in research and development
expenditures from $281,000 for the three months ended September 30, 1996, to
$751,000 for the three months ended September 30, 1997. The Company expects this
investment to increase throughout 1998 and for the foreseeable future as VFC
product enhancements and capabilities are added.
Selling, general and administrative expenses increased by $679,000, or 92%,
from $739,000 for the three months ended September 30, 1996, to $1,418,000 for
the three months ended September 30, 1997. The
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<PAGE> 21
increase was due primarily to the expansion of the sales and marketing staff and
an increase in marketing expenses associated with VFC. The Company expects these
expenses to increase throughout 1998 as new versions of VFC are released, new
sales channels are established and potential markets are explored.
Interest income decreased by $9,000, or 39%, from $23,000 for the three
months ended September 30, 1996 to $14,000 for the three months ended September
30, 1997. The decrease was due to lower balances of cash, cash equivalents, and
short term investments during the three months ended September 30, 1997,
compared to the three months ended September 30, 1996. Interest expense
increased by $9,000, or 450%, from $2,000 for the three months ended September
30, 1996 to $11,000 for the three months ended September 30, 1997. This was due
to the increased utilization of a line of credit during the third quarter.
As a result of the foregoing, the Company reported a net loss of $754,000
for the three months ended September 30, 1997, compared to net income of
$169,000 for the same period in 1996.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1996
Revenues decreased by $322,000, or 4%, from $7,355,000 for the nine months
ended September 30, 1996 to $7,033,000 for the nine months ended September 30,
1997. The primary cause of this decrease was a decline in revenues from
consulting services and third party product sales of $735,000, or 26%, from
$2,867,000 for the nine months ended September 30, 1996 to $2,132,000 for the
nine months ended September 30, 1997, resulting from the shift of certain of the
Company's engineering personnel to research and development to accelerate the
development of VFC. In addition, INQUIRE/Text-related revenue decreased by
$118,000, or 5%, from $2,362,000 for the nine months ended September 30, 1996 to
$2,244,000 for the nine months ended September 30, 1997. Due to the maturity of
the product and the market, the Company expects INQUIRE/Text-related revenue to
continue to decline. The decrease in revenues was partially offset by AMBIA
revenues of $253,000 from July 22, 1997, the date of its acquisition, to
September 30, 1997 and by an increase in intelligence-related revenues of
$278,000, or 13%, from $2,127,000 for the nine months ended September 30, 1996,
to $2,405,000 for the nine months ended September 30, 1997.
Gross profit increased by $53,000, or 2%, from $2,943,000 for the nine
months ended September 30, 1996, to $2,996,000 for the nine months ended
September 30, 1997. The slight increase was due to the acquisition of AMBIA.
Research and development expenditures increased by $1,159,000, or 216%,
from $537,000 for the nine months ended September 30, 1996, to $1,696,000 for
the nine months ended September 30, 1997. The Company continues to spend heavily
on the development of its VFC products.
Selling, general and administrative expenses increased by $1,913,000, or
95%, from $2,007,000 for the nine months ended September 30, 1996, to $3,920,000
for the nine months ended September 30, 1997. The increase was due primarily to
the expansion of the sales and marketing staff and an increase in marketing
expenses associated with VFC.
As a result of the foregoing, the Company reported a net loss of $2,579,000
for the nine months ended September 30, 1997, compared to net income of $453,000
for the same period in 1996.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Total revenues increased by $2,511,000, or 36%, from $7,049,000 for the
year ended December 31, 1995, to $9,560,000 for the year ended December 31,
1996. Client/server related revenues increased by $3,270,000, or 204%, from
$1,603,000 for the year ended December 31, 1995, to $4,874,000 for the year
ended December 31, 1996, in part reflecting a full year of revenues from Merex.
Revenues from third party client/server related product sales increased by
$898,000, or 357%, from $251,000 for the year ended December 31, 1995 to
$1,150,000 for the year ended December 31, 1996. INQUIRE/Text-related revenues
decreased by $773,000, or 14%, from $5,446,000 for the year ended December 31,
1995, to $4,672,000 for the year ended December 31, 1996. The decrease was due
primarily to the decline in maintenance contracts.
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Gross profit increased by $1,220,000, from $2,883,000, a 42% margin, for
the year ended December 31, 1995, to $4,103,000 for the year ended December 31,
1996. The increase in the gross profit margin was due primarily to increased
commercial client/server consulting during 1996, offset in part by the decline
in high margin INQUIRE/Text maintenance revenues.
Research and development expense increased by $629,000, or 336%, from
$187,000 for the year ended December 31, 1995, to $816,000 for the year ended
December 31, 1996. The principal cause of the increase was the development of
VFC software products.
Selling, general and administrative expenses increased by $212,000, or 8%,
from $2,657,000 for the year ended December 31, 1995, to $2,869,000 for the year
ended December 31, 1996. The increase was due primarily to an increase in the
sales staff for the planned release of VFC.
Interest income decreased by $23,000, or 19%, from $119,000 for the year
ended December 31, 1995, to $96,000 for the year ended December 31, 1996. The
decrease was due primarily to a lower average market yield on cash and cash
equivalents in 1996 compared to 1995. The Company invested only in short-term,
highly liquid money market instruments.
Interest expense decreased by $13,000, or 54%, from $24,000 for the year
ended December 31, 1995, to $11,000 for the year ended December 31, 1996. The
expense was related primarily to capital equipment leases that expire through
1998.
Net income increased by $372,000, or 284%, from $131,000 for the year ended
December 31, 1995, to $503,000 for the year ended December 31, 1996. The
increase in net income was due to the factors discussed above. As a result of
Preferred Stock dividends of $120,000 and $58,000 paid in 1995 and 1996,
respectively, net income available to holders of Common Stock amounted to
$11,000, or $.01 per share, and $445,000, or $.20 per share ($.18 fully
diluted), respectively. During 1996, all of the outstanding preferred stock was
converted into Common Stock and, therefore, no Preferred Stock dividends will be
paid in 1997.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO DECEMBER 31, 1994
Total revenues decreased by $453,000, or 6%, from $7,502,000 for the year
ended December 31, 1994 to $7,049,000 for the year ended December 31, 1995. The
primary cause was a $971,000 decline in INQUIRE/Text-related revenue from the
prior year, primarily reflecting reduced product license fees, offset by
client/server-related consulting revenue, which increased 79% to $1,364,000 from
$763,000 in the prior year. The acquisition of Merex in October 1995 resulted in
approximately $550,000 in client/server consulting revenue during the fourth
quarter of 1995, which represents most of the increase. Total fourth quarter
revenues increased from $1,837,000 in 1994 to $2,156,000 in 1995.
Gross profit decreased by $532,000, or 16%, from $3,415,000 (representing a
46% gross margin) to $2,883,000 (representing a 41% gross margin) for the year
ended December 31, 1994. The decrease was due in part to the effect of a 6%
decline in revenues and also certain lower margin government contracts acquired
from Merex. The Company changed its methodology for overhead allocation in 1995
to reflect more accurately certain indirect costs of revenues that resulted in a
reclassification of the 1994 statement of operations from a gross profit of 40%
to a revised 45% but had no effect on operating income.
Research and development expense decreased by $221,000, or 54%, from
$408,000 for the year ended December 31, 1994, to $187,000 for the year ended
December 31, 1995. The principal cause of the decrease was cost reduction due to
outsourcing of mainframe-related computer costs in the fourth quarter of 1994
which had a full year impact in 1995. The Company believes that substantially
all of the impact of cost reduction has been realized.
Selling, general and administrative expenses increased by $175,000, or 7%,
from $2,482,000 for the year ended December 31, 1994, to $2,657,000 for the year
ended December 31, 1995. The increase was due in part to the costs of building a
marketing and sales force, an increase in consulting fees relating to execution
of the Company's strategic plan to expand into client/server based consulting,
and the impact of integration costs
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arising from the Merex acquisition. The decline in revenues and increase in
expenses resulted in an increase in expenses as a percentage of revenues to 38%
from 33% in the prior year.
Interest income increased by $73,000, or 159%, from $46,000 for the year
ended December 31, 1994, to $119,000 for the year ended December 31, 1995,
respectively. The increase was due primarily to a higher average balance of cash
and cash equivalents in 1995 over 1994. The Company invested only in short-term,
highly liquid money market instruments. Interest expense decreased to $24,000 in
1995 from $42,000 in the prior year. The expense is primarily related to certain
capital equipment leases which expire through 1998.
Net income decreased by $387,000, or 75%, from $518,000 for the year ended
December 31, 1994 to $131,000 for the year ended December 31, 1995. The decrease
was due to the factors discussed above. The Company expects the Merex
acquisition to favorably impact net income in 1996.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company had cash, cash equivalents and short
term investments of $703,000 and a working capital deficit of $892,000. 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 July 1998. The line of credit is contingent upon the
Company continuing to meet certain financial covenants. At November 28, 1997,
the Company had outstanding borrowings of approximately $986,000, including
accrued interest, under this line of credit.
Net cash used in operating activities for the nine months ended September
30, 1997 of $2,293,000 was due to the Company's net loss for the period of
$2,579,000, and an increase in accounts receivable, offset by non-cash expenses
such as depreciation and amortization, and a significant increase in accounts
payable. Accounts receivable are derived from sales made to customers on 30-day
(or less) terms. Net cash provided by investing activities of $182,000 for the
nine months ended September 30, 1997 was derived primarily from the maturity of
short term investments, offset by purchases of property and equipment. Net cash
provided by financing of $1,123,000 came from proceeds of short-term borrowing
for the nine months ended September 30, 1997.
Net cash provided by operating activities for the year ended December 31,
1996 of $1,140,000 was primarily due 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 obligations and preferred stock dividends. At
December 31, 1996, the Company had cash, cash equivalents, and short-term
investments of $2,213,000.
The Company incurred net losses of $2,579,000 for the nine months ended
September 30, 1997 and was in a negative working capital position of $892,000 at
September 30, 1997. Since September, 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, although at a declining rate. The
Company anticipates, based on currently proposed plans and assumptions relating
to its operations (including the costs associated with its growth strategy),
that the proceeds of the Offering, together with its existing financial
resources and cash flow from operations, should be sufficient to satisfy its
anticipated cash requirements through the end of the year 2000. However, there
can be no assurance that this will be the case. 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.
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NEW ACCOUNTING PRONOUNCEMENTS
Statement of Accounting Standards No. 128, "Earnings per Share," changes
the reporting requirements for earnings per share ("EPS") for publicly traded
companies by replacing primary EPS with basic EPS and changing the disclosures
associated with this change. The Company is required to adopt this standard for
its December 31, 1997 year-end. The Company does not expect that this
pronouncement will have a material impact on the Company's financial statements.
Statement of Accounting Standards No. 129, "Disclosure of Information about
Capital Structure," establishes standards for disclosing information about an
entity's capital structure. The Company is required to adopt this standard for
its December 31, 1997 year-end. The Company does not expect that this
pronouncement will have a material impact on the Company's financial statements.
Statement of Accounting Standards No. 130, "Reporting Comprehensive
Income," establishes standards for the reporting and display of comprehensive
income in a full set of general purpose financial statements. The Company is
required to adopt this standard for its December 31, 1998 year-end and is
currently evaluating the impact of this standard.
Statement of Accounting Standards No. 131, "Disclosures about Segments of
an Enterprise and Related Information," requires that public business
enterprises report certain information about operating segments. The Company is
required to adopt this standard for its December 31, 1998 year-end and is
currently evaluating the impact of this standard.
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BUSINESS
The Company provides electronic document management software and systems to
corporate and government workgroups, departments and enterprises. The Company's
newest product, VFC, has been designed to address what DataPrOpinion 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. The VFC Document Web Server 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 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
provide the capability to bridge multiple document management systems or
repositories. The first enablers are expected to be available for shipment in
the second quarter of 1998.
The Company's VFC technology has been endorsed by leading industry vendors,
including Lotus, PC DOCS, Verity, and NovaSoft, and has received numerous
favorable industry trade analyst and press reviews. At the April 1997 AIIM trade
show, with more than 35,000 attendees and 325 exhibitors, Imaging World Magazine
identified VFC as "#1 TO WATCH." 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.
In December 1997, the Company and Adobe, a major software company with
reported 1996 revenues of more than $750 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 $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 VAR of client/server and Internet/intranet document
systems products. Recently, the Company made two acquisitions to broaden its
product and service offerings: Merex, acquired in October 1995, and 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. See "Certain Transactions."
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.
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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 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:
- The 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.
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- 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.
- Enablers. Enablers provide the capability to bridge multiple document
management systems or repositories. The first enablers are expected to
be available for shipment in the second quarter of 1998.
VFC combines the following features:
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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
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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.
- 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.
- 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 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 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. 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/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. 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, PC DOCS 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
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<PAGE> 29
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
continue to develop new products and to improve its existing products. The
Company intends to continue to invest in its technology and to use a portion of
the proceeds of this Offering for research and development.
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 use a portion
of the proceeds from this Offering to enhance its sales and marketing
capabilities.
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. As of the date of this Prospectus, the Company has
no agreement, arrangement, or understanding with respect to any acquisition. See
"Certain Transactions."
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 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 sales force of 15 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
demonstra-
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tions, 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, 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.
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 six
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 six
months. The Company believes that the sales cycle for repeat sales may be
shorter. VFC is licensed at a price of $4,995 per server. The Company plans to
increase the price of VFC with its next release, which will have additional
features. 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
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within the intelligence community. Sales to government customers represented
approximately 45% of revenues in 1996 and approximately 39% for the first nine
months of 1997; however, no one customer accounted for more than 10% of the
Company's revenues in either period.
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 with a base fee and an additional fee that is 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 products and enhancements to existing products on a cost-effective
and timely basis. Software development expenses
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increased from $187,000 in 1995 to $816,000 in 1996. For the nine months ended
September 30, 1997, the Company expended $1,696,000 on software development.
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 registered servicemarks to protect its proprietary rights
in the names Infodata and INQUIRE and it has a registered trademark with respect
to the mark Inquire. The Company has registered trademarks for its Aerial,
Re:mark and Compose products. In addition, the Company has submitted trademark
applications in order to protect its Virtual File Cabinet and VFC names.
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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 January 5, 1998, the Company had a total of 114 employees, of which
75 were technical professionals, 14 comprised the sales and marketing staff, and
the remainder were involved in management, administration, and accounting.
MANUFACTURING
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.
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 $368,316 in 1997, are expected
to be $462,000 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. The lease expires May 31, 1998 and the Company is discussing the
possibility of extending the lease with the landlord.
LEGAL PROCEEDINGS
The Company is presently not a party to any material legal proceedings.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The current executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- ------------------------------------------
<S> <C> <C>
Richard T. Bueschel(1)(2)................. 64 Chairman of the Board and Director
James Ungerleider(1)...................... 48 President, Chief Executive Officer and
Director
Harry Kaplowitz(1)........................ 54 Executive Vice President and Director
Richard M. Tworek(1)...................... 41 Chief Technology Officer, Executive Vice
President and Director
Christopher P. Dettmar.................... 44 Chief Financial Officer
Dr. Robert J. Loane....................... 59 Senior Vice President
Razi Mohiuddin............................ 36 Vice President
Alan S. Fisher(5)......................... 37 Director
Laurence C. Glazer(3)(4)(5)............... 52 Director
Robert M. Leopold(1)(2)(3)(5)............. 71 Director
Isaac M. Pollak(2)(4)..................... 47 Director
Millard H. Pryor, Jr.(3)(4)(5)............ 64 Director
</TABLE>
- ---------------
(1) Member of Executive Committee.
(2) Member of Nominating Committee.
(3) Member of Audit Committee.
(4) Member of Compensation Committee.
(5) Member of Finance Committee.
Richard T. Bueschel has been the Chairman of the Board of Directors and the
Chairman of the Executive Committee of the Company since January 1993 and was
acting Chief Executive Officer of the Company from April 1997 to November 1997.
Since 1988, he has been the Chief Executive Officer of Northern Equities, Inc.,
an investment and management firm. Mr. Bueschel is Chairman of the Board of
Communications Management Systems, Inc. and a director of Study.Net Corporation.
He co-founded Time Share Corporation, TSC, Inc., Computer Environments Corp. and
DataMarket Corp., each of which are software companies, and has served on the
boards of directors of numerous technology companies. Mr. Bueschel has a B.A.
from Dartmouth College and an M.B.A. from Northeastern University.
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 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 B.S. in Electrical
Engineering from the Massachusetts Institute of Technology and an M.B.A. from
the Wharton Graduate School.
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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 B.S. in Mathematics from
Eastern Michigan University and an M.S. (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
B.S. in Commerce from the University of Virginia and an M.B.A. from Pennsylvania
State University.
Dr. Robert J. Loane has been the 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 is now involved with the architecture of future
products and provides consulting services to many of the Company's customers.
Dr. Loane has a Ph.D. in Computer Sciences from Princeton University and a
B.E.E. from Cornell University.
Razi Mohiuddin has been a Vice President of the Company and 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 B.S. in Computer
Science from the University of Illinois, Chicago.
Alan S. Fisher has been a director of the Company since July 1997. In July 1994,
he co-founded ONSALE, Inc. Mr. Fisher has been the Chief Technical Officer of
ONSALE, Inc. since 1994. Mr. Fisher was a co-founder, and, from 1988 to July
1997, President and Chairman of Software Partners, Inc. Prior to founding
Software Partners, from 1984 to 1988, Mr. Fisher was a Project Manager at
Teknowledge, Inc., a developer of artificial intelligence products. From 1981 to
1984, Mr. Fisher was a member of the technical staff at AT&T Bell Laboratories.
Mr. Fisher has a B.S. in Electrical Engineering from the University of Missouri
and an M.S. in Electrical Engineering from Stanford University.
Laurence C. Glazer has been a director of the Company since August 1993. In
1970, Mr. Glazer founded Buckingham Properties, a real estate development firm
specializing in redevelopment and enhancement of urban property in Rochester,
New York. Since 1970, he has been a Partner of Buckingham Properties. Mr. Glazer
is a member of the Board of Directors of Rochester Institute of Technology
College of Business. From January 1980 to September 1984, he was Co-Chief
Executive Officer of Great Lakes Paper. Mr. Glazer has a B.A. from the
University of Buffalo and an M.B.A. from Columbia University.
Robert M. Leopold has been a director of the Company since 1992. Since 1977, Mr.
Leopold has been President of Huguenot Associates, Inc., a financial and
business consulting firm. From 1986 to 1989, Mr. Leopold served as Chief
Executive Officer of Insituform of North America, a provider of materials and
technology for rehabilitation of underground pipes. Currently, he is a director
of Standard Security Life Insurance Company of New York, a wholly owned
subsidiary of Independence Holding Company, Inc., H.E.R.C. Products
Incorporated, and Dental Services of America, Inc. From 1988 to December 1997,
he was a Director of Windsor Capital. Mr. Leopold has a B.S. from Georgia
Institute of Technology and completed course work for an M.B.A. at New York
University.
Isaac M. Pollak has been a director of the Company since March 1993. Since 1980,
Mr. Pollak has been President and Chief Executive Officer of LGP Ltd., a
developer and marketer of promotional items. Mr. Pollak has an M.B.A. from City
College, CUNY and an M.S. from Long Island University.
34
<PAGE> 36
Millard H. Pryor, Jr. has been a director of the Company since 1992. He has been
Managing Director of Pryor & Clark Company, an investment holding company, since
September 1970. From 1988 to 1992, he was Chairman of Corcap, Inc., a
corporation engaged in supplying services and products to the government. From
1972 to 1991, Mr. Pryor was Chairman of Lydall, Inc., which manufactured
technical fiber materials. He is a Director of CompuDyne Corporation, Corcap,
Inc., Wiremold Company, Hoosier Magnetics, Inc., Pacific Scientific Company, and
The Hartford Funds. Mr. Pryor has a B.A. and an M.B.A. from the University of
Michigan.
BOARD OF DIRECTORS
Each director is elected to hold office until the next succeeding annual
meeting of shareholders and until his successor is elected and qualified or
until his death, resignation or removal. The Board has delegated certain
authority to several committees.
The Executive Committee members are Richard T. Bueschel, James Ungerleider,
Harry Kaplowitz, Robert M. Leopold and Richard M. Tworek. The Executive
Committee may exercise any of the powers and perform any of the duties of the
Board of Directors, subject to the provisions of the law and certain limits
imposed by the Board of Directors.
The Audit Committee members are Robert M. Leopold, Laurence C. Glazer and
Millard H. Pryor, Jr. The Audit Committee is responsible for recommending the
accounting firm to be engaged as independent auditors; consulting with the
independent auditors regarding the adequacy of internal accounting controls; and
reviewing the scope of the audit and the results of the audit examination. The
Audit Committee is also responsible for reviewing transactions between the
Company and its officers, directors or other affiliates.
The Nominating Committee members are Richard T. Bueschel, Robert M.
Leopold, and Isaac M. Pollak. The Nominating Committee reviews and makes
recommendations to the Board of Directors regarding the selection of nominees to
serve as committee members of the Board as well as directors of the Company.
The Compensation Committee members are Millard H. Pryor, Jr., Laurence C.
Glazer and Isaac M. Pollak. The Compensation Committee reviews and makes
recommendations to the Board of Directors regarding the compensation and
benefits policies and practices of the Company. The Compensation Committee also
administers the Company's 1995 Stock Option Plan. In addition, the Committee is
assigned responsibility for reviewing and approving the compensation of officers
of the Company.
The Finance Committee members are Alan S. Fisher, Laurence C. Glazer,
Robert M. Leopold and Millard H. Pryor, Jr. The Finance Committee is responsible
for overseeing the Company's financing activities.
35
<PAGE> 37
EXECUTIVE COMPENSATION
The following table sets forth for the Company's president and all
executive officers whose total annual salary and bonuses exceeded $100,000
(collectively, the "Named Officers") for the years ended December 31, 1995, 1996
and 1997, the amount and nature of all compensation awarded to, earned by or
paid to such Named Officers for the year indicated for services rendered in all
capacities.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION LONG-TERM
COMPENSATION
AWARDS
---------------------------------------------------
SECURITIES
FISCAL SALARY UNDERLYING
NAME AND PRINCIPAL POSITION YEAR ($) BONUS ($) OPTIONS (#)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
James A. Ungerleider(1) 1997 $ 12,000 $50,000 250,000
President, Chief Executive Officer and
Director
- -----------------------------------------------------------------------------------------------------
Harry Kaplowitz(2) 1997 $144,000 $18,000 7,500
Executive Vice President and Director 1996 $138,000 -- 20,000
1995 $132,000 $10,251 --
- -----------------------------------------------------------------------------------------------------
Dr. Robert J. Loane(3) 1997 $100,000 -- --
Senior Vice President 1996 $100,000 -- 6,000
1995 $100,000 $ 2,238 --
- -----------------------------------------------------------------------------------------------------
Richard M. Tworek(4) 1997 $149,000 $40,000 20,000
Chief Technology Officer, Executive Vice 1996 $131,000 -- 20,000
President and Director 1995 $ 22,277 -- --
- -----------------------------------------------------------------------------------------------------
</TABLE>
(1) Mr. Ungerleider's employment commenced on November 5, 1997. The bonus was
earned in 1997 but paid in January 1998.
(2) The 1995 bonus was paid in April 1996.
(3) The 1995 bonus was paid in April 1996.
(4) Mr. Tworek's employment commenced on October 11, 1995.
The following table summarizes the number of shares and the terms of stock
options granted to the Named Officers in 1997:
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
% OF TOTAL OPTIONS
NUMBER OF SECURITIES GRANTED TO EXERCISE
UNDERLYING OPTIONS EMPLOYEES IN FISCAL PRICE
NAME GRANTED (#) YEAR 1997 ($/SH) EXPIRATION DATE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
James A. Ungerleider 250,000(1) 48.6 $ 9.50 November 4, 2002
- -----------------------------------------------------------------------------------------------------------
Harry Kaplowitz 7,500(2) 1.5 $11.00 February 5, 2002
- -----------------------------------------------------------------------------------------------------------
Richard M. Tworek 20,000(3) 3.9 $11.00 February 5, 2002
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Exercisable as follows: 30% on November 5, 1997, 20% on November 5, 1998,
20% on November 5, 1999, and 30% on November 5, 2000.
(2) Exercisable in three equal annual installments on February 6, 1997, February
6, 1998 and February 6, 1999 after the Company's stock closes at
$15.00/share or greater for 30 consecutive days.
(3) Exercisable in three equal annual installments on February 6, 1997, February
6, 1998 and February 6, 1999 after the Company's stock closes at
$15.00/share or greater for 30 consecutive days.
36
<PAGE> 38
The following table sets forth information concerning the number of
unexercised options and the fiscal 1996 year-end value of unexercised options on
an aggregated basis held by the Named Officers. The Company has not granted any
stock appreciation rights; 5,444 options were exercised in fiscal 1996.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES VALUE OF
UNDERLYING UNEXERCISED UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT FISCAL YEAR-END OPTIONS AT FISCAL YEAR-END
ACQUIRED (#) ($)(1)
ON VALUE -------------------------------------------------------------
NAME EXERCISE (#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
James A. Ungerleider -- -- 75,000 175,000 $ 825,000 $ 1,925,000
Christopher P.
Dettmar -- -- 5,000 10,000 $ 55,000 $ 110,000
Harry Kaplowitz 2,332 $21,862 103,547 14,176 $ 1,139,017 $ 155,936
Dr. Robert J. Loane 8,500 $79,688 14,886 2,000 $ 163,746 $ 22,000
Richard M. Tworek -- -- 13,333 26,667 $ 146,663 $ 293,337
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The value of unexercised in-the-money options at fiscal year end was
calculated by obtaining the product of the last sale price on December 31,
1997 (which was $11.00 per share) multiplied by the number of in-the-money
exercisable options or the number of in-the-money unexercisable options, as
the case may be.
AGREEMENTS WITH EXECUTIVES
The Company entered into a letter employment agreement ("Letter Agreement")
with James Ungerleider on November 5, 1997. Pursuant to the Letter Agreement,
Mr. Ungerleider is serving as the Company's President and Chief Executive
Officer, and receives an annual base salary of $200,000 plus an annual incentive
bonus based on the achievement of certain management objectives and financial
performance measures. In addition, Mr. Ungerleider received options to acquire
250,000 shares of the Company's Common Stock at a price of $9.50 per share,
vesting over a three-year period from the date of the Letter Agreement, a
$50,000 hiring bonus to be paid on January 2, 1998, health insurance and life
insurance. Mr. Ungerleider's employment with the Company is terminable at will
and is not for a definite term. However, if Mr. Ungerleider is terminated by the
Company, other than "for cause," as defined in the Letter Agreement, he will
continue to be paid his base salary in monthly increments for a period of 18
months, and he will continue to receive various insurance benefits during such
period. These insurance and salary benefits will cease should Mr. Ungerleider
begin employment elsewhere with a new employer during such 18-month period. The
Letter Agreement also provides that, if during Mr. Ungerleider's first 12 months
of employment with the Company, Mr. Bueschel is no longer Chairman of the Board
and during that same 12-month period Mr. Ungerleider is terminated other than
for cause, the aforementioned salary and benefit provision will apply for a
24-month period.
On December 17, 1997, the Company and Mr. Ungerleider entered into an
Agreement on Confidential Information, Inventions and Ideas (the
"Confidentiality Agreement"). The Confidentiality Agreement provides that Mr.
Ungerleider will not disclose any confidential information during and after his
employment and, if his employment is terminated by the Company with cause or if
he terminates his employment without cause, for a period of one year following
the termination of his employment with the Company, he will not solicit clients,
consultants or suppliers of the Company or otherwise compete with the Company on
the sale or licensing of any products or services that are competitive with the
products or services developed or marketed by the Company in the United States.
The Confidentiality Agreement also provides that Mr. Ungerleider will not
solicit any employee of the Company for a period of one year following the date
of termination of his employment.
As part of the acquisition of Merex by the Company in October 1995, the
Company entered into an Employment and Non-Compete Agreement ("Employment
Agreement"), dated October 11, 1995, with Richard M. Tworek. Pursuant to the
Employment Agreement, Mr. Tworek is serving as Executive Vice
37
<PAGE> 39
President of the Company until October 11, 1999, and receives a minimum base
salary of $125,000 per year, plus any bonus compensation as may be determined by
the Company's Board of Directors. The Employment Agreement also provides that,
unless Mr. Tworek's employment is terminated by the Company without cause, for a
period of two years following the expiration or termination of the Employment
Agreement or his earlier resignation. Mr. Tworek may not (i) induce any then
existing client, customer or supplier of the Company to curtail business with
the Company, (ii) disturb any business relationship between the Company and any
third party, or (iii) make statements to any third party likely to result in
adverse publicity for the Company. The Employment Agreement also provides that,
unless Mr. Tworek's employment is terminated by the Company without cause, he
may not solicit any employee of the Company, and for a period of one year
following his termination may not employ any person who is or was an employee of
the Company or Merex.
As part of the acquisition of AMBIA, on July 22, 1997 the Company and AMBIA
entered into a two-year employment agreement with Razi Mohiuddin ("Mohiuddin
Employment Agreement"). Pursuant to the Mohiuddin Employment Agreement, Mr.
Mohiuddin is serving as a Vice President of the Company and manager of the
Company's West Coast facilities for a term of 24 months, unless extended by the
mutual agreement of the Company and Mr. Mohiuddin, with a base salary of
$110,000 per year, subject to adjustment based on performance reviews. The
Mohiuddin Employment Agreement also provides that Mr. Mohiuddin will be subject
to a noncompetition provision for a period of two years and a nonsolicitation
provision for a period of one year following the date of termination unless Mr.
Mohiuddin's employment is terminated by the Company without cause.
The Company has entered into Executive Separation Agreements with Mr.
Kaplowitz and Dr. Loane. In the event that either officer's employment is
terminated involuntarily, without cause, following a change in control of the
Company, as defined, that officer is entitled to separation pay equal to two
years' base salary and continuation of life and health insurance coverage for
two years. Additionally, any type of pension or profit-sharing credited service
will be extended for two years. There were no separation payments accrued or
paid under the Executive Separation Agreements in 1996.
DIRECTOR COMPENSATION
During 1996, non-employee directors received an annual fee of $3,000 plus
$500 per Board meeting or meeting of a committee of the Board (fees for
committee meetings held on the same day as Board meetings are $100). During
1996, no Executive Committee meeting fees were accrued or paid to Executive
Committee members. During 1996, Laurence C. Glazer, Isaac M. Pollak and Millard
H. Pryor, Jr., members of the Compensation Committee, were each granted a
non-qualified option under the Company's 1995 Stock Option Plan to purchase
4,666 shares of Common Stock at an exercise price of $5.0313 per share. During
1997, each of Richard T. Bueschel, Alan S. Fisher, Laurence C. Glazer, Robert M.
Leopold, Isaac M. Pollak and Millard H. Pryor, Jr., the Company's non-employee
directors, received an annual fee amounting to $10,000, payable quarterly in
shares of the Company's Common Stock (an aggregate of 1,100 shares each for the
year), plus $1,000 per board meeting attended. The Company plans to compensate
its non-employee directors on the same basis in 1998. Any director who is an
employee of the Company receives no additional compensation for serving as a
director.
1995 STOCK OPTION PLAN
In 1995, the Board of Directors adopted, and the Company's shareholders
approved, the 1995 Stock Option Plan ("1995 Plan"), which (i) consolidated the
Company's 1991 Incentive Stock Option Plan and 1992 Non-Qualified Stock Option
Plan and (ii) provided for the automatic grant of stock options to the members
of the Compensation Committee of the Company's Board of Directors ("Compensation
Committee"). The purpose of the 1995 Plan is to attract, retain and motivate
directors, officers, selected employees and consultants of the Company, as well
as officers and selected employees of any subsidiary thereof, by affording them
an opportunity to acquire a proprietary interest in the Company and to thereby
create in such persons an increased interest and a greater concern for the
welfare of the Company. The 1995 Plan is administered by the Compensation
Committee, which consists of not less than two members of the Board of
38
<PAGE> 40
Directors who qualify as "non-employee directors" of the Company within the
meaning of Rule 16b-3 under the Exchange Act.
Subject to possible adjustment in the event of a recapitalization, stock
split or similar transaction, a total of 1,511,000 shares of Common Stock may be
issued upon the exercise of options granted under the 1995 Plan. Options to
purchase an aggregate of 1,439,381 shares of Common Stock under the 1995 Plan
have been issued in the past, of which options to purchase 287,234 shares have
been exercised and options to purchase 49,625 shares have either terminated or
lapsed. As of January 5, 1998, options to purchase a total of 1,086,023 shares
of Common Stock under the 1995 Plan, at prices ranging from $1.085 to $11.00 per
share, were outstanding. Of the currently outstanding options, options for
620,114 shares are currently vested and exercisable. The 1995 Plan also provides
that if any shares underlying outstanding options cease to be subject to
purchase thereunder due to expiration or termination of the options, such shares
thereafter will be available to underlie newly granted options under the 1995
Plan.
The Compensation Committee may grant options under the 1995 Plan to (i)
certain selected employees and officers of the Company or any subsidiary thereof
who are regularly employed on a salaried basis; (ii) directors of the Company,
other than members of the Compensation Committee, who are not officers or
employees of the Company; and (iii) consultants or advisors to the Company,
provided that the services rendered by such persons are not in connection with
the offer or sale of securities in a capital-raising transaction. Members of the
Compensation Committee receive awards of options pursuant to a formula set forth
in the 1995 Plan.
The 1995 Plan provides that upon the occurrence of an event constituting a
"change of control," all options granted under the 1995 Plan immediately become
fully exercisable. A "change of control" will be deemed to have occurred under
the 1995 Plan if any person or organization becomes the beneficial owner,
directly or indirectly, of either (i) a majority of the Company's outstanding
shares of Common Stock or (ii) securities of the Company representing a majority
of the combined voting power of the Company's then outstanding voting
securities.
As a result of the Company's acquisition of AMBIA, outstanding options to
purchase 390,000 shares of AMBIA common stock were converted into options
("Replacement Options") to acquire approximately 35,000 shares of Common Stock
of the Company at an exercise price of $1.69 per share. The Replacement Options
are subject to the terms of the 1995 Plan. The Company filed a registration
statement on Form S-8 to register the shares underlying the Replacement Options
on December 19, 1997.
STOCK PURCHASE PLAN
On April 23, 1997, the Board of Directors of the Company approved the
adoption of the Company's 1997 Employee Stock Purchase Plan ("SPP"), and on May
28, 1997, the holders of a majority of the Company's outstanding shares of
Common Stock present or represented at the annual meeting of shareholders duly
adopted the SPP. The purpose of the SPP is to provide eligible employees the
opportunity to purchase Common Stock through payroll deductions. The SPP is
intended as an employment incentive and to encourage stock ownership such that
participating employees can share in the Company's progress.
The SPP is administered by the Board of Directors of the Company. Any
employee of the Company is eligible to participate, on a voluntary basis, in the
SPP, except that persons who own or hold stock, including stock underlying
options, or as a result of participation in the SPP would own stock, including
stock underlying options, amounting to 5% or more of the total combined voting
power or value of all classes of stock of the Company are not entitled to
participate in the SPP. Currently, approximately 113 persons are eligible to
participate in the SPP. 200,000 shares of the authorized but unissued Common
Stock of the Company have been reserved for issuance under the SPP.
The purchase price per share at which shares of the Common Stock are sold
in an offering under the SPP is set by the Board; provided that the purchase
price may not be less than 85% of the lesser of the fair market value of the
Common Stock on the first or the last day of the offering period. Subject to
certain limitations, the number of shares of the Common Stock a participant
purchases in an offering period is determined by dividing
39
<PAGE> 41
the total amount of payroll deductions withheld from the participant's
compensation during the offering period by the purchase price per share.
EMPLOYEE BENEFIT PLAN
In 1988, the Company established an employee benefit plan ("Benefit Plan"),
which qualifies under Section 401(k) of the 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%
of the employee's contribution to the Benefit Plan and totaled approximately
$43,000 in 1997 and $32,000 in 1996. In addition to these contributions, the
Company, at the sole discretion of its Board of Directors, may make
profit-sharing contributions to the Benefit Plan; no such contributions were
made in 1997 or 1996.
CERTAIN TRANSACTIONS
From January 1, 1996 through December 31, 1997, the Company made business
management consulting fee payments totaling $190,000 to Bermuda Capital for the
services of Mr. Richard T. Bueschel, the Company's Chairman, and paid $10,000
directly to Mr. Bueschel, for his services as acting Chief Executive Officer of
the Company from 1996 to 1997. The Company does not have a written consulting
agreement with Bermuda Capital or Mr. Bueschel.
From January 1, 1996 through December 31, 1997, the Company made payments
totaling $142,500 to Huguenot Associates, Inc. for the consulting services of
its President, Robert M. Leopold, a director of the Company. The Company is
currently making payments of $7,500 per month to Huguenot Associates, Inc. for
financial consulting services. In January 1996, the Company issued 8,000 shares
of its Common Stock to Mr. Leopold for services rendered by him to the Company
in connection with the acquisition of certain assets and liabilities of Merex on
October 11, 1995.
On October 3, 1996, the Company extended a loan to Richard M. Tworek, a
director and executive officer of the Company, in the principal amount of
$70,000. The loan bears annual interest of prime plus 1% and is payable by him
on or before October 2, 1999. As of the date of the Prospectus, the principal
amount of the loan was $70,000.
In October 1995, the Company purchased substantially all of the assets and
assumed certain liabilities of Merex in consideration for the issuance of
210,000 shares of Common Stock to Richard M. Tworek, Mary Margaret Styer and
Andrew M. Fregly (collectively, "Merex Shareholders"), with a fair value as
determined by the Company's Board of Directors of $1.125 per share. 158,754 of
such shares were issued to Richard M. Tworek. The purchase was effected pursuant
to an Asset and Purchase Agreement and Plan of Reorganization, dated as of
October 6, 1995 ("Merex Agreement"), among the Company, Merex and the Merex
Shareholders. Pursuant to the Merex Agreement, the Company agreed, until October
11, 1998, to register the shares issued to the Merex Shareholders within 30 days
of their written request to do so. Mr. Tworek has agreed to waive his
registration rights for a period of six months following the Effective Date. The
total acquisition cost was approximately $361,000, including the direct costs of
the acquisition. As part of the Merex Agreement, the Company entered into the
Employment Agreement with Mr. Tworek, pursuant to which Mr. Tworek is serving as
Executive Vice President of the Company until October 11, 1999, and receives a
minimum base salary of $125,000, plus any bonus compensation as may be
determined by the Company's Board of Directors.
On July 22, 1997, the Company acquired 100% of the issued and outstanding
capital stock of AMBIA through the issuance of 400,000 shares of Common Stock to
AMBIA's shareholders, Alan Fisher and Razi Mohiuddin (collectively, "AMBIA
Shareholders"), with a fair value as determined by the Company's Board of
Directors of $5.425 per share. Pursuant to a registration rights agreement by
and among the Company and the AMBIA Shareholders, the Company granted the AMBIA
Shareholders a one-time demand registration right, exercisable until July 22,
2000 at the request of both AMBIA Shareholders. The agreement also entitles the
AMBIA Shareholders to piggyback registration rights until July 22, 2000. The
AMBIA Shareholders have agreed to waive their registration rights for a period
of six months following the Effective Date. The acquisition was accomplished by
means of a merger of AMBIA Acquisition Corporation, a Delaware corporation
("Acquisition") and wholly-owned subsidiary of the Company, with and into AMBIA,
pursuant to the terms of the Agreement of Merger and Plan of Reorganization,
dated as of July 22, 1997 ("AMBIA Agreement"),
40
<PAGE> 42
by and among the Company, AMBIA, the AMBIA Shareholders, Software Partners,
Inc., a Delaware corporation ("SPI"), and Acquisition. As a result of the
Merger, all of the issued and outstanding shares of AMBIA were exchanged for and
converted into 400,000 shares of the Company's Common Stock, 339,999 shares were
delivered to the AMBIA Shareholders, 60,000 shares were delivered to an escrow
agent and one share was delivered to the AMBIA Shareholders in cash in lieu of a
fractional share. The escrow is being maintained to secure the Company against
breaches of representations, warranties and covenants made under the AMBIA
Agreement by the AMBIA Shareholders, SPI and AMBIA. The total acquisition cost
was approximately $2,300,000, including the direct costs of the acquisition. As
a part of the acquisition of AMBIA, the Company and AMBIA entered into a
two-year employment agreement with Mr. Mohiuddin, pursuant to which Mr.
Mohiuddin is serving as a Vice President of the Company and manager of the
Company's West Coast facilities at a base salary of $110,000 per year. In
addition, as part of the acquisition of AMBIA, the Company agreed to appoint
Alan Fisher to its Board of Directors, subject to certain provisions in the
AMBIA Agreement.
41
<PAGE> 43
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information known to the Company
regarding beneficial ownership of the Common Stock as of the date of this
Prospectus for (i) each person or group that is a beneficial owner of more than
5% of the outstanding shares of Common Stock, (ii) each of the Named Officers
and directors, and (iii) all directors and executive officers of the Company as
a group. Except as otherwise indicated, the Company believes that such
beneficial owners, based on information furnished by such owners, have sole
investment and voting power with respect to such shares, subject to community
property laws, where applicable. Unless otherwise indicated, the address of all
persons named in the table is 12150 Monument Drive, Fairfax, Virginia 22033.
<TABLE>
<CAPTION>
SHARES PERCENT PERCENT
BENEFICIALLY BEFORE AFTER
BENEFICIAL OWNER OWNED(1) OFFERING OFFERING
- --------------------------------------------------------------- ------------ -------- --------
<S> <C> <C> <C>
Richard T. Bueschel(2)......................................... 171,909 6.0% 4.4%
Suite 198
48 Par-La-Ville Road
Hamilton HM 11 Bermuda
James Ungerleider(3)........................................... 75,000 2.6% 2.0%
Harry Kaplowitz(4)............................................. 151,833 5.3% 3.9%
Richard M. Tworek(5)........................................... 197,083 7.1% 5.2%
Dr. Robert J. Loane(6)......................................... 67,355 2.4% 1.8%
Razi Mohiuddin(7).............................................. 147,121 5.3% 3.9%
1953 Landings Drive
Mountain View, California 94043
Alan S. Fisher(8).............................................. 253,366 9.2% 6.7%
1861 Landings Drive
Mountain View, California 94043
Laurence C. Glazer(9).......................................... 67,556 2.4% 1.8%
Robert M. Leopold(10).......................................... 110,836 3.9% 2.9%
Isaac M. Pollak(11)............................................ 124,942 4.5% 3.3%
Millard H. Pryor, Jr.(12)...................................... 29,316 1.1% *%
All directors and executive officers of the Company as a group
(12 persons)(13)............................................. 1,401,386 43.8% 33.4%
</TABLE>
- ---------------
* Less than 1%
(1) A person is deemed to be the beneficial owner of voting securities that can
be acquired by such person within 60 days from the date of this Prospectus
upon the exercise of options, warrants or convertible securities. Each
beneficial owner's percentage ownership is determined by assuming that
convertible securities, options or warrants that are held by such person
(but not those held by any other person) and which are exercisable within
60 days of this Prospectus have been exercised. Unless otherwise noted, the
Company believes that all persons named in the table have sole voting and
investment power with respect to all shares of Common Stock beneficially
owned by them.
(2) Includes 122,051 shares subject to presently exercisable stock options or
stock options exercisable within 60 days. Excludes 36,667 shares subject to
options not exercisable within 60 days.
(3) Includes 75,000 shares subject to presently exercisable stock options or
stock options exercisable within 60 days. Excludes 175,000 shares subject
to options not exercisable within 60 days.
(4) Includes 103,547 shares subject to presently exercisable stock options or
options exercisable within 60 days. Excludes 14,167 shares subject to
options not exercisable within 60 days.
(5) Includes 13,333 shares subject to presently exercisable stock options or
options exercisable within 60 days. Excludes 26,667 shares subject to
options not exercisable within 60 days.
(6) Includes 14,886 shares subject to presently exercisable stock options or
options exercisable within 60 days. Excludes 2,000 shares subject to
options not exercisable within 60 days.
42
<PAGE> 44
(7) Includes 22,069 shares subject to an Escrow Agreement, dated July 22, 1997,
by and among Alan Fisher, Razi Mohiuddin, the Company and SETTLEMENT CORP.
as escrow agent, pursuant to which Mr. Mohiuddin shall be entitled to vote
such shares.
(8) Includes 37,931 shares subject to an Escrow Agreement dated July 22, 1997,
by and among Alan Fisher, Razi Mohiuddin, the Company and SETTLEMENT CORP.
as escrow agent, pursuant to which Mr. Fisher shall be entitled to vote
such shares.
(9) Includes 4,666 shares subject to presently exercisable options or options
exercisable within 60 days.
(10) Includes 64,270 shares subject to presently exercisable stock options or
stock options exercisable within 60 days. Excludes 27,500 shares subject to
options not exercisable within 60 days.
(11) Includes 12,200 shares owned by LGP Ltd., a profit sharing trust for which
Mr. Pollak has sole voting and investment power. Includes 26,440 shares
subject to presently exercisable stock options and options exercisable
within 60 days.
(12) Includes 9,332 shares subject to presently exercisable stock options and
options exercisable within 60 days.
(13) Includes 438,525 shares subject to presently exercisable stock options or
stock options exercisable within 60 days. Includes 60,000 shares subject to
an Escrow Agreement dated July 22, 1997, by and among Alan Fisher, Razi
Mohiuddin, the Company and SETTLEMENT CORP. as escrow agent, pursuant to
which Mr. Fisher shall be entitled to vote 37,931 of such shares and Mr.
Mohiuddin shall be entitled to vote 22,069 of such shares. Includes 12,200
shares owned by LGP Ltd., a profit sharing trust for which Mr. Pollak has
sole voting and investment power.
DESCRIPTION OF SECURITIES
GENERAL
The authorized capital stock of the Company is 7,006,666 shares, consisting
of 6,666,666 shares of Common Stock, par value $0.03 per share, and 340,000
shares of Preferred Stock, par value $1.00 per share. As of January 5, 1998,
there were 2,759,116 shares of Common Stock outstanding. No shares of Preferred
Stock are currently outstanding. Upon completion of this Offering, there will be
approximately 3,759,116 shares of Common Stock outstanding (3,909,116 if the
Underwriters' over-allotment option is exercised in full) and no shares of
Preferred Stock outstanding.
COMMON STOCK
The holders of shares of Common Stock are entitled to one vote for each
share held of record on all matters to be voted on by shareholders. There is no
cumulative voting with respect to the election of directors, with the result
that the holders of more than 50% of the shares voted can elect all of the
directors then being elected. The holders of Common Stock are entitled to
receive dividends when, as and if declared by the Board of Directors out of
funds legally available therefor. In the event of liquidation, dissolution or
winding up of the Company, the holders of Common Stock are entitled to share
ratably in all assets remaining available for distribution to them after payment
of liabilities and after provision has been made for each class of stock, if
any, having preference over the Common Stock. Holders of shares of Common Stock,
as such, have no redemption, preemptive or other subscription rights, and there
are no conversion provisions applicable to the Common Stock. All of the
outstanding shares of Common Stock are, and the shares of Common Stock offered
hereby, when issued and paid for as set forth in this Prospectus, will be, fully
paid and nonassessable.
PREFERRED STOCK
The Company's authorized shares of Preferred Stock may be issued in one or
more series. The Board of Directors is expressly vested with the authority to
fix by resolution the designations, powers, preferences, qualifications,
limitations or restrictions of and upon shares of each series, including,
without limitation,
43
<PAGE> 45
voting, dividend, conversion, redemption and liquidation rights. In addition,
the Board of Directors may fix the number of shares constituting any such series
and increase or decrease the number of shares in any such series.
The Company believes that the availability of Preferred Stock issuable in
series will provide increased flexibility for structuring possible future
financings and acquisitions, if any, and in meeting other corporate needs. It is
not possible to state the actual effect of the authorization and issuance of any
series of Preferred Stock upon the rights of holders of Common Stock until the
Board of Directors determines the specific terms, rights and preferences of a
series of Preferred Stock. However, such effects might include, among other
things, restricting dividends on the Common Stock, diluting the voting power of
the Common Stock, or impairing liquidation rights of such shares without further
action by holders of the Common Stock. In addition, under various circumstances,
the issuance of Preferred Stock may have the effect of facilitating, as well as
impeding or discouraging, a merger, tender offer, proxy contest, the assumption
of control by a holder of a large block of the Company's securities or the
removal of incumbent management. The issuance of Preferred Stock could also
adversely affect the market price of the Common Stock.
LIMITATION OF LIABILITY OF OFFICERS AND DIRECTORS
As permitted by the Virginia Stock Corporations Act ("VSCA"), the Company's
Articles and Bylaws limit the personal liability of a director or officer to the
Company for monetary damages for breach of fiduciary duty of care as a director.
Liability is not eliminated if the officer or director engaged in willful
misconduct or a knowing violation of the criminal law or of any federal or state
securities law, including, without limitation, any claim of unlawful insider
trading or manipulation of the market for any security. Furthermore, a director
who votes for or assents to distributions made in violation of the VSCA or the
Company's Articles will be personally liable to the Company and its creditors
for the amount of the distribution that exceeds what could have been distributed
without violating the VSCA or the Company's Articles, pursuant to Section
13.1-692 of the VSCA.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Company's Articles and Bylaws require the Company to indemnify any
director or officer of the Company, or any person who is or was serving at the
request of the Company as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise, to the fullest extent
permitted by law. The Company has obtained officers' and directors' liability
insurance of $1,000,000 for members of its Board of Directors and executive
officers. In addition to the indemnification provided in the Company's Bylaws,
the Company intends to enter into agreements to indemnify its directors and
officers.
Insofar as indemnification for liabilities arising under the Securities
Act, as amended, may be permitted to directors, officers or persons controlling
the Company pursuant to the foregoing provisions, or otherwise, the Company has
been informed that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
VIRGINIA ANTI-TAKEOVER LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
The Company is subject to the provisions of Section 13.1-725.1 of the VSCA.
Subject to certain exceptions, these provisions apply to Virginia corporations
having more than 300 shareholders of record and provide that for three years
following the time that a shareholder becomes an owner of 10% of the outstanding
voting shares (an "Interested Shareholder"), a Virginia corporation cannot
engage in any "Affiliated Transaction" with such Interested Shareholder without
the approval of two-thirds of the voting shares other than those shares
beneficially owned by the Interested Shareholder, and the approval of a majority
of the disinterested directors (as defined in Section 13.1-725 of the VSCA).
After the expiration of the three-year period, the statute requires, subject to
certain exceptions, approval of Affiliated Transactions by two-thirds of the
voting shares other than those beneficially owned by the Interested Shareholder.
Affiliated Transactions subject to this approval requirement include mergers,
share exchanges, material dispositions of corporate assets not in the ordinary
course of business, any guarantee by the corporation of a material amount of
indebtedness of any Interested Shareholder, certain dispositions to an
Interested Shareholder of voting shares
44
<PAGE> 46
of the corporation, any dissolution of the corporation proposed by or on behalf
of an Interested Shareholder, or any reclassification, including reverse stock
splits, recapitalization or merger of the corporation with its subsidiaries,
which increases the percentage of voting shares owned beneficially by an
Interested Shareholder by more than 5%. Virginia law also provides that, with
respect to Virginia corporations having 300 or more shareholders of record,
shares acquired in a transaction that would cause such holder's voting strength
to meet or exceed any of three thresholds (20%, 33 1/3% or 50%) have no voting
rights with respect to such shares unless granted by a majority vote of shares
not owned by the acquiring person or any officer or employee-director of the
corporation. This provision empowers such holder to require the Virginia
corporation to hold a special meeting of shareholders to consider the matter
within 50 days of its request.
Article 3 of the Company's Articles provides that the Board of Directors,
without action by the shareholders, may issue and fix the rights and preferences
of shares of Preferred Stock. Article 2 of the Company's Bylaws further provides
that a director may only be removed upon the affirmative vote of a majority of
the voting power of the shareholders of record entitled to elect a successor and
present in person or by proxy at a special meeting of such shareholders for
which express notice of the intention to transact such business was given and at
which a quorum is present. These provisions may have the effect of delaying,
deferring or preventing a change of control of the Company without further
action by the shareholders, may discourage bids for the Common Stock at a
premium over the market price of, and the voting and other rights of the holders
of, Common Stock.
The provisions of Virginia law and the provisions contained in the
Company's Articles and Bylaws, discussed above, could prohibit or delay mergers
or other takeover or change in control attempts with respect to the Company and,
accordingly, may discourage attempts to acquire the Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have approximately
3,749,791 shares of Common Stock outstanding. All 1,000,000 shares of Common
Stock being offered hereby will be immediately tradable without restriction or
further registration under the Securities Act. In addition, substantially all of
the currently outstanding shares of Common Stock have been or will be registered
for sale under the Securities Act or are eligible for sale under an exemption
therefrom. The directors and executive officers and certain shareholders of the
Company holding, in the aggregate, 962,861 shares of Common Stock and options to
purchase an aggregate of 730,526 shares of Common Stock, have agreed not to sell
or otherwise dispose of any of such shares for twelve months from the date of
this Prospectus without the prior written consent of GKN Securities Corp.
("GKN"); provided, however, that (a) at any time beginning six months after the
effective date ("Effective Date") of the Registration Statement of which this
Prospectus is a part, the directors, executive officers and certain shareholders
may sell, without GKN's consent, up to 20% of the shares owned by them, if (i)
the last sales price of the Common Stock has been at least 125% of the per share
public offering price for at least 10 consecutive trading days ending the day
prior to the proposed sale and (ii) the sales price of the shares to be sold is
no less than 125% of the per share public offering price, (b) at any time
beginning three months after the Effective Date, (i) Richard T. Bueschel may
sell up to an aggregate of 7,500 shares, (ii) Harry Kaplowitz may sell up to an
aggregate of 12,500 shares, (iii) Dr. Robert J. Loane may sell up to an
aggregate of 2,500 shares and (iv) Robert M. Leopold may sell up to an aggregate
of 7,500 shares, in each case without GKN's consent, and (c) at any time after
the Effective Date, Richard M. Tworek may sell up to an aggregate of 10,000
shares without GKN's consent. GKN may, in its sole discretion and at any time
without notice, release all or any portion of the securities subject to lock-up
agreements. Additionally, as of the date of this Prospectus, the Company has
reserved an aggregate of 1,646,000 shares of Common Stock for issuance upon
exercise of outstanding options and the Underwriters' Purchase Option. All but
635,000 of the shares of Common Stock underlying such securities have been
registered under the Securities Act.
45
<PAGE> 47
Pursuant to the asset purchase agreement by and among the Company and the
Merex Shareholders, the Company agreed, until October 11, 1998, to register the
210,000 shares issued to the Merex Shareholders, 158,754 of which have been
issued to Richard M. Tworek, within 30 days of their written request to do so.
Mr. Tworek has agreed to waive his registration rights for a period of six
months following the Effective Date.
Pursuant to a registration rights agreement by and among the Company and
the AMBIA Shareholders, executed in connection with the acquisition of AMBIA,
the Company granted the AMBIA Shareholders a one-time demand registration right
with respect to the 400,000 shares (including 60,000 held in escrow) issued to
them. The demand registration right is exercisable until July 22, 2000 at the
request of both Razi Mohiuddin and Alan Fisher. The registration rights
agreement also provides, subject to certain exceptions, for unlimited piggyback
registration rights until July 22, 2000. The AMBIA Shareholders have agreed to
waive their registration rights for a period of six months following the
Effective Date.
UNDERWRITING
Southeast Research Partners, Inc. ("SERP") and GKN Securities Corp. ("GKN,"
and together with SERP, the "Underwriters"), have severally agreed, subject to
the terms and conditions of the Underwriting Agreement, to purchase a total of
1,000,000 shares of Common Stock from the Company. Each of SERP and GKN has
agreed to purchase 50% of such shares.
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to approval of certain legal matters by counsel to the
Underwriters and various other conditions precedent, and that the Underwriters
are obligated to purchase all the shares of Common Stock offered hereby (other
than the shares of Common Stock covered by the over-allotment option described
below) if any are purchased.
The Underwriters have advised the Company that the Underwriters propose to
offer the shares of Common Stock to the public at the price set forth on the
cover page of this Prospectus and to certain dealers at those prices less a
concession not in excess of $ per share. The Underwriters may allow,
and such dealers may reallow, a concession not in excess of $ per share
to certain other dealers. After the Offering, the offering prices and other
terms may be changed by the Underwriters.
The Company has granted to the Underwriters an option, exercisable during
the 45-day period after the date of this Prospectus, to purchase from the
Company at the offering price set forth on the cover page of this Prospectus,
less underwriting discounts and commissions, up to 150,000 shares of Common
Stock.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act. The Company also
has agreed to pay the Underwriters an expense allowance on a nonaccountable
basis equal to 2% of the gross proceeds derived from the sale of the shares of
Common Stock underwritten (including the sale of any shares of Common Stock
subject to the Underwriters' over-allotment option), $50,000 of which has been
paid to date.
In connection with the Offering, the Company has agreed to sell to the
Underwriters, for an aggregate of $100, an option to purchase up to an aggregate
of 100,000 shares of Common Stock ("Underwriters' Purchase Option"). The
Underwriters' Purchase Option is exercisable at $ per share (120% of the
offering price) for a period of four years commencing one year from the date of
this Prospectus. The Underwriters' Purchase Option grants to the holders thereof
certain "piggyback" and demand rights for periods of seven and five years,
respectively, from the date of this Prospectus with respect to the registration
under the Securities Act of the shares issuable upon exercise of the
Underwriters' Purchase Option. The Underwriters' Purchase Option cannot be
transferred, sold, assigned or hypothecated during the one year period following
the date of this Prospectus, except to officers of the Underwriters and to
selected dealers and their officers or partners.
Pursuant to the Underwriting Agreement, the directors and executive
officers and certain shareholders of the Company (collectively, "Insiders")
holding, in the aggregate, 962,861 shares of Common Stock and options to
purchase an aggregate of 730,526 shares of Common Stock, have agreed not to sell
or otherwise dispose of any of such shares for a period of 12 months following
the Effective Date without obtaining the prior written consent of GKN; provided
however, that (a) at any time beginning six months after the Effective Date
46
<PAGE> 48
each of the Insiders may sell, without GKN's consent, up to 20% of the shares
owned by him, if (i) the last sales price of the Common Stock has been at least
125% of the per share public offering price for at least 10 consecutive trading
days ending the day prior to the proposed sale and (ii) the sales price of the
shares to be sold is no less than 125% of the per share public offering price,
(b) at any time beginning three months after the Effective Date, (i) Richard T.
Bueschel may sell up to an aggregate of 7,500 shares, (ii) Harry Kaplowitz may
sell up to an aggregate of 12,500 shares, (iii) Dr. Robert J. Loane may sell up
to an aggregate of 2,500 shares and (iv) Robert M. Leopold may sell up to an
aggregate of 7,500 shares, in each case without GKN's consent, and (c) at any
time after the Effective Date, Richard M. Tworek may sell up to an aggregate of
15,000 shares without GKN's consent. GKN may, in its sole discretion and at any
time without notice, release all or any portion of the securities subject to
lock-up agreements.
The Underwriters may engage in over-allotment, stabilizing transactions,
syndicate short covering transactions and penalty bids in accordance with
Regulation M under the Exchange Act. Over-allotment involves sales by the
underwriting syndicate in excess of the offering size, which creates a syndicate
short position. Stabilizing transactions permit bids to purchase the shares of
Common Stock so long as the stabilizing bids do not exceed a specified maximum.
Syndicate short covering transactions involve purchases of the shares of Common
Stock in the open market after the distribution has been completed in order to
cover syndicate short positions. Penalty bids permit the Underwriters to reclaim
a selling concession from a selling group member when the shares of Common Stock
originally sold by such selling group member are repurchased in the open market
by the Underwriters. Such stabilizing transactions, syndicate short covering
transactions and penalty bids may cause the price of the shares of Common Stock
to be higher than it would otherwise be in the absence of such transactions.
These transactions may be effected on the Nasdaq SmallCap Market or otherwise
and, if commenced, may be discontinued at any time.
In general, the rules of the Commission will prohibit the Underwriters from
making a market in the Common Stock during a "restricted period" commencing up
to five days prior to the pricing of the offering of Common Stock offered hereby
and extending until completion of the Offering. The Commission has, however,
adopted exceptions from these rules that permit passive market making under
certain conditions. These rules permit an underwriter to continue to make a
market subject to the conditions, among others, that its bid not exceed the
highest bid by a market maker not connected with the Offering and that its net
purchases on any one trading day not exceed prescribed limits. Pursuant to these
exemptions, the Underwriters, selling group members (if any) or their respective
affiliates may engage in passive market making in the Company's Common Stock
during the restricted period.
SERP and GKN are both wholly-owned subsidiaries of GKN Holding Corp.
LEGAL MATTERS
The validity of the Common Stock offered hereby and matters of Virginia law
will be passed upon for the Company by Freedman, Levy, Kroll & Simonds,
Washington, D.C. Certain other matters pertaining to the Company will be passed
upon by Kramer, Levin, Naftalis & Frankel. Graubard Mollen & Miller, New York,
New York, has served as counsel to the Underwriters in connection with this
Offering.
EXPERTS
The audited consolidated financial statements and schedule of the Company
as of and for the years ended December 31, 1995 and 1996 included in this
Prospectus and elsewhere in the Registration Statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said report.
The audited financial statements of AMBIA as of and for the years ended
December 31, 1995 and 1996 included in this Prospectus and elsewhere in the
Registration Statement have been audited by Seiler & Company, independent public
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in giving said
report.
47
<PAGE> 49
INFODATA SYSTEMS INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
INFODATA SYSTEMS INC. AND SUBSIDIARIES
Report of Independent Public Accountants............................................ F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996 and September 30, 1997
(unaudited)...................................................................... F-3
Consolidated Statements of Operations for the Years Ended December 31, 1995 and 1996
and the Nine Months Ended September 30, 1996 (unaudited) and 1997 (unaudited).... F-4
Consolidated Statements of Changes in Shareholders' Equity for the Years Ended
December 31, 1995 and 1996 and the Nine Months Ended September 30, 1997
(unaudited)...................................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995 and 1996
and the Nine Months Ended September 30, 1996 (unaudited) and 1997 (unaudited).... F-6
Notes to the Consolidated Financial Statements...................................... F-7
AMBIA CORPORATION, INC.
Independent Auditors' Report........................................................ F-17
Balance Sheets as of December 31, 1995 and 1996 and June 30, 1997 (unaudited)....... F-18
Statements of Loss and Accumulated Deficit for the Years Ended December 31, 1995 and
1996 and the Six Months Ended June 30, 1997 (unaudited).......................... F-19
Statements of Stockholders' Deficit for the Years Ended December 31, 1995 and 1996
and the Six Months Ended June 30, 1997 (unaudited)............................... F-20
Statements of Cash Flows for the Years Ended December 31, 1995 and 1996 and the Six
Months Ended June 30, 1997 (unaudited)........................................... F-21
Notes to Financial Statements....................................................... F-22
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)..................... F-25
Pro Forma Condensed Consolidated Statement of Income for the Year Ended December 31,
1996 (unaudited)................................................................. F-26
Pro Forma Condensed Consolidated Statement of Income for the Nine Months Ended
September 30, 1997 (unaudited)................................................... F-27
Notes to the Pro Forma Condensed Consolidated Statements of Income (unaudited)...... F-28
</TABLE>
F-1
<PAGE> 50
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, 1995
and 1996, and the related consolidated statements of operations, changes in
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.
As discussed in Note 1, the Company has incurred accumulated and working
capital deficits. While the Company has developed a plan to obtain additional
financing to mitigate its liquidity risk, there can be no assurance that such
funds will be secured.
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, 1995 and 1996, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Washington, D. C.
December 18, 1997
F-2
<PAGE> 51
INFODATA SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................ $ 1,476 $ 1,266 $ 278
Short term investments................................... 33 947 425
Accounts receivable, net of allowance of $30, $80 and
$80................................................... 1,901 1,522 2,219
Prepaid royalties........................................ 18 -- --
Other current assets..................................... 146 185 234
------- ------- -------
Total current assets............................. 3,574 3,920 3,156
------- ------- -------
Property and equipment, at cost
Furniture and equipment.................................. 2,046 2,373 2,713
Less accumulated depreciation and amortization........... (1,633) (1,897) (2,136)
------- ------- -------
413 476 577
Goodwill, net of accumulated amortization of $6, $31 and
$76...................................................... 264 274 2,624
Other assets............................................... 68 137 105
Software development costs, net of accumulated amortization
of $2,010, $2,052 and $2,084............................. 126 84 52
------- ------- -------
Total assets..................................... $ 4,445 $ 4,891 $ 6,514
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of capital lease obligations............. $ 106 $ 46 $ 30
Note payable............................................. 2 -- 958
Accounts payable......................................... 335 327 1,135
Accrued expenses......................................... 677 823 822
Deferred revenue......................................... 1,171 1,079 1,070
Preferred dividend payable............................... 30 -- --
Current portion of deferred rent......................... 33 33 33
------- ------- -------
Total current liabilities........................... 2,354 2,308 4,048
------- ------- -------
Capital lease obligations.................................. 82 33 12
Deferred revenue........................................... 192 75 75
Deferred rent.............................................. 52 19 --
------- ------- -------
Total liabilities................................... 2,680 2,435 4,135
------- ------- -------
Shareholders' equity
Preferred stock.......................................... 132 -- --
Common stock............................................. 44 68 82
Additional paid-in capital............................... 8,056 9,055 11,543
Accumulated deficit...................................... (6,467) (6,667) (9,246)
------- ------- -------
Total shareholders' equity.......................... 1,765 2,456 2,379
------- ------- -------
Total liabilities and shareholders' equity....... $ 4,445 $ 4,891 $ 6,514
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 52
INFODATA SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------- ------------------
1995 1996 1996 1997
------ ------ ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues............................................... $7,049 $9,560 $7,355 $ 7,033
Cost of revenues....................................... 4,166 5,457 4,412 4,037
------ ------ ------ ------
Gross profit........................................... 2,883 4,103 2,943 2,996
------ ------ ------ ------
Operating expenses:
Research and development............................. 187 816 537 1,696
Selling, general and administrative.................. 2,657 2,869 2,007 3,920
------ ------ ------ ------
2,844 3,685 2,544 5,616
------ ------ ------ ------
Operating income (loss)................................ 39 418 399 (2,620)
Interest income........................................ 119 96 70 54
Interest expense....................................... (24) (11) (9) (18)
------ ------ ------ ------
Income (loss) before income taxes...................... 134 503 460 (2,584)
Provision for income taxes............................. 3 -- 7 (5)
------ ------ ------ ------
Net income (loss)...................................... $ 131 $ 503 $ 453 $(2,579)
====== ====== ====== ======
Preferred dividends.................................... 120 58 58 --
====== ====== ====== ======
Net income (loss) available to common shareholders..... $ 11 $ 445 $ 395 $(2,579)
====== ====== ====== ======
Per share:(*)
Net income (loss) per common and equivalent share:
Primary........................................... $ 0.01 $ 0.20 $ 0.19 $ (0.92)
====== ====== ====== ======
Fully diluted..................................... $ 0.01 $ 0.18 $ 0.16 $ (0.92)
====== ====== ====== ======
Weighted average shares:(*)
Primary........................................... 1,694 2,162 2,085 2,796
Fully diluted..................................... 1,465 2,718 2,448 2,796
</TABLE>
- ---------------
(*) All share and per share amounts retroactively reflect a 1-for-6 common stock
dividend in May 1996 and a 2-for-1 common stock split in the form of a 100%
stock distribution made in August 1996.
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 53
INFODATA SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
----------------- ------------------ PAID-IN ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
-------- ------ --------- ------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994............... 133,500 $ 134 1,204,748 $ 37 $ 7,768 $(6,478) $ 1,461
Conversion of preferred stock for common
stock.................................... (2,000) (2) 5,146 -- 2 -- --
Issuance of shares for business
acquisition.............................. -- -- 210,000 6 230 -- 236
Issuance of shares for services............ -- -- 8,000 -- 9 -- 9
Exercise of stock options.................. -- -- 37,442 1 47 -- 48
Dividends on preferred stock............... -- -- -- -- -- (120) (120)
Net income................................. -- -- -- -- -- 131 131
-------- ----- --------- --- ------- ------- ------
Balance at December 31, 1995............... 131,500 132 1,465,336 44 8,056 (6,467) 1,765
1:6 common stock dividend.................. -- -- 241,063 7 636 (643) --
Redemption of preferred shares for
common................................... (131,500) (132) 394,614 12 120 -- --
Fractional share redemption................ -- -- -- -- -- (2) (2)
Exercise of stock options.................. -- -- 176,852 5 243 -- 248
Dividends on preferred stock............... -- -- -- -- -- (58) (58)
Net income................................. -- -- -- -- -- 503 503
-------- ----- --------- --- ------- ------- ------
Balance at December 31, 1996............... -- -- 2,277,865 68 9,055 (6,667) 2,456
Issuance of shares for business acquisition
(unaudited).............................. -- -- 400,000 12 2,286 -- 2,298
Issuance of shares for services
(unaudited).............................. -- -- 2,000 -- 11 -- 11
Exercise of stock options (unaudited)...... -- -- 49,939 2 165 -- 167
Employee stock purchase plan (unaudited)... -- -- 3,952 -- 26 -- 26
Net loss (unaudited)....................... -- -- -- -- -- (2,579) (2,579)
-------- ----- --------- --- ------- ------- ------
Balance at September 30, 1997
(unaudited).............................. -- $ -- 2,733,756 $ 82 $ 11,543 $(9,246) $ 2,379
======== ===== ========= === ======= ======= ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-5
<PAGE> 54
INFODATA SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------ ------------------
1995 1996 1996 1997
------ ------- ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................... $ 131 $ 503 $ 453 $(2,579)
Adjustments to reconcile net income (loss) to cash
provided by (used in) operating activities:
Depreciation and amortization.................... 275 264 195 239
Software amortization............................ 373 42 32 31
Goodwill and other intangible amortization....... 10 48 34 (44)
Cancellation of debt on note payable............. (85) -- -- --
Investment discount amortization................. 7 -- -- --
Write-down of leased assets...................... 20 -- -- --
Other............................................ -- -- (6) --
Changes in operating assets and liabilities:
Accounts receivable.............................. (464) 379 (185) (696)
Prepaid royalties and other current assets....... 117 (21) (20) (49)
Other assets..................................... -- -- -- 32
Accounts payable................................. 94 (8) (122) 808
Accrued expenses................................. (12) 175 196 (8)
Deferred revenue................................. (226) (209) (285) (8)
Deferred rent.................................... (32) (33) (31) (19)
------- ------ ------ -------
Net cash provided by (used in) operating
activities.................................. 208 1,140 261 (2,293)
------- ------ ------ -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net............ (84) (357) (200) (340)
Business acquisition................................ (47) (23) (12) --
Loan to officer..................................... -- (70) -- --
Purchases of short term investments................. -- (943) -- --
Proceeds from maturity of short term investments.... 47 29 29 522
Other............................................... (3) (32) -- --
------- ------ ------ -------
Net cash (used in) provided by investing
activities.................................. (87) (1,396) (183) 182
------- ------ ------ -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations............... (122) (108) (84) (37)
Proceeds from short term borrowing.................. -- -- -- 1,280
Payments on notes payable........................... (21) (2) (2) (324)
Retirement of acquisition-related note payable...... (155) -- -- --
Preferred stock dividends........................... (120) (88) (87) --
Issuance of common stock............................ 48 244 155 204
------- ------ ------ -------
Net cash (used in) provided by financing
activities.................................. (370) 46 (18) 1,123
------- ------ ------ -------
Net (decrease) increase in cash and cash
equivalents......................................... (249) (210) 60 (988)
Cash and cash equivalents, at beginning of period..... 1,725 1,476 1,476 1,266
------- ------ ------ -------
Cash and cash equivalents, at end of period........... $1,476 $ 1,266 $1,536 $ 278
======= ====== ====== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-6
<PAGE> 55
INFODATA SYSTEMS INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1997 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
1. ORGANIZATION AND OPERATIONS:
The Company
Infodata Systems Inc. ("Company" or "Infodata") provides electronic
document 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, which was the
leading independent full-text retrieval product in the IBM and IBM-compatible
mainframe 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. The Company created the Virtual File
Cabinet ("VFC") to address these markets in the current electronic document
management systems landscape. The Company provides consulting services, third
party software products, its own software products, maintenance and integration
services to both corporate and government customers.
The Company's operations are subject to certain 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. As of September 30,
1997, the Company had incurred a net loss and accumulated and working capital
deficits. Management has developed a plan to obtain additional financing to
mitigate the Company's liquidity risk through a public offering and sale of
1,000,000 shares of common stock pursuant to a registration statement to be
filed in December 1997 with the Securities and Exchange Commission ("SEC").
However, there can be no assurance that such funds will be secured. The lack of
such funds could have a material adverse impact on the Company's financial
condition.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Infodata and its wholly-owned subsidiaries, Infodata Systems International Inc.
and Infodata Research and Development Corporation. These entities are
collectively referred to herein as the "Company." All significant intercompany
accounts and transactions have been eliminated in consolidation.
2. ACQUISITION:
On July 22, 1997, the Company acquired all of the common stock of AMBIA
Corporation ("AMBIA") in consideration for 400,000 shares of the Company's
common stock (restricted as to sale) with a fair value as determined by the
Company's Board of Directors of $5.425 per share. The total acquisition cost was
approximately $2,300,000 including the direct costs of the acquisition.
Approximately $25,000 was allocated to acquired tangible assets, $60,000 to
acquired intangible assets, and $2,213,000 to goodwill. 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.
F-7
<PAGE> 56
INFODATA SYSTEMS INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 future operating results or of
what would have occurred had the acquisition been consummated at that time.
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
(UNAUDITED)
<S> <C> <C>
Revenue........................................... $10,395,000 $ 7,958,000
Net loss available to common shareholders......... (577,000) (2,916,000)
Net loss per share................................ $ (0.23) $ (0.94)
</TABLE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Reporting
The financial information as of September 30, 1997, and for the nine months
ended September 30, 1996 and 1997, has been prepared by the Company, without
audit, and includes, in the opinion of management, all adjustments, consisting
of normal recurring adjustments, necessary for a fair presentation of the
interim period results. Operating results for any interim period are not
necessarily indicative of the results for any other period or for an entire
year.
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.
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.
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.
Cash Equivalents and Short Term Investments
All highly liquid investments with an original maturity of 90 days or less
at the time of purchase are considered to be cash equivalents. At December 31,
1995 and 1996, and September 30, 1997, the Company had $1,269,000, $768,000 and
$0, respectively, of cash equivalents invested in commercial paper.
Short term investments include certificates of deposit and securities
available for sale. Securities available for sale at December 31, 1995 and 1996,
and September 30, 1997, totaled approximately $0, $943,000 and $425,000,
respectively. At December 31, 1995 and 1996, the securities available for sale
consisted of commercial paper and U.S. Treasury Bills with maturities greater
than 90 days for which the carrying value approximated market value.
At September 30, 1997, the securities available for sale consisted of U.S.
Treasury Bills. Available for sale securities are carried at fair value, with
unrealized gains and losses reported as a separate component of shareholders'
equity. No unrealized gains or losses were recorded for the years ended December
31, 1995 and
F-8
<PAGE> 57
INFODATA SYSTEMS INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1996, nor for the nine month period ended September 30, 1997. Realized gains and
losses and declines in value judged to be other than temporary on available for
sale securities are included in other income.
Supplemental Disclosures of Cash Flow Information
Cash payments for interest totaled $22,000 and $11,000 for the years ended
December 31, 1995 and 1996, respectively. Cash payments for interest totaled
$9,000 and $18,000 for the nine months ended September 30, 1996 and 1997,
respectively. Cash payments for income taxes totaled $7,000 and $4,000 for the
years ended December 31, 1995 and 1996, respectively. The Company did not make
any cash payments for income taxes during the nine month periods ended September
30, 1996 and 1997.
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 five to 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 amortized using the
straight-line method over ten years. Goodwill created by the AMBIA acquisition
is amortized using the straight-line method over seven years. 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 September 30, 1997, the Company does not believe there has been an
impairment of goodwill.
Research and Development
Research and development costs are expensed as incurred.
Net Income per Common Share
For the years ended December 31, 1995 and 1996, the weighted average number
of common shares used in the calculation of primary net income per share was
approximately 1,694,000 and 2,162,000, respectively. On a fully diluted basis
for December 31, 1995 and 1996, the weighted average number of common and common
equivalent shares was approximately 1,465,000 and 2,718,000, respectively. The
weighted average number of common shares used in calculation of primary net
income per share was 2,796,000 for the nine months ended September 30, 1997. Due
to the anti-dilutive impact of common equivalent shares on net loss per share
for the nine month period ended September 30, 1997, common equivalent shares are
excluded from the weighted average number of shares on a fully diluted basis.
Net income for the years ended December 31, 1995 and 1996, and the nine
months ended September 30, 1996, have been decreased for preferred stock
dividends of $120,000, $58,000 and $58,000, respectively, to arrive at net
income available to common shareholders. The Company's preferred stock was
converted into common stock during 1996, thus no preferred stock dividends were
declared in 1997 (see Note 7).
Supplemental Pro Forma Net Loss Per Share
The Company anticipates repaying approximately $1 million in certain notes
payable with proceeds from the offering contemplated by a registration statement
to be filed in December 1997, with the SEC (see Note 1). Assuming such
repayment, supplemental pro forma net loss per share, adjusted to give effect
for the elimination of interest associated with such debt, would have been
$(.85) for the nine month period ended September 30, 1997. For purposes of this
supplemental pro forma presentation, weighted average shares
F-9
<PAGE> 58
INFODATA SYSTEMS INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
outstanding have been adjusted for the estimated number of shares that the
Company would need to issue to repay the note payable discussed above, using the
midpoint of the anticipated offering range.
Significant Customers
Sales to U.S. government agencies totaled approximately $2,586,000 and
$4,255,000 for the years ended December 31, 1995 and 1996, respectively,
representing 37% and 45% of revenues. As of December 31, 1995 and 1996, accounts
receivable due from U.S. government agencies approximated $678,000 and $655,000,
respectively. Sales to U.S. government agencies totaled approximately $2,901,000
and $2,773,000 for the nine months ended September 30, 1996 and 1997,
respectively, representing 39% of revenues for each of the years then ended. At
September 30, 1997, accounts receivable from U.S. government agencies
approximated $568,000.
Software Development Costs
Capitalization of software development costs begins upon the establishment
of technological feasibility. Capitalization ceases when the products are
available for general release to customers. The establishment of technological
feasibility and the continuing assessment of recoverability of capitalized
software development costs require considerable judgment by management with
respect to certain external factors, including, but not limited to, anticipated
future gross revenue, estimated economic life and changes in software and
hardware technologies. Amortization expense is determined on an individual
product basis and is computed as the greater of the amount calculated on a
revenue basis or straight-line basis over the economic life of the product,
generally three to five years. Amortization of software development costs is
included in cost of revenue in the accompanying consolidated statements of
operations.
Periodically, the Company reviews the estimated lives 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 life of the INQUIRE product as reflected
by the substantial revenue stream associated with maintenance renewals. The
impact of such revision in estimated remaining useful life increased net income
by approximately $22,000 in 1996.
Recent Authoritative Pronouncements
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share," changes the reporting requirements for earnings per share ("EPS") for
publicly-traded companies by replacing primary EPS with basic EPS and changing
the disclosures associated with this change. The Company is required to adopt
this standard for its December 31, 1997 year-end. The Company does not expect
that this pronouncement will have a material impact on its financial statements.
SFAS No. 129, "Disclosure of Information about Capital Structure,"
establishes standards for disclosing information about an entity's capital
structure. The Company is required to adopt this standard for its December 31,
1997 year-end. The Company does not expect that this pronouncement will have a
material impact on its financial statements.
SFAS No. 130, "Reporting Comprehensive Income," establishes standards for
the reporting and display of comprehensive income in a full set of general
purpose financial statements. The Company is required to adopt this standard for
its December 31, 1998 year-end and is currently evaluating the impact of this
standard.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," requires that public business enterprises report certain
information about operating segments. The Company is required to adopt this
standard for its December 31, 1998 year-end and is currently evaluating the
impact of the standard.
F-10
<PAGE> 59
INFODATA SYSTEMS INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. INCOME TAXES:
At December 31, 1996 and September 30, 1997, the Company had approximately
$5,347,000 and $7,643,000, respectively, 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
(see Note 2) could limit the extent to which the Company may utilize these
carryforwards in any one year. In addition, at December 31, 1996 and September
30, 1997, the Company had $70,000 in research and development tax credit
carryforwards expiring in 1997 and $55,000 in investment tax credit
carryforwards expiring in 1997 through 2000.
The actual income tax expense for the years ended December 31, 1995 and
1996, differed from the amount computed by applying the Federal statutory rate
of 34 percent as a result of the following:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1995 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
Tax at statutory rate................ $ 46,000 $ 171,000 $(949,000)
Benefit of operating loss
carryforwards...................... (55,000) -- 892,000
Benefit of stock options exercised... -- (192,000) --
Nondeductible amortization........... 3,000 16,000 54,000
Miscellaneous items.................. 6,000 5,000 3,000
Federal Alternative Minimum Tax...... 3,000 -- --
-------- --------- ---------
$ 3,000 $ -- $ --
</TABLE>
The 1995 provision for income taxes relates solely to the Federal
Alternative Minimum Tax.
The significant components of net deferred tax (liabilities) assets are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1995 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
Deferred tax liabilities:
Net software development costs.... $ (48,000) $ -- $ (20,000)
Other............................. (10,000) (32,000) --
----------- ----------- -----------
$ (58,000) $ (32,000) $ (20,000)
Deferred tax assets:
Net operating loss carryforward... 1,974,000 2,030,000 2,901,000
Investment tax credit and research
and development tax credits
carryforward................... 207,000 125,000 125,000
Other............................... 55,000 92,000 122,000
----------- ----------- -----------
2,236,000 2,247,000 3,148,000
Net deferred tax asset before
valuation allowance............... 2,178,000 2,215,000 3,128,000
Valuation allowance................. (2,178,000) (2,215,000) (3,128,000)
----------- ----------- -----------
Net deferred tax asset.............. $ -- $ -- $ --
</TABLE>
Under the provisions of SFAS No. 109, the tax effect of the net operating
loss and investment tax credit carryforwards, together with net temporary
differences, represents a net deferred tax asset against which management has
fully reserved due to the uncertainty of future taxable income. The
carryforwards will be benefited for financial reporting purposes when utilized
to offset future taxable income.
F-11
<PAGE> 60
INFODATA SYSTEMS INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
6. NOTE 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. This per annum
rate was 8.4% as of September 30, 1997. The weighted average interest rate for
the nine months ended September 30, 1997 was 8.4%. The advances on the facility
are based on eligible billed accounts receivable fewer than 90 days old, which
constitute collateral for the line of credit. The facility expires on December
31, 1997. As of December 31, 1996, the Company had no borrowings under this line
of credit. As of September 30, 1997, the Company had borrowed $958,000 under
this line of credit.
7. SHAREHOLDERS' EQUITY:
Preferred Stock
During 1996, all the outstanding shares of preferred stock were converted
into common stock, and all dividends in arrears were satisfied through the
issuance of an equivalent number of common shares.
At December 31, 1995, 131,500 shares of convertible preferred stock were
outstanding. The preferred shares had the following provisions:
- Cumulative, preferential dividends paid quarterly if declared by the
Board of Directors at an annual rate of 9 percent ($.90 per share).
- The option to convert one share of preferred stock for 1.111 common
shares.
- Full voting rights, to the extent of common shares that would be held
upon conversion.
- Pre-emptive rights relating to future stock offerings.
- Preference in the distribution of corporate assets up to $10.00 per share
plus cumulative unpaid dividends.
- All the preferred stock was redeemable at the option of the Company at a
price of $10.00 per share.
Dividends on preferred stock were paid upon declaration by the Board of
Directors. Cash dividends of $120,000 ($0.90 per preferred share) and $58,000
($0.45 per preferred share) were declared during 1995 and 1996, respectively.
OPTIONS AND WARRANTS
In April 1995, the Company's shareholders approved the adoption of the 1995
Stock Option Plan (the "1995 Plan") which consolidates and is the successor to
the Company's Incentive Stock Option Plan approved by shareholders in 1991 and
the Non-Qualified Stock Option Plan approved in 1992 (together, the "Predecessor
Plans"). Options have been granted to employees as well as to members of the
Board of Directors. The 1995 Plan also provides for the automatic granting of a
fixed number of options each year to members of the Compensation Committee of
the Company's Board of Directors and increases the total number of shares
authorized for issuance upon the exercise of options from the 777,779 shares
previously authorized to l,011,000 shares. In August 1997, an additional 500,000
shares were authorized for issuance.
F-12
<PAGE> 61
INFODATA SYSTEMS INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under the 1995 Plan, options may be granted at prices not less than 100
percent of the fair market value of the common stock at the date of grant.
Options vest over varying years of service. Vested options are exercisable until
the earlier of ten years from the date of grant or three months after
termination of employment for options granted under the Predecessor Plans, five
years from the date of grant or one month after termination of employment for
options issued under the 1995 Plan.
As of September 30, 1997, warrants remained outstanding for the right to
purchase 15,556 shares of common stock issued to certain former members of the
Board of Directors and to certain non-affiliated parties. All of the outstanding
warrants were issued over the years ended December 31, 1990 and 1991. These
warrants, which are exercisable for seven years from date of grant, are
exercisable upon grant. Warrants to purchase an additional 7,777 shares of
common stock are authorized for future issuance.
A summary of option and warrant activity under the 1995 Plan and the
Predecessor Plans is presented below:
<TABLE>
<CAPTION>
NUMBER OF EQUIVALENT SHARES
-----------------------------------
INCENTIVE STOCK NON-QUALIFIED
OPTIONS STOCK OPTIONS WARRANTS
--------------- --------------- --------------
<S> <C> <C> <C>
Outstanding at December 31, 1994.... 526,146 87,112 15,556
Granted........................... 29,166 14,000 --
Exercised......................... (43,681) -- --
Expired or canceled............... (142,770) -- --
--------- --------- ------
Outstanding at December 31, 1995.... 368,861 101,112 15,556
Granted........................... 246,655 92,998 --
Exercised......................... (52,322) (124,530) --
Expired or canceled............... (13,196) -- --
--------- --------- ------
Outstanding at December 31, 1996.... 549,998 69,580 15,556
Granted........................... 190,777 72,941 --
Exercised......................... (39,885) (10,054) --
Expired or canceled............... (26,666) (2,832) --
--------- --------- ------
Outstanding at September 30, 1997... 674,224 129,635 15,556
Exercise price.................... $1.08 to $11.00 $1.08 to $11.00 $2.17 to $2.73
</TABLE>
In November 1997, the Company granted 250,000 stock options to the
Company's President and Chief Executive Officer pursuant to an employment
agreement. The options may be exercised at $9.50 per share and vest over a three
year period. The fair value of the options on the date of grant was $9.75 per
share. The difference will be recognized as compensation expense ratably as the
options vest.
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
F-13
<PAGE> 62
INFODATA SYSTEMS INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
awards under those plans consistent with the method of SFAS No. 123, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------- ----------------
1995 1996 1996 1997
---- ---- ---- -------
<S> <C> <C> <C> <C>
Net income (loss) as reported...................... $131 $503 $453 $(2,579)
Pro forma compensation expense..................... 3 134 101 237
---- ---- ---- -------
Pro forma net income (loss)........................ $128 $369 $352 $(2,816)
Per share:
Net income (loss) available to common shareholders
per common and equivalent share:
Primary, as reported............................. $.01 $.20 $.19 $ (.92)
Primary, pro forma............................... $.01 $.14 $.17 $ (1.01)
Fully diluted, as reported....................... $.01 $.18 $.16 $ (.92)
Fully diluted, pro forma......................... $.01 $.13 $.14 $ (1.01)
</TABLE>
The weighted average fair value of options granted in 1995 and 1996 was
$1.61 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 1995 and 1996: no dividend yield, expected
volatility of 63.0 percent, risk-free interest rate of 6.21 percent and expected
life of five years. At September 30, 1997, the weighted average exercise price
for outstanding options was $4.66 per share.
Because SFAS No. 123 has not been applied to options granted prior to
January 1, 1995, the resulting pro forma compensation cost may not be
representative of that to be expected in future years.
On March 15, 1996, the Board of Directors declared a one for six common
stock dividend payable to shareholders of record as of April 17, 1996, and
distributed on May 17, 1996. Accordingly, the fair market value (based upon
quoted market prices, as adjusted) of the additional 241,063 shares issuable,
which totaled $643,000, was charged to accumulated deficit and the respective
amount was credited to common stock and additional paid-in capital.
On July 30, 1996, the Company's Board of Directors approved a two-for-one
common stock split in the form of a 100 percent stock distribution. The
distribution was made on August 26, 1996, to common shareholders of record as of
August 12, 1996. The stated par value per share of common stock was not changed
from $.03 and the number of authorized shares of common stock increased from
3,333,333 to 6,666,666 shares. Accordingly, the par value of the additional
shares issued was transferred from additional paid-in capital to common stock,
and all share and per share amounts have been restated to retroactively reflect
the stock split.
8. COMMITMENTS AND CONTINGENCIES:
Capital Lease Obligations
The Company leases certain fixed assets under long-term capital lease
agreements. These assets are included in the accompanying consolidated balance
sheets as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1995 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
Property and equipment....................... $ 580,000 $ 549,000 $ 182,000
Less -- Accumulated depreciation and
amortization............................... (403,000) (474,000) (98,000)
--------- --------- --------
$ 177,000 $ 75,000 $ 84,000
</TABLE>
F-14
<PAGE> 63
INFODATA SYSTEMS INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation and amortization of these assets is computed using the
straight-line method over the shorter of the useful lives of the assets or the
term of the lease obligation.
The future maturities of capital lease obligations as of December 31, 1996,
are as follows:
<TABLE>
<S> <C>
1997.............................................. $ 51,000
1998.............................................. 28,000
1999.............................................. 6,000
--------
Total minimum payments............................ 85,000
Less -- Amounts representing interest............. (6,000)
--------
Present value of minimum lease payments .......... 79,000
Less -- Current portion........................... (46,000)
--------
Long-term portion................................. $ 33,000
</TABLE>
Operating Leases
Effective August 1, 1993, the Company entered into a lease for its
corporate headquarters facility in Fairfax, Virginia. This lease expires July
31, 1998. The minimum commitment under this agreement amounts to $307,000. Under
the terms of the lease, the landlord provided various incentives, which have
been deferred and classified as deferred rent in the accompanying consolidated
balance sheets. These amounts are being amortized over the life of the lease.
For the years ended December 31, 1995 and 1996, and the nine months ended
September 30, 1996 and 1997, rent expense was $297,000, $290,000, $212,000 and
$258,000. During 1996, the Company incurred $53,000 of rent expense related to
space and equipment for an off-site training facility under a month-to-month
lease. During the first nine months of 1997, the Company incurred $81,000 of
rent expense related to the off-site training facility.
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 $60,000 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 portion of their
compensation toward their retirement on a tax deferred basis. The Company is
required to make contributions equal to 10 percent of the employee's
contribution to the Benefit Plan and totaled approximately $23,000 and $32,000
for the years ended December 31, 1995 and 1996, respectively, and $26,000 and
$33,000 for the nine months ended September 30, 1996 and 1997, respectively. 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 1995, 1996 or 1997.
Contingencies
A customer has asserted that the Company did not perform on a contract and
seeks a $90,000 refund. The Company vigorously denies the assertion and
management believes that based upon the current facts it is not probable that a
loss will occur. Accordingly, no accrual has been made for this claim at
December 31, 1996, or September 30, 1997.
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
F-15
<PAGE> 64
INFODATA SYSTEMS INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 $168,000
and $195,000 for the years ended December 31, 1995 and 1996, respectively, and
$143,000 and $158,000 for the nine months ended September 30, 1996 and 1997,
respectively, for services rendered by certain Directors of the Company. Amounts
payable for these services to companies employing these Directors were $15,000
and $12,500 at December 31, 1995 and 1996, respectively, and $0 at September 30,
1997. Amounts receivable from a company employing a director was $13,000 at
December 31, 1996.
In October 1996, the Company executed a note receivable from an officer and
shareholder for $70,000 due in full on September 30, 1999 with quarterly
interest payments at an annual rate of 1 percent over prime (approximately 9.25%
at December 31, 1996 and 9.50% at September 30, 1997) adjusted quarterly.
The Company issued 8,000 shares of restricted common stock to a Director
for a total compensation expense of $9,000 in consideration for services
rendered during 1995.
F-16
<PAGE> 65
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
AMBIA
We have audited the accompanying combined balance sheets of Ambia
Corporation and Software Partners, Inc. -- AMBIA Division, hereafter referred to
as AMBIA as of December 31, 1995 and 1996 and the related statements of loss and
accumulated deficit and cash flows for the years then ended. The financial
statements are the responsibility of AMBIA's management. Our responsibility is
to express an opinion on the financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. 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 AMBIA as of December 31,
1995 and 1996, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
We have reviewed the balance sheet of AMBIA as of June 30, 1997 and the
related statements of income (loss) and accumulated deficit and cash flows for
six months then ended, in accordance with Statements on Standards for Accounting
and Review Services issued by the American Institute of Certified Public
Accountants. All information included in these financial statements is the
representation of the management of AMBIA.
A review consists principally of inquires of Company personnel and
analytical procedures applied to financial data. It is substantially less in
scope than an audit in accordance with generally accepted auditing standards,
the objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements as of June 30, 1997 and for six
months the ended in order for them to be in conformity with generally accepted
accounting principles.
Seiler & Company
Redwood City, California
June 3, 1997 as to the 1995 and 1996 financial statements
and June 11, 1997 as to the 1997 financial statements
F-17
<PAGE> 66
AMBIA
BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------- AS OF
1995 1996 JUNE 30, 1997
--------- --------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................ $ -- $ -- $ --
Accounts receivable trade, net....................... 233,258 119,101 133,181
Accounts receivable others, net...................... -- 15,448 --
Prepaid expenses..................................... -- -- 6,465
Inventories.......................................... 14,476 -- --
-------- -------- ---------
Total current assets......................... 247,734 134,549 139,646
INTANGIBLE ASSETS...................................... 13,183 13,386 13,441
-------- -------- ---------
Total assets................................. $ 260,917 $ 147,935 $ 153,087
======== ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued expenses................ $ 407,089 $ -- $ 67,961
Due to Software Partners, Inc........................ -- -- 152,679
Deferred revenue..................................... 25,500 128,889 --
-------- -------- ---------
Total current liabilities.................... 432,589 128,889 220,640
-------- -------- ---------
Total liabilities............................ 432,589 128,889 220,640
-------- -------- ---------
STOCKHOLDERS' EQUITY (DEFICIT):
Additional paid in capital........................... -- 867,118 867,118
Common stock no par value, 4,500,000 shares issued
and outstanding
Accumulated deficit.................................. (171,672) (848,072) (934,671)
-------- -------- ---------
Total stockholders' equity (deficit).............. (171,672) 19,046 (67,553)
-------- -------- ---------
Total liabilities and stockholders' equity
(deficit).................................. $ 260,917 $ 147,935 $ 153,087
======== ======== =========
</TABLE>
See accompanying notes
F-18
<PAGE> 67
AMBIA
STATEMENTS OF LOSS AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, SIX MONTHS
------------------------ ENDED
1995 1996 JUNE 30, 1997
--------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES:
Consulting income.................................... $ 498,800 $ 253,438 $ 413,352
Product sales........................................ 193,189 581,430 460,353
--------- ---------- ---------
Total revenues............................... 691,989 834,868 873,705
--------- ---------- ---------
EXPENSES:
Wages................................................ 525,223 960,312 567,439
Software development................................. 55,858 169,481 149,900
Advertising and promotion............................ 53,760 70,530 16,775
Rent................................................. 39,645 53,343 41,148
Employee benefits.................................... 46,209 48,134 58,612
Telephone............................................ 20,166 28,378 24,824
Services -- postage.................................. 11,000 27,561 28,364
Cost of goods sold................................... 7,968 23,981 8,848
Travel............................................... 14,278 21,856 4,064
Accounting........................................... 6,028 19,089 8,511
Professional services................................ 22,106 18,306 3,840
Office supplies...................................... 23,853 16,085 4,142
Legal................................................ 3,336 13,393 895
Services -- shipping................................. 14,771 10,409 11,412
Amortization......................................... 3,228 8,371 5,698
Bank charges......................................... 1,845 7,387 5,192
Insurance............................................ 1,136 6,818 8,499
Bad debt............................................. -- 3,237 9,000
Business meals....................................... 1,915 1,914 1,421
Software............................................. 8,936 1,784 --
Data entry........................................... -- 899 280
Franchise taxes...................................... -- -- 800
Dues and subscriptions............................... -- -- 640
Sales commission..................................... 2,400 -- --
--------- ---------- ---------
Total expenses............................... 863,661 1,511,268 960,304
--------- ---------- ---------
NET LOSS............................................... (171,672) (676,400) (86,599)
ACCUMULATED DEFICIT, BEGINNING OF YEAR................. -- (171,672) (848,072)
--------- ---------- ---------
ACCUMULATED DEFICIT, END OF YEAR....................... $(171,672) $ (848,072) $(934,671)
========= ========== =========
</TABLE>
See accompanying notes
F-19
<PAGE> 68
AMBIA
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------- PAID IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------- ------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Balance as of
December 31, 1994................. $ -- $ -- $ -- $ --
Net income (loss).............. -- -- (171,672) (171,672)
------- -------- -------- --------
Balance as of
December 31, 1995................. -- -- (171,672) (171,672)
Additional paid in capital..... -- 867,118 -- 867,118
Net income (loss).............. -- -- (676,400) (676,400)
------- -------- -------- --------
Balance as of
December 31, 1996................. -- 867,118 (848,072) 19,046
Net Income (loss)
(Unaudited).................. -- -- (86,599) (86,599)
------- -------- -------- --------
Balance as of
June 30, 1997 (Unaudited)......... $ -- $ 867,118 $(934,671) $ (67,553)
======= ======== ======== ========
</TABLE>
See accompanying notes
F-20
<PAGE> 69
AMBIA
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------- SIX MONTHS ENDED
1995 1996 JUNE 30, 1997
--------- --------- ----------------
(UNAUDITED)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss.......................................... $(171,672) $(676,400) $ (86,599)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation and amortization..................... 3,228 8,371 5,698
Changes in operating assets and liabilities
Accounts receivable............................ (233,258) 98,709 1,368
Prepaid expenses............................... -- -- (6,465)
Inventories.................................... (14,476) 14,476 --
Accounts payable............................... -- -- 67,961
Deferred revenue............................... 25,500 103,389 (128,889)
--------- --------- ---------
Net cash provided (used) by operating
activities................................ (390,678) (451,455) (146,926)
--------- --------- ---------
INVESTING ACTIVITIES:
Purchase of intangible assets..................... (16,411) (8,574) (5,753)
--------- --------- ---------
Net cash provided (used) by investing
activities................................ (16,411) (8,574) (5,753)
--------- --------- ---------
FINANCING ACTIVITIES:
Short-term borrowings............................. 407,089 -- 152,679
Additional paid in capital........................ -- 460,029 --
--------- --------- ---------
Net cash provided (used) by financing
activities................................ 407,089 460,029 152,679
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.... -- -- --
========= ========= =========
SUPPLEMENTARY NON-CASH TRANSACTIONS:
Amounts due to Software Partners, Inc. at December
31, 1995 were converted to additional paid in
capital in 1996................................ $ 407,089
=========
</TABLE>
See accompanying notes
F-21
<PAGE> 70
AMBIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND JUNE 30, 1997
NOTE 1 -- ACCOUNTING POLICIES
A. Nature of Business
Software Partners, Inc. -- Ambia Division and Ambia Corporation, hereafter
referred to as AMBIA, develops and markets Acrobat add-on products for the
electronic publishing market in North America and Europe. Acrobat is a product
from Adobe Systems, Inc. that helps organizations publish documents on multiple
platforms from any software product.
In May 1996, Software Partners, Inc., a Delaware corporation, located in
Mountain View, California, spun-off its Ambia Division into a separate
corporation, Ambia Corporation. As a result of the spin-off, all intellectual
property was transferred, at cost, into Ambia Corporation in exchange for common
stock. Amounts due to Software Partners' other divisions were recorded as
additional paid-in capital.
The operations were carried on as Software Partners, Inc. -- Ambia Division
from January 1, 1995 to April 30, 1996, and as Ambia Corporation since May 1,
1996.
The accompanying financial statements include the results of operations of
Software Partners, Inc. -- Ambia Division and Ambia Corporation.
B. 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.
C. Intangible Assets and Deferred Charges
Trademarks and patents, stated at cost less accumulated amortization, are
being amortized on the straight-line method over a three year period.
Product design costs, stated at cost less accumulated amortization, are
being amortized on a straight-line method over a two-year period.
D. Recognition of Income
AMBIA recognizes income on its products upon shipment. Consulting revenue
is recognized as services are provided. AMBIA provides a 30-60 day warranty on
its products and services.
E. Advertising Costs
AMBIA expenses advertising production costs as they are incurred and
advertising communication costs the first time advertising takes place.
F. Research and Development
Current operations are charged with all research, engineering and product
development expenses.
G. Income Taxes
AMBIA accounts for its income taxes using the Financial Accounting
Standards Board Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" (SFAS No. 109), which requires
F-22
<PAGE> 71
AMBIA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the establishment of a deferred tax asset or liability for the recognition of
future deductible or taxable amounts and operating loss and tax credit
carryforwards. Deferred tax expense or benefit is recognized as a result of the
changes in the assets and liabilities during the year. There was no deferred tax
asset or liability at December 31, 1995, 1996 and June 30, 1997.
NOTE 2 -- ACCOUNTS RECEIVABLE, TRADE
Accounts receivable, trade consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Trade...................................... $233,258 $119,101 $142,181
Less allowance for doubtful accounts....... -- -- 9,000
-------- -------- --------
Total...................................... $233,258 $119,101 $133,181
======== ======== ========
</TABLE>
The Company also had goods on consignment, valued at approximately $14,600,
with Adobe Systems Europe Ltd. as of June 30, 1997. The goods on consignment
were not included in accounts receivable.
NOTE 3 -- INTANGIBLE ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
Intangible assets consist of the following: 1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Trademarks and patents................... $ 10,496 $ 13,252 $ 19,005
Product design........................... 5,915 11,733 11,733
------- ------- -------
16,411 24,985 30,738
Less accumulated amortization............ 3,228 11,599 17,297
------- ------- -------
Total.................................... $ 13,183 $ 13,386 $ 13,441
======= ======= =======
</TABLE>
Amortization charged to earnings for 1995, 1996 and 1997 was $3,228,
$8,371, and $2,969, respectively.
NOTE 4 -- RELATED PARTY TRANSACTIONS
All activities were carried out by Software Partners, Inc. (SPI), on behalf
of AMBIA.
Revenues and expenses on the accompanying financial statements represent
revenues earned and expenses incurred and allocated by SPI to Ambia.
Software Partners, Inc. leases office space in Mountain View, California.
The lease expires on May 31, 1998. Rent is allocated to AMBIA based on the
number of employees, and totaled $39,645, $18,400 and $19,199 during 1995, 1996
and 1997, respectively. Estimated future obligations of AMBIA under the lease
are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
JUNE 30,
----------------------------------------------------
<S> <C>
1998.............................................. 88,116
</TABLE>
NOTE 5 -- ECONOMIC DEPENDENCY
AMBIA earned a substantial portion of its revenue from three, four and two
customers in 1995, 1996 and 1997, respectively. During the year ended December
31, 1995, 1996 and six months ended June 30, 1997 revenue from these customers
totaled $288,730, $216,852, and $135,600, respectively. At June 30, 1997 no
amounts were due from these customers.
F-23
<PAGE> 72
AMBIA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- COMMON STOCK OPTIONS
AMBIA has a fixed stock-based compensation plan. Under the plan, the
Company may grant options for up to 500,000 shares of common stock. The exercise
price of each option is equal to the market price of the Company's stock on the
date of grant. The maximum term of the options is ten years, and they vest at
the end of four years.
The Company applies APB Opinion 25 in accounting for its fixed stock-based
compensation plan. Accordingly, no compensation costs has been recognized for
the plan. Had compensation cost been determined on the basis of fair value
pursuant to Financial Accounting Standards No. 123, net loss would have been
increased as follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- -------
<S> <C> <C> <C>
Loss as reported............................ $171,672 $676,400 $86,599
Loss proforma............................... 171,672 693,180 86,599
</TABLE>
The fair value of each option granted is estimated on the grant date using
the Black-Scholes model. The following assumptions were made in estimating fair
value:
<TABLE>
<CAPTION>
ASSUMPTION FIXED PLAN
------------------------------------------------ ----------
<S> <C>
Dividend yield.................................. --
Risk-free interest rate......................... 8.5%
Expected life................................... 4 years
</TABLE>
Summary of the status of the fixed plan is as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
-------------------- WEIGHTED AVERAGE
1996 1997 REMAINING SHARES
-------- -------- ----------------
<S> <C> <C> <C>
Outstanding exercisable, beginning of year....... -- 395,000 $ 0.15
Granted.......................................... 395,000 --
Exercised........................................ -- --
Forfeited........................................ -- (4,062)
------- ------- -----
Outstanding exercisable, end of year............. 395,000 390,938 $ 0.15
</TABLE>
The status of fixed options outstanding are as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
------------------------------------ EXERCISABLE OPTIONS
WEIGHTED ---------------------------------
AVERAGE WEIGHTED
REMAINING AVERAGE
EXERCISE CONTRACTUAL EXERCISE EXERCISE
PRICE SHARES LIFE PRICE SHARES PRICE
-------- -------- ----------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1996...... $ 0.15 390,938 4 years $ 0.15 390,938 $ 0.15
June 30, 1997.......... $ 0.15 395,000 4 years $ 0.15 395,000 $ 0.15
</TABLE>
As of December 31, 1996 and June 30, 1997 no options had been exercised.
F-24
<PAGE> 73
INFODATA SYSTEMS, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
On July 22, 1997, Infodata Systems Inc. (the "Company") acquired all of the
outstanding common stock of AMBIA Corporation ("AMBIA") in consideration for
400,000 shares of the Company's common stock (restricted as to sale) with a fair
value as determined by the Company's Board of Directors at $5.425 per share. The
total acquisition cost was approximately $2,300,000 including the direct costs
of the acquisition. Approximately $25,000 was allocated to acquired tangible
assets, $60,000 to acquired intangible assets, and $2,213,000 to goodwill. The
acquisition is being accounted for in accordance with the purchase method of
accounting and was accomplished by means of a merger of a wholly-owned
subsidiary of the Company into AMBIA.
The following unaudited Pro Forma Condensed Consolidated Statements of
Income give effect to the acquisition of AMBIA by the Company as if the
acquisition had occurred on January 1, 1996 and 1997, respectively. These pro
forma statements of income give effect, for the periods presented to the
following pro forma adjustments: (a) the increase in amortization associated
with goodwill resulting from the acquisition; and (b) the change in weighted
average common shares outstanding resulting from the issuance of 400,000 shares
of common stock in connection with the acquisition.
The following unaudited Pro Forma Condensed Consolidated Statements of
Income should be read in conjunction with the notes thereto included herewith,
with the Company's audited and unaudited consolidated financial statements and
notes thereto for the periods presented and with AMBIA's audited and unaudited
financial statements and notes thereto for the periods presented. The unaudited
Pro Forma Condensed Consolidated Statements of Income are not necessarily
indicative of future operating results or of what would have occurred had the
acquisition been consummated at the time specified. The pro forma adjustments
are based on available information and certain adjustments that management
believes to be reasonable. In the opinion of management, all material
adjustments have been made that are necessary to present fairly the pro forma
information.
F-25
<PAGE> 74
INFODATA SYSTEMS INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
------------------------------------------------------
PRO FORMA PRO FORMA
INFODATA AMBIA(1) ADJUSTMENTS CONSOLIDATED
-------- -------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues....................................... $9,560 $ 835 $ -- $ 10,395
Cost of revenues............................... 5,457 24 -- 5,481
------ ------ ----- -------
Gross profit................................... 4,103 811 -- 4,914
Operating expenses:
Research and development..................... 816 169 -- 985
Selling, general and administrative.......... 2,869 1,318 346(A) 4,533
------ ------ ----- -------
3,685 1,487 346 5,518
------ ------ ----- -------
Operating income (loss)........................ 418 (676) (346) (604)
Interest income................................ 96 -- -- 96
Interest expense............................... (11) -- -- (11)
------ ------ ----- -------
Income (loss) before income taxes.............. 503 (676) (346) (519)
Provision for income taxes..................... -- -- -- --
------ ------ ----- -------
Net income (loss).............................. $ 503 $ (676) $(346) $ (519)
====== ====== ===== =======
Preferred dividends............................ 58 -- -- 58
------ ------ ----- -------
Net income (loss) available to common
shareholders................................. $ 445 $ (676) $(346) $ (577)
====== ====== ===== =======
Pro forma net income (loss) per share(2)....... $ 0.20 -- -- $ (0.23)
====== =======
Pro forma weighted average shares
outstanding(2)............................... 2,162 -- 400 2,562
=======
</TABLE>
F-26
<PAGE> 75
INFODATA SYSTEMS INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997
------------------------------------------------------
PRO FORMA PRO FORMA
INFODATA AMBIA(3) ADJUSTMENTS CONSOLIDATED
-------- -------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues...................................... $ 7,033 $ 925 $ -- $ 7,958
Cost of revenues.............................. 4,037 10 -- 4,047
------- ------ ----- -------
Gross profit.................................. 2,996 915 -- 3,911
Operating expenses:
Research and development.................... 1,696 162 -- 1,858
Selling, general and administrative......... 3,920 869 221(A) 5,010
------- ------ ----- -------
5,616 1,031 221 6,868
------- ------ ----- -------
Operating income (loss)....................... (2,620) (116) (221) (2,957)
Interest income............................... 54 -- -- 54
Interest expense.............................. (18) -- -- (18)
------- ------ ----- -------
Loss before income taxes...................... (2,584) (116) (221) (2,921)
Provision for income taxes.................... (5) -- -- (5)
------- ------ ----- -------
Net Loss...................................... $ (2,579) $ (116) $(221) $ (2,916)
======= ====== ===== =======
Pro forma net loss per share(2)............... $ (0.92) -- -- $ (0.94)
======= =======
Pro forma weighted average shares
outstanding(2).............................. 2,796 -- 298 3,094
=======
</TABLE>
F-27
<PAGE> 76
INFODATA SYSTEMS INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(1) Reflects the results of AMBIA Corporation on a stand alone basis for the
year ended December 31, 1996.
(2) Pro forma net income (loss) per share and pro forma weighted average shares
outstanding reflect the issuance of 400,000 shares of Infodata Systems, Inc.
common stock issued to the shareholders of AMBIA Corporation as if the
transaction had been consummated as of the beginning of the period.
(3) Reflects the results of AMBIA Corporation on a stand alone basis for the
period January 1, 1997 through July 21, 1997, the day before the date of
acquisition.
(A) Reflects increase in amortization expense associated with goodwill on the
AMBIA Corporation acquisition and amortization of acquired intangible
assets.
F-28
<PAGE> 77
======================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR BY THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE
SECURITIES OFFERED BY THIS PROSPECTUS, OR AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY ANY SECURITIES BY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER
OR SOLICITATION IS NOT AUTHORIZED OR IS UNLAWFUL. THE DELIVERY OF THIS
PROSPECTUS SHALL NOT, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS
PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. 2
Prospectus Summary.................... 3
Risk Factors.......................... 7
Use of Proceeds....................... 14
Dividend Policy....................... 15
Price Range of Common Stock........... 15
Capitalization........................ 16
Dilution.............................. 16
Selected Consolidated Financial
Data................................ 17
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 18
Business.............................. 24
Management............................ 33
Certain Transactions.................. 40
Principal Shareholders................ 42
Description of Securities............. 43
Shares Eligible for Future Sale....... 45
Underwriting.......................... 46
Legal Matters......................... 47
Experts............................... 47
Financial Statements.................. F-1
</TABLE>
======================================================
======================================================
(Infodata Logo)
INFODATA
SYSTEMS INC.
1,000,000 SHARES OF COMMON STOCK
-----------------
PROSPECTUS
-----------------
SOUTHEAST RESEARCH PARTNERS, INC.
GKN SECURITIES CORP.
January , 1998
======================================================
<PAGE> 78
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article 10 ("Article 10") of Chapter 9 of Title 13.1 of the Virginia Stock
Corporation Act ("VSCA") authorizes a Virginia corporation to indemnify its
officers, directors, employees and agents under certain circumstances against
expenses and liabilities incurred in legal proceedings involving such persons
because of their holding or having held such positions with the corporation and
to purchase and maintain insurance for such indemnification. The Company's
Bylaws and Paragraph 10 of its Articles of Incorporation provide that the
Company shall indemnify its officers and directors to the fullest extent
permitted by Article 10 of the VSCA.
Section 13.1-692.1 of the VSCA limits the personal liability of an officer
or director to the corporation for damages arising out of certain alleged
breaches of the director's duties to the corporation. No such limitation of
liability is available if the officer or director engaged in: (i) willful
misconduct or (ii) a knowing violation of the criminal law or of any federal or
state securities law, including, without limitation, any claim of unlawful
insider trading or manipulation of the market for any security. Paragraph 9 of
the Company's Articles of Incorporation eliminates the personal liability of the
directors and officers of the Company to the fullest extent permitted by Section
13.1-692.1 of the VSCA.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The Registrant estimates that expenses payable by the Registrant in
connection with the offering described in this Registration Statement (other
than the underwriting discount and commissions and reasonable expense allowance)
will be as follows:
<TABLE>
<S> <C>
SEC registration fee.................................................... $ 4,121.15
NASD filing fee......................................................... $ 1,897.01
Nasdaq filing fees...................................................... $ 7,500.00
Printing and engraving expenses......................................... $ 75,000.00
Accounting fees and expenses............................................ $125,000.00
Legal fees and expenses (except Blue Sky)............................... $250,000.00
Blue sky fees and expenses.............................................. $ 50,000.00
Miscellaneous........................................................... $ 36,481.84
-----------
Total......................................................... $550,000.00
===========
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
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.
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, Lawrence 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-
II-1
<PAGE> 79
employee director. Through September 30, 1997, each non-employee director was
entitled to 872 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 will be 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 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ ---------------------------------------------------------------------------------
<C> <S>
1.1* Form of Underwriting Agreement.
2.1*** Plan and Agreement of Merger, dated as of March 10, 1995, by and between Infodata
Systems Inc. and Virginia Infodata Systems, Inc.
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, 1996).
3.2*** Articles of Amendment of Articles of Incorporation of the Company, dated as of
August 12, 1996.
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.
5.1* Opinion of Freedman, Levy, Kroll & Simonds regarding the validity of the
Company's Common Stock to be issued in the public offering.
10.1***+ Cross License Agreement, dated as of December 3, 1997, by and between the Company
and Adobe Systems Incorporated.
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.
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, between the
Company, AMBIA Corporation and Razi Mohiuddin.
</TABLE>
II-2
<PAGE> 80
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ ---------------------------------------------------------------------------------
<C> <S>
10.8*** Employment and Non-Compete Agreement, dated as of October 11, 1995, between the
Company and Richard M. Tworek.
10.9*** Letter Employment Agreement, dated as of November 5, 1997, between the Company
and James Ungerleider.
10.10*** Note, Loan and Security Agreement, dated as of October 31, 1997, between the
Company and Merrill Lynch Business Financial Services Inc.
10.11*** Loan and Registration Right Agreement, dated as of October 3, 1996, between the
Company and Richard M. Tworek.
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 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.
10.15* Agreement on Confidential Information, Inventions and Ideas, dated as of December
17, 1997, between the Company and James Ungerleider.
21.1* Subsidiaries of the Company.
23.1* Consent of Arthur Andersen LLP, Independent Auditors.
23.2* Consent of Seiler & Company, Independent Auditors.
23.3 Consent of Freedman, Levy, Kroll & Simonds (contained in Exhibit 5.1).
23.4* Consent of Kramer, Levin, Naftalis & Frankel.
27.1*** Financial Data Schedule.
</TABLE>
- ---------------
* Filed herewith
** To be filed by amendment
*** Previously filed
+ Material has been omitted from Exhibit 10.1 pursuant to a request for
confidential treatment. The omitted material has been separately filed with
the Commission.
(B) FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<CAPTION>
SCHEDULE DESCRIPTION
- -------- ------------------------------------------------------------------------------------
<C> <S>
II Valuation and Qualifying Accounts
</TABLE>
ITEM 28. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities,
a post-effective amendment to this Registration Statement to;
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the Registration Statement;
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration of the securities offered,
and the offering of such securities at that time to be the initial bona
fide offering.
II-3
<PAGE> 81
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-4
<PAGE> 82
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Amendment No. 2
to Registration Statement to be signed on its behalf by the undersigned, in the
City of New York, State of New York, on January 9, 1998.
INFODATA SYSTEMS INC.
By: /s/ JAMES UNGERLEIDER
--------------------------------------
James Ungerleider
(President)
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 2 to Registration Statement has been signed by the following
persons in the capacities and on the dates stated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------------ -----------------
<C> <S> <C>
/s/ JAMES UNGERLEIDER President, Chief Executive January 9, 1998
- --------------------------------------------- Officer and Director
James Ungerleider
/s/ CHRISTOPHER P. DETTMAR Chief Financial Officer January 9, 1998
- ---------------------------------------------
Christopher P. Dettmar
* Chairman of the Board and January 9, 1998
- --------------------------------------------- Director
Richard T. Bueschel
* Director January 9, 1998
- ---------------------------------------------
Alan S. Fisher
* Director January 9, 1998
- ---------------------------------------------
Laurence C. Glazer
* Director January 9, 1998
- ---------------------------------------------
Harry Kaplowitz
* Director January 9, 1998
- ---------------------------------------------
Robert Leopold
* Director January 9, 1998
- ---------------------------------------------
Isaac M. Pollak
* Director January 9, 1998
- ---------------------------------------------
Millard H. Pryor, Jr.
* Director January 9, 1998
- ---------------------------------------------
Richard M. Tworek
* /s/ JAMES UNGERLEIDER
- ---------------------------------------------
James Ungerleider
Attorney-In-Fact
</TABLE>
II-5
<PAGE> 83
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Infodata Systems Inc.:
We have audited in accordance with generally accepted auditing standards,
the financial statements of Infodata Systems Inc. (a Virginia corporation) and
subsidiaries (the "Company") as of and for the years ended December 31, 1995 and
1996, included in this registration statement and have issued our report thereon
dated December 18, 1997. Our audits were made for the purpose of forming an
opinion on the basic financial statements taken as a whole. The schedule listed
in item 27(b) is the responsibility of the Company's management and is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, fairly states, in all material
respects, the financial data required to be set forth therein in relation to the
basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Washington, D.C.
December 18, 1997
S-1
<PAGE> 84
SCHEDULE II
INFODATA SYSTEMS INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING COSTS AND BALANCE AT
DESCRIPTION OF YEAR EXPENSES DEDUCTIONS END OF YEAR
- ----------------------------------------------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
For the year ended December 31, 1995,
Deducted from assets accounts:
Allowance for doubtful accounts........... $ 30 $ -- $-- $30
For the year ended December 31, 1996,
Deducted from assets accounts:
Allowance for doubtful accounts........... $ 30 $ 50 $-- $80
</TABLE>
S-2
<PAGE> 85
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION OF DOCUMENT NUMBER
- -------- ------------------------------------------------------------------------- ----------
<S> <C> <C>
1.1* Form of Underwriting Agreement...........................................
2.1*** Plan and Agreement of Merger, dated as of March 10, 1995, by and between
Infodata Systems Inc. and Virginia Infodata Systems, Inc.................
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 to the
Company's Proxy Statement dated April 10, 1995)..........................
3.2*** Articles of Amendment of Articles of Incorporation of the Company, dated
as of August 12, 1996....................................................
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....................................
5.1* Opinion of Freedman, Levy, Kroll & Simonds regarding the validity of the
Company's Common Stock to be issued in the public offering...............
10.1***+ Cross License Agreement, dated as of December 3, 1997, by and between the
Company and Adobe Systems Incorporated...................................
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...............................................................
10.4 Lease for Data Processing Service Agreement, dated 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, between
the Company, AMBIA Corporation and Razi Mohiuddin........................
10.8*** Employment and Non-Compete Agreement, dated as of October 11, 1995,
between the Company and Richard M. Tworek................................
</TABLE>
<PAGE> 86
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION OF DOCUMENT NUMBER
- -------- ------------------------------------------------------------------------- ----------
<S> <C> <C>
10.9*** Letter Employment Agreement, dated as of November 5, 1997, between the
Company and James Ungerleider............................................
10.10*** Note, Loan and Security Agreement, dated as of October 31, 1997, between
the Company and Merrill Lynch Business Financial Services Inc............
10.11*** Loan and Registration Right Agreement, dated as of October 3, 1996,
between the Company and Richard M. Tworek................................
10.12 1995 Stock Option Plan (incorporated by reference to Exhibit 4(a) to the
Company's Form S-8, dated as of June 13, 1995)...........................
10.13 1997 Employee Stock Purchase Plan (incorporated by reference to Exhibit
4(a) to the Company's Form S-8, dated as of June 27, 1997)...............
10.14* Letter Agreement, dated as of December 14, 1997, extending the Employment
Agreement between the Company and Richard M. Tworek.
10.15* Employment Agreement on Confidential Information, Inventions and Ideas,
dated as of December 17, 1997, between the Company and James
Ungerleider..............................................................
21.1* Subsidiaries of the Company..............................................
23.1* Consent of Arthur Andersen LLP, Independent Auditors.....................
23.2* Consent of Seiler & Company, Independent Auditors........................
23.3 Consent of Freedman, Levy, Kroll & Simonds (contained in Exhibit 5.1)....
23.4* Consent of Kramer, Levin, Naftalis & Frankel.............................
27.1*** Financial Data Schedule..................................................
</TABLE>
- ---------------
* Filed herewith
** To be filed by amendment
*** Previously filed
+ Material has been omitted from Exhibit 10.1 pursuant to a request for
confidential treatment. The omitted material has been separately filed with
the Commission.
<PAGE> 1
EXHIBIT 1.1
UNDERWRITING AGREEMENT
BETWEEN
INFODATA SYSTEMS INC.
AND
SOUTHEAST RESEARCH PARTNERS, INC. AND GKN SECURITIES CORP.
DATED: January , 1998
<PAGE> 2
INFODATA SYSTEMS INC.
1,000,000 Shares of Common Stock
UNDERWRITING AGREEMENT
New York, New York
January , 1998
Southeast Research Partners, Inc.
2101 Corporate Boulevard
Suite 402
Boca Raton, Florida 33431
GKN Securities Corp.
61 Broadway
New York, N.Y. 10006
Ladies and Gentlemen:
The undersigned, Infodata Systems Inc., a Virginia corporation
("Company"), hereby confirms its agreement with Southeast Research Partners,
Inc. ("SERP") and GKN Securities Corp. ("GKN," together with SERP, being
referred to herein variously as "you" or the "Underwriters") as follows:
1. Purchase and Sale of Securities.
1.1 Firm Securities.
1.1.1 Purchase of Firm Securities. On the basis of the
representations and warranties herein contained, but subject to the terms and
conditions herein set forth, the Company agrees to issue and sell to the
Underwriters and the Underwriters agree to purchase from the Company, severally
and not jointly, 1,000,000 shares of the Company's Common Stock, par value $.03
per share ("Common Stock"), at a purchase price (net of commissions) of $____
per share (such shares of Common Stock being referred to herein as "Firm
Securities"), with 500,000 shares of Common Stock being sold to and purchased by
each of SERP and GKN.
1
<PAGE> 3
1.1.2 Payment and Delivery. Delivery and payment for the Firm
Securities shall be made at 10:00 A.M., New York time, on or before the third
business day following the date the Firm Securities commence trading or at such
earlier time as the Underwriters shall determine, or at such other time as shall
be agreed upon by the Underwriters and the Company, at the offices of GKN or at
such other place as shall be agreed upon by the Underwriters and the Company.
The hour and date of delivery and payment for the Firm Securities are called the
"Closing Date." Payment for the Firm Securities shall be made on the Closing
Date at the Underwriters' election by wire transfer or by certified or bank
cashier's check(s) in New York Clearing House funds, payable to the order of the
Company upon delivery to you of certificates (in form and substance satisfactory
to the Representatives) representing the Firm Securities for the respective
accounts of the Underwriters. The Firm Securities shall be registered in such
name or names and in such authorized denominations as the Underwriters may
request in writing at least two full business days prior to the Closing Date.
The Company will permit the Underwriters to examine and package the Firm
Securities for delivery at least one full business day prior to the Closing
Date. The Company shall not be obligated to sell or deliver the Firm Securities
except upon tender of payment by the Underwriters for all the Firm Securities.
1.2 Over-Allotment Option.
1.2.1 Option Securities. For the purposes of covering any
over-allotments in connection with the distribution and sale of the Firm
Securities, the Underwriters are hereby granted an option to purchase up to an
additional 150,000 shares of Common Stock from the Company ("Over-allotment
Option"). Such additional 150,000 shares of Common Stock are hereinafter
referred to as the "Option Securities." The Firm Securities and the Option
Securities are hereinafter referred to collectively as the "Public Securities."
The purchase price to be paid for the Option Securities will be the same price
per Option Security as the price per Firm Security set forth in Section 1.1.1
hereof.
1.2.2 Exercise of Option. The Over-allotment Option granted
pursuant to Section 1.2.1 hereof may be exercised by the Underwriters as to all
or any part of the Option Securities at any time, from time to time, within
forty-five days after the effective date ("Effective Date") of the Registration
Statement (as hereinafter defined). The Underwriters will not be under any
obligation to purchase any Option Securities prior to the exercise of the
Over-allotment Option. The Over-allotment Option granted hereby may be exercised
by the giving of oral notice to the Company from the Underwriters, which must be
confirmed by a letter or telecopy setting forth the number of Option Securities
to be purchased, the date and time for delivery of and payment for the Option
Securities and stating that the Option Securities referred to therein are to be
used for the purpose of covering over-allotments in connection with the
distribution and sale of the Firm Securities. If such notice is given at least
two full business days prior to the Closing Date, the date set forth therein for
such delivery and payment will be the Closing Date. If such notice is given
thereafter, the date set forth therein for such delivery and payment will not be
earlier than three full business days after the date of the notice. If such
delivery and payment for the Option Securities does not occur on the Closing
Date, the date and time of the closing for such Option Securities will be as set
forth in the notice (hereinafter the "Option Closing Date"). Upon exercise of
the Over-allotment Option, the Company will become obligated to convey to the
2
<PAGE> 4
Underwriters, and, subject to the terms and conditions set forth herein, the
Underwriters will become obligated to purchase, the number of Option Securities
specified in such notice.
1.2.3 Payment and Delivery. Payment for the Option Securities
will be at the Underwriters' election by certified or bank cashier's check(s) in
New York Clearing House funds, payable to the order of the Company at the
offices of GKN or at such other place as shall be agreed upon by the
Underwriters and the Company upon delivery to you of certificates representing
such securities for the respective accounts of the Underwriters. The
certificates representing the Option Securities to be delivered will be in such
denominations and registered in such names as the Underwriters request not less
than two full business days prior to the Closing Date or the Option Closing
Date, as the case may be, and will be made available to the Underwriters for
inspection, checking and packaging at the aforesaid office of the Company's
transfer agent or correspondent not less than one full business day prior to
such Closing Date.
1.3 Underwriters' Purchase Option.
1.3.1 Purchase Option. The Company hereby agrees to issue and
sell to the Underwriters (and/or their designees) on the Closing Date, for an
aggregate purchase price of $100, an option ("Underwriters' Purchase Option")
for the purchase of an aggregate of 100,000 shares of Common Stock
("Underwriters' Shares") at an initial exercise price of $____ per share. The
Underwriters' Shares are identical to the Firm Securities. The Representatives'
Purchase Option and the Underwriters' Shares are hereinafter referred to
collectively as the "Underwriters' Securities." The Public Securities and the
Underwriters' Securities are hereinafter referred to collectively as the
"Securities."
1.3.2 Payment and Delivery. Delivery and payment for the
Underwriters' Purchase Option shall be made on the Closing Date. The Company
shall deliver to the Underwriters, upon payment therefor, certificates for the
Underwriters' Purchase Option in the name or names and in such authorized
denominations as the Underwriters may request. The Underwriters' Purchase Option
shall be exercisable for a period of four years commencing one year from the
Effective Date.
2. Representations and Warranties of the Company. The Company represents
and warrants to the Underwriters as follows:
2.1 Filing of Registration Statement. The Company has filed with the
Securities and Exchange Commission ("Commission") a registration statement and
an amendment or amendments thereto, on Form SB-2 (File No. 333-42611) including
any related preliminary prospectus ("Preliminary Prospectus"), for the
registration of the Securities under the Securities Act of 1933, as amended
("Act"), which registration statement and amendment or amendments have been
prepared by the Company in conformity with the requirements of the Act, and the
rules and regulations ("Regulations") of the Commission under the Act. Except as
the context may otherwise require, such registration statement, as amended, on
file with the Commission at the time the registration statement becomes
effective (including the prospectus, financial statements, schedules, exhibits
and all other documents filed as a part thereof or incorporated
3
<PAGE> 5
therein and all information deemed to be a part thereof as of such time pursuant
to paragraph (b) of Rule 430A of the Regulations), is hereinafter called the
"Registration Statement," and the form of the final prospectus dated the
Effective Date (or, if applicable, the form of final prospectus filed with the
Commission pursuant to Rule 424 of the Regulations), is hereinafter called the
"Prospectus." The Registration Statement has been declared effective by the
Commission on the date hereof.
2.2 No Stop Orders, Etc. Neither the Commission nor, to the best of the
Company's knowledge, any state regulatory authority has issued any order
preventing or suspending the use of any Preliminary Prospectus or has instituted
or, to the best of the Company's knowledge, threatened to institute, any
proceedings with respect to such an order.
2.3 Disclosures in Registration Statement.
2.3.1 Securities Act and Exchange Act Representation. At the
time the Registration Statement became effective and at all times subsequent
thereto up to and including the Closing Date and the Option Closing Date, if
any, the Registration Statement and the Prospectus and any amendment or
supplement thereto contained and will contain all material statements that are
required to be stated therein in accordance with the Act and the Regulations,
and conformed and will conform in all material respects to the requirements of
the Act and the Regulations; neither the Registration Statement nor the
Prospectus, nor any amendment or supplement thereto, during such time period and
on such dates, contained or will contain any untrue statement of a material fact
or omitted or will omit to state any material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. When any Preliminary Prospectus was first
filed with the Commission (whether filed as part of the Registration Statement
for the registration of the Securities or any amendment thereto or pursuant to
Rule 424(a) of the Regulations) and when any amendment thereof or supplement
thereto was first filed with the Commission, such Preliminary Prospectus and any
amendments thereof and supplements thereto complied in all material respects
with the applicable provisions of the Act and the Regulations and did not
contain an untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The representation and warranty made in this Section 2.3.1 does not
apply to statements made or statements omitted in reliance upon and in
conformity with written information furnished to the Company with respect to the
Underwriters by the Representatives expressly for use in the Registration
Statement or Prospectus or any amendment thereof or supplement thereto.
2.3.2 Disclosure of Contracts. The description in the
Registration Statement and the Prospectus of contracts and other documents is
accurate and presents fairly the information required to be disclosed and there
are no contracts or other documents required to be described in the Registration
Statement or the Prospectus or to be filed with the Commission as exhibits to
the Registration Statement that have not been so described or filed. Each
contract or other instrument (however characterized or described) to which the
Company is a party or by which its property or business is or may be bound or
affected and (i) that is referred to in the Pro-
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spectus, or (ii) is material to the Company's business, has been duly and
validly executed, is in full force and effect in all material respects and is
enforceable against the parties thereto in accordance with its terms, except (i)
as such enforceability may be limited by bankruptcy, insolvency, reorganization
or similar laws affecting creditors' rights generally, (ii) as enforceability of
any indemnification provision may be limited under the federal and state
securities laws, and (iii) that the remedy of specific performance and
injunctive and other forms of equitable relief may be subject to the equitable
defenses and to the discretion of the court before which any proceeding therefor
may be brought, and none of such contracts or instruments has been assigned by
the Company, and neither the Company nor, to the best of the Company's
knowledge, any other party is in default thereunder and, to the best of the
Company's knowledge, no event has occurred which, with the lapse of time or the
giving of notice, or both, would constitute a default thereunder. None of the
material provisions of such contracts or instruments violates or will result in
a violation of any existing applicable law, rule, regulation, judgment, order or
decree of any governmental agency or court having jurisdiction over the Company
or any of its respective assets or businesses, including, without limitation,
those relating to environmental laws and regulations.
2.3.3 Prior Securities Transactions. No securities of the
Company have been sold by the Company or by or on behalf of, or for the benefit
of, any person or persons controlling, controlled by, or under common control
with the Company within the three years prior to the date hereof, except as
disclosed in the Registration Statement.
2.4 Changes After Dates in Registration Statement.
2.4.1 No Material Adverse Change. Since the respective dates
as of which information is given in the Registration Statement and the
Prospectus, except as otherwise specifically stated therein, (i) there has been
no material adverse change in the condition, financial or otherwise, or in the
results of operations, business or business prospects of the Company, including,
but not limited to, a material loss or interference with its business from fire,
storm, explosion, flood or other casualty, whether or not covered by insurance,
or from any labor dispute or court or governmental action, order or decree,
whether or not arising in the ordinary course of business, and (ii) there have
been no transactions entered into by the Company, other than those in the
ordinary course of business, that are material with respect to the condition,
financial or otherwise, or to the results of operations, business or business
prospects of the Company.
2.4.2 Recent Securities Transactions, Etc. Subsequent to the
respective dates as of which information is given in the Registration Statement
and the Prospectus, and except as may otherwise be indicated or contemplated
herein or therein, the Company has not (i) issued any securities or incurred any
liability or obligation, direct or contingent, for borrowed money; or (ii)
declared or paid any dividend or made any other distribution on or in respect to
its capital stock.
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2.5 Independent Accountants. Arthur Andersen LLP, whose report is filed
with the Commission as part of the Registration Statement, are independent
accountants as required by the Act and the Regulations.
2.6 Financial Statements. The financial statements, including the notes
thereto and supporting schedules included in the Registration Statement and
Prospectus, fairly present the financial position and the results of operations
of the Company at the dates and for the periods to which they apply; and such
financial statements have been prepared in conformity with generally accepted
accounting principles, consistently applied throughout the periods involved; and
the supporting schedules included in the Registration Statement present fairly
the information required to be stated therein.
2.7 Authorized Capital; Options; Etc. The Company had at the date or
dates indicated in the Prospectus duly authorized, issued and outstanding
capitalization as set forth in the Registration Statement and the Prospectus.
Based on the assumptions stated in the Registration Statement and the
Prospectus, the Company will have on the Closing Date the adjusted stock
capitalization set forth therein. Except as set forth in the Registration
Statement and the Prospectus, on the Effective Date and on the Closing Date
there will be no options, warrants, or other rights to purchase or otherwise
acquire any authorized but unissued shares of Common Stock of the Company,
including any obligations to issue any shares pursuant to anti-dilution
provisions, or any security convertible into shares of Common Stock of the
Company, or any contracts or commitments to issue or sell shares of Common Stock
or any such options, warrants, rights or convertible securities.
2.8 Valid Issuance of Securities; Etc.
2.8.1 Outstanding Securities. All issued and outstanding
securities of the Company have been duly authorized and validly issued and are
fully paid and non-assessable; the holders thereof have no rights of rescission
with respect thereto, and are not subject to personal liability by reason of
being such holders; and none of such securities were issued in violation of the
preemptive rights of any holders of any security of the Company or similar
contractual rights granted by the Company. The outstanding options and warrants
to purchase shares of Common Stock constitute the valid and binding obligations
of the Company, enforceable in accordance with their terms. The authorized
Common Stock and outstanding options and warrants to purchase shares of Common
Stock conform to all statements relating thereto contained in the Registration
Statement and the Prospectus. The offers and sales of the outstanding Common
Stock, options and warrants to purchase shares of Common Stock were at all
relevant times either registered or qualified under the Act and the applicable
state securities or Blue Sky Laws or exempt from such registration requirements.
2.8.2 Securities Sold Pursuant to this Agreement. The
Securities have been duly authorized and, when issued and paid for, will be
validly issued, fully paid and non-assessable; the holders thereof are not and
will not be subject to personal liability by reason of being such holders; the
Securities are not and will not be subject to the preemptive rights of any
holders of any security of the Company or similar contractual rights granted by
the Company; and all
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corporate action required to be taken for the authorization, issuance and sale
of the Securities has been duly and validly taken. When issued, the
Representatives' Purchase Option will constitute the valid and binding
obligation of the Company to issue and sell, upon exercise thereof and payment
therefor, the number and type of securities of the Company called for thereby
and the Underwriters' Purchase Option will be enforceable against the Company in
accordance with its terms, except (i) as such enforceability may be limited by
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally, (ii) as enforceability of any indemnification provision may be
limited under the federal and state securities laws, and (iii) that the remedy
of specific performance and injunctive and other forms of equitable relief may
be subject to the equitable defenses and to the discretion of the court before
which any proceeding therefor may be brought.
2.9 Registration Rights of Third Parties. Except as set forth in the
Prospectus, no holders of any securities of the Company or of any options or
warrants of the Company exercisable for or convertible or exchangeable into
securities of the Company have the right to require the Company to register any
such securities of the Company under the Act or to include any such securities
in a registration statement to be filed by the Company.
2.10 Validity and Binding Effect of Agreements. This Agreement and the
Underwriters' Purchase Option have been duly and validly authorized by the
Company and constitute, or when executed and delivered, will constitute, the
valid and binding agreements of the Company, enforceable against the Company in
accordance with their respective terms, except (i) as such enforceability may be
limited by bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally, (ii) as enforceability of any indemnification
provision may be limited under the federal and state securities laws, and (iii)
that the remedy of specific performance and injunctive and other forms of
equitable relief may be subject to the equitable defenses and to the discretion
of the court before which any proceeding therefor may be brought.
2.11 No Conflicts, Etc. The execution, delivery, and performance by the
Company of this Agreement and the Underwriters' Purchase Option and the
consummation by the Company of the transactions herein and therein contemplated
and the compliance by the Company with the terms hereof and thereof do not and
will not, with or without the giving of notice or the lapse of time or both, (i)
result in a breach of, or conflict with any of the terms and provisions of, or
constitute a default under, or result in the creation, modification, termination
or imposition of any lien, charge or encumbrance upon any property or assets of
the Company pursuant to the terms of, any indenture, mortgage, deed of trust,
note, loan or credit agreement or any other agreement or instrument evidencing
an obligation for borrowed money, or any other agreement or instrument to which
the Company is a party or by which the Company may be bound or to which any of
the property or assets of the Company is subject; (ii) result in any violation
of the provisions of the Certificate of Incorporation or the By-Laws of the
Company; (iii) violate any existing applicable law, rule, regulation, judgment,
order or decree of any governmental agency or court, domestic or foreign, having
jurisdiction over the Company or any of its properties or business ("Laws");
(iv) have a material adverse effect on any permit, license, certificate,
registration, approval, consent or franchise necessary for the Company to own or
lease and operate any of its properties or to conduct its business.
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2.12 No Defaults; Violations. No default exists in the due performance
and observance of any term, covenant or condition of any license, contract,
indenture, mortgage, deed of trust, note, loan or credit agreement, or any other
agreement or instrument evidencing an obligation for borrowed money, or any
other agreement or instrument to which the Company is a party or by which the
Company may be bound or to which any of the properties or assets of the Company
is subject, except where such default, singly or in the aggregate, would not
have a material adverse effect on the financial position, prospects, value or
the operation of the properties or the business of the Company, taken as a
whole. The Company is not in violation of any term or provision of its
Certificate of Incorporation or By-Laws or of any franchise, license, permit, or
applicable Law, except where such violation, singly or in the aggregate, would
not have a material adverse effect on the financial position, prospects, value
or the operation of the properties or the business of the Company, taken as a
whole.
2.13 Corporate Power; Licenses; Consents.
2.13.1 Conduct of Business. The Company has all requisite
corporate power and authority, and has all necessary authorizations, approvals,
orders, licenses, certificates and permits of and from all governmental or
regulatory officials and bodies to own or lease its properties and conduct its
business as described in the Prospectus, and the Company is and has been doing
business in compliance with all such authorizations, approvals, orders,
licenses, certificates and permits and all federal, state and local laws, rules
and regulations. The disclosures in the Registration Statement concerning the
effects of federal, state and local regulation on the Company's business as
currently contemplated are correct in all material respects and do not omit to
state a material fact.
2.13.2 Transactions Contemplated Herein. The Company has all
corporate power and authority to enter into this Agreement and to carry out the
provisions and conditions hereof, and all consents, authorizations, approvals
and orders required in connection therewith have been obtained. No consent,
approvals, authorizations or orders of, and no filing with, any court,
government agency or other body is required for the valid authorization,
issuance, sale and delivery of the Securities and the consummation of the
transactions and agreements contemplated by this Agreement and the Underwriters'
Purchase Option, and as contemplated by the Prospectus, except (a) with respect
to applicable federal and state securities laws; and (b) the filings with the
Commission and the Nasdaq Stock Market, Inc. described in Section 3.22 hereof.
2.14 Title to Property; Insurance. The Company has good and marketable
title to, or valid and enforceable leasehold estates in, all items of real and
personal property (tangible and intangible) owned or leased by it, free and
clear of all liens, encumbrances, claims, security interests, defects and
restrictions of any material nature whatsoever, other than those referred to in
the Prospectus and liens for taxes not yet due and payable. The Company has
adequately insured its properties against loss or damage by fire or other
casualty and maintains, in adequate amounts, such other insurance as is usually
maintained by companies engaged in the same or similar business.
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2.15 Litigation; Governmental Proceedings. Except as set forth in the
Prospectus, there is no action, suit, proceeding, inquiry, arbitration,
investigation, litigation or governmental proceeding pending or, to the
Company's knowledge, threatened against, or involving the properties or business
of, the Company that might materially and adversely affect the financial
position, prospects, value or the operations or the properties or the business
of the Company, or that questions the validity of the capital stock of the
Company or this Agreement or of any action taken or to be taken by the Company
pursuant to, or in connection with, this Agreement. There are no outstanding
orders, judgments or decrees of any court, governmental agency or other
tribunal, domestic or foreign, naming the Company and enjoining the Company from
taking, or requiring the Company to take, any action, or to which the Company,
its properties or business is bound or subject.
2.16 Good Standing. The Company has been duly organized and is validly
existing as a corporation and is in good standing under the laws of the state of
its incorporation. The Company is duly qualified and licensed and in good
standing as a foreign corporation in each jurisdiction in which ownership or
leasing of any properties or the character of its operations requires such
qualification or licensing, except where the failure to qualify would not have a
material adverse effect on the Company.
2.17 Taxes. The Company has filed all returns (as hereinafter defined)
required to be filed with taxing authorities prior to the date hereof or has
duly obtained extensions of time for the filing thereof. The Company has paid
all taxes (as hereinafter defined) shown as due on such returns that were filed
and has paid all taxes imposed on or assessed against the Company. The
provisions for taxes payable, if any, shown on the financial statements filed
with or as part of the Registration Statement are sufficient for all accrued and
unpaid taxes, whether or not disputed, and for all periods to and including the
dates of such consolidated financial statements. Except as disclosed in writing
to the Underwriters, (i) no issues have been raised (and are currently pending)
by any taxing authority in connection with any of the returns or taxes asserted
as due from the Company, and (ii) no waivers of statutes of limitation with
respect to the returns or collection of taxes have been given by or requested
from the Company. The term "taxes" mean all federal, state, local, foreign, and
other net income, gross income, gross receipts, sales, use, ad valorem,
transfer, franchise, profits, license, lease, service, service use, withholding,
payroll, employment, excise, severance, stamp, occupation, premium, property,
windfall profits, customs, duties or other taxes, fees, assessments, or charges
of any kind whatever, together with any interest and any penalties, additions to
tax, or additional amounts with respect thereto. The term "returns" means all
returns, declarations, reports, statements, and other documents required to be
filed in respect to taxes.
2.18 Transactions Affecting Disclosure to NASD.
2.18.1 Finder's Fees. There are no claims, payments,
issuances, arrangements or understandings for services in the nature of a
finder's, consulting or origination fee with respect to the introduction of the
Company to the Underwriters or the sale of the Securities hereunder or any other
arrangements, agreements, understandings, payments or issuance with
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respect to the Company that may affect the Underwriters' compensation, as
determined by the National Association of Securities Dealers, Inc. ("NASD").
2.18.2 Payments Within Twelve Months. Other than payments to
the Underwriters, the Company has not made any direct or indirect payments (in
cash, securities or otherwise) to (i) any person, as a finder's fee, investing
fee or otherwise, in consideration of such person raising capital for the
Company or introducing to the Company persons who provided capital to the
Company, or (ii) to any NASD member, or (iii) to any person or entity that has
any direct or indirect affiliation or association with any NASD member within
the twelve month period prior to the date on which the Registration Statement
was filed with the Commission ("Filing Date") or thereafter.
2.18.3 Use of Proceeds. None of the net proceeds of the
offering will be paid by the Company to any NASD member or any affiliate or
associate of any NASD member, except as specifically authorized herein.
2.18.4 Insiders' NASD Affiliation. No officer or director of
the Company or owner of any of the Company's unregistered securities has any
direct or indirect affiliation or association with any NASD member. The Company
will advise the Underwriters and the NASD if any officer, director or
stockholder of the Company is or becomes an affiliate or associated person of an
NASD member participating in the offering.
2.19 Foreign Corrupt Practices Act. Neither the Company nor any of its
officers, directors, employees, agents or any other person acting on their
behalf has, directly or indirectly, given or agreed to give any money, gift or
similar benefit (other than legal price concessions to customers in the ordinary
course of business) to any customer, supplier, employee or agent of a customer
or supplier, or official or employee of any governmental agency or
instrumentality of any government (domestic or foreign) or any political party
or candidate for office (domestic or foreign) or other person who was, is, or
may be in a position to help or hinder the business of the Company (or assist it
in connection with any actual or proposed transaction) that (i) might subject
the Company to any damage or penalty in any civil, criminal or governmental
litigation or proceeding, (ii) if not given in the past, might have had a
materially adverse effect on the assets, business or operations of the Company
as reflected in any of the financial statements contained in the Prospectus or
(iii) if not continued in the future, might adversely affect the assets,
business, operations or prospects of the Company. The Company's internal
accounting controls and procedures are sufficient to cause the Company to comply
with the Foreign Corrupt Practices Act of 1977, as amended.
2.20 Nasdaq and Pacific Stock Exchange Eligibility. As of the Effective
Date, the Securities have been approved for quotation on the Nasdaq SmallCap
Market and for listing on the Pacific Stock Exchange ("PSE").
2.21 Intangibles. The Company owns or possesses the requisite licenses
or other rights to use all trademarks, service marks, service names, trade
names, patents and patent applications, copyrights and other rights
(collectively, "Intangibles") described as being licensed
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to or owned by it in the Registration Statement. The Company's Intangibles that
have been registered in the United States Patent and Trademark Office have been
fully maintained and are in full force and effect. There is no claim or action
by any person pertaining to, or proceeding pending or threatened and the Company
has not received any notice of conflict with the asserted rights of others that
challenges the exclusive rights of the Company with respect to any Intangibles
used in the conduct of the Company's business. The Intangibles and the Company's
current products, services and processes do not infringe on any Intangibles held
by any third party. To the best of the Company's knowledge, no others have
infringed upon the Intangibles of the Company.
2.22 Relations With Employees.
2.22.1 Employee Matters. The Company has generally enjoyed a
satisfactory employer-employee relationship with its employees and is in
compliance in all material respects with all federal, state and local laws and
regulations respecting the employment of its employees and employment practices,
terms and conditions of employment and wages and hours relating thereto. There
are no pending investigations involving the Company by the U.S. Department of
Labor or any other governmental agency responsible for the enforcement of such
federal, state or local laws and regulations. There is no unfair labor practice
charge or complaint against the Company pending before the National Labor
Relations Board or any strike, picketing, boycott, dispute, slowdown or stoppage
pending or threatened against or involving the Company or any predecessor
entity, and none has ever occurred. No question concerning representation exists
respecting the employees of the Company and no collective bargaining agreement
or modification thereof is currently being negotiated by the Company. No
grievance or arbitration proceeding is pending under any expired or existing
collective bargaining agreements of the Company, if any.
2.22.2 Employee Benefit Plans. Other than as set forth in the
Registration Statement, the Company neither maintains, sponsors nor contributes
to, nor is it required to contribute to, any program or arrangement that is an
"employee pension benefit plan," an "employee welfare benefit plan," or a
"multi-employer plan" as such terms are defined in Sections 3(2), 3(1) and
3(37), respectively, of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") ("ERISA Plans"). The Company does not maintain or contribute
to, and has at no time maintained or contributed to, a defined benefit plan, as
defined in Section 3(35) of ERISA. If the Company does maintain or contribute to
a defined benefit plan, any termination of the plan on the date hereof would not
give rise to liability under Title IV of ERISA. No ERISA Plan (or any trust
created thereunder) has engaged in a "prohibited transaction" within the meaning
of Section 406 of ERISA or Section 4975 of the Internal Revenue Code of 1986, as
amended ("Code"), that could subject the Company to any tax penalty for
prohibited transactions and which has not adequately been corrected. Each ERISA
Plan is in compliance with all material reporting, disclosure and other
requirements of the Code and ERISA as they relate to any such ERISA Plan.
Determination letters have been received from the Internal Revenue Service with
respect to each ERISA Plan that is intended to comply with Code Section 401(a),
stating that such ERISA Plan and the attendant trust are qualified thereunder.
The Company has never completely or partially withdrawn from a "multi-employer
plan."
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2.23 Officers' Certificate. Any certificate signed by any duly
authorized officer of the Company and delivered to you or to your counsel shall
be deemed a representation and warranty by the Company to the Underwriters as to
the matters covered thereby.
2.24 Lock-Up Agreements. The Company has caused to be duly executed
legally binding and enforceable agreements pursuant to which all of the officers
and directors of the Company (including their family members and affiliates) and
those shareholders (including their family members and affiliates) owning five
percent or more of the outstanding shares of Common Stock on November 12, 1997
or on the Closing Date (collectively, "Insiders"), all of whom are listed on
SCHEDULE 2.24 attached hereto, agree not to sell any shares of Common Stock
owned by them (either pursuant to Rule 144 of the Regulations or otherwise) for
a period of 12 months following the Effective Date except with the consent of
GKN; provided, however, that (a) at any time after the six month anniversary of
the Effective Date, each of the Insiders may sell, without GKN's consent, up to
20% of the shares of Common Stock owned by such Insider, if (i) the last sales
price of the Common Stock has been at least 125% of the per share public
offering price for at least the ten consecutive trading days ending the day
prior to the proposed sale and (ii) the sales price of the shares to be sold is
no less than 125% of the per share public offering price, (b) at any time after
the three month anniversary of the Effective Date, (i) Richard T. Bueschel may
sell up to an aggregate of 7,500 shares of Common Stock, (ii) Harry Kaplowitz
may sell up to an aggregate of 12,500 shares of Common Stock, (iii) Dr. Robert
J. Loane may sell up to an aggregate of 2,500 shares of Common Stock and (iv)
Robert M. Leopold may sell up to an aggregate of 7,500 shares of Common Stock,
in each case without GKN's consent, and (c) at any time after the Effective Date
Richard M. Tworek may sell up to an aggregate of 15,000 Shares of Common Stock
without GKN's consent.
2.25 Subsidiaries. Except as set forth on SCHEDULE 2.25, the Company
does not own an interest in any corporation, partnership, joint venture, trust
or other business entity. The Company has no subsidiaries other than AMBIA
Corporation, Infodata Systems International Inc. and Infodata Systems Research
and Development, each a corporation duly organized and validly existing under
the laws of the jurisdiction of its incorporation ("Subsidiaries"). The Company
owns all of the capital stock of the Subsidiaries free and clear of all liens,
security interests and other encumbrances of any nature whatsoever, except as
set forth in the Prospectus. There are no options or warrants for the purchase
of, or other rights to purchase, or outstanding voting securities convertible
into or exchangeable for, any capital stock or other securities of the
Subsidiaries. Unless the context otherwise requires, the representations and
warranties made by the Company in this Agreement shall also apply and be true
with respect to the Subsidiaries, individually and taken as a whole with the
Company, as if each representation and warranty contained herein made specific
reference to the Subsidiaries each time the term "Company" was used.
2.26 Government Contracts.
2.26.1 Security Clearances. The Company possesses all
necessary security clearances and permits for the execution of its obligations
under each contract between the
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Company and any agency or instrumentality of the U.S. Government ("Government
Contract") to which it is currently a party. The Company has never been denied a
security clearance.
2.26.2 No Violations, Breaches or Defaults. The Company is
not, nor will consummation of this Agreement and the transactions contemplated
hereby result, in any material violation, breach or default of any term or
provision of (i) any Government Contract or (ii) any bid, proposal or quote
submitted to the Government by the Company, nor will the consummation of this
Agreement and the transactions contemplated hereby permit the termination by the
U.S. Government of any Government Contract. The Company is not, nor will
consummation of this Agreement and the transactions contemplated hereby result,
in any violation or default in any material respect of any provision of any
Federal order, status, rule or regulation governing any Government Contract,
bid, proposal, quote, or transaction of any kind between the Government and the
Company.
2.26.3 No Bar or Suspension. The Company is not currently
barred or suspended from doing business with the U.S. Government, nor has any
barring or suspension proceeding or action been commenced, and the Company does
not know of any facts that would warrant the institution of any barring or
suspension proceeding against the Company in the future. No show cause notices
or cure notices have been issued against the Company on any Government Contracts
awarded to the Company within the past five years. No default terminations have
been issued against the Company on any Government Contracts awarded to the
Company within the past five years. The Company is not currently under
administrative, civil or criminal investigation or indictment with respect to
any alleged irregularity, misstatement or omission arising under or relating to
any of its Government Contracts, bids, quotations or proposals, past or present,
by any U.S. Government agency, nor has any such investigation been threatened.
The Company is not undergoing and has not undergone any audit, and does not have
any knowledge of any basis for audits in the future, arising under or relating
to any Government Contract by any U.S. Government agency.
2.26.4 No Rights. The U.S. Government has no rights, including
royalty rights, with respect to any "technical data" or "computer software," as
those terms are defined in the Federal Acquisition Regulations, Part 27 and
agency supplements thereto, or any Intangibles (as defined in Section 2.21)
presently used in the operation of the Company's business.
3. Covenants of the Company. The Company covenants and agrees as follows:
3.1 Amendments to Registration Statement. The Company will deliver to
the Underwriters, prior to filing, any amendment or supplement to the
Registration Statement or Prospectus proposed to be filed after the Effective
Date and not file any such amendment or supplement to which the Underwriters
shall reasonably object.
3.2 Federal Securities Laws.
3.2.1 Compliance. During the time when a Prospectus is
required to be delivered under the Act, the Company will use all reasonable
efforts to comply with all require-
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ments imposed upon it by the Act, the Regulations, the Securities Exchange Act
of 1934, as amended ("Exchange Act"), and the regulations under the Exchange
Act, as from time to time in force, so far as necessary to permit the
continuance of sales of or dealings in the Public Securities in accordance with
the provisions hereof. If at any time when a Prospectus relating to the Public
Securities is required to be delivered under the Act any event shall have
occurred as a result of which, in the opinion of counsel for the Company or
counsel for the Underwriters, the Prospectus, as then amended or supplemented,
includes an untrue statement of a material fact or omits to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading, or if
it is necessary at any time to amend the Prospectus to comply with the Act, the
Company will notify the Underwriters promptly and prepare and file with the
Commission, subject to Section 3.1 hereof, an appropriate amendment or
supplement in accordance with Section 10 of the Act.
3.2.2 Filing of Final Prospectus. The Company will file the
Prospectus (in form and substance satisfactory to the Underwriters) with the
Commission pursuant to the requirements of Rule 424 of the Regulations.
3.2.3 Exchange Act Registration. For a period of five years
from the Effective Date, the Company will use its best efforts to maintain the
registration of the Common Stock under the provisions of the Exchange Act.
3.3 Blue Sky Filing. The Company will endeavor in good faith, in
cooperation with the Underwriters, at or prior to the time the Registration
Statement becomes effective, to qualify the Public Securities for offering and
sale under the securities laws of such jurisdictions as the Underwriters may
reasonably designate, provided that no such qualification shall be required in
any jurisdiction where, as a result thereof, the Company would be subject to
service of general process or to taxation as a foreign corporation doing
business in such jurisdiction. In each jurisdiction where such qualification
shall be effected, the Company will, unless the Underwriters agree that such
action is not at the time necessary or advisable, use all reasonable efforts to
file and make such statements or reports at such times as are or may be required
by the laws of such jurisdiction.
3.4 Delivery to Underwriters of Prospectuses. The Company will deliver
to each of the Underwriters, without charge, from time to time during the period
when the Prospectus is required to be delivered under the Act or the Exchange
Act, such number of copies of each Preliminary Prospectus and the Prospectus as
such Underwriter may reasonably request and, as soon as the Registration
Statement or any amendment or supplement thereto becomes effective, deliver to
each of you two original executed Registration Statements, including exhibits,
and all post-effective amendments thereto and copies of all exhibits filed
therewith or incorporated therein by reference and all original executed
consents of certified experts.
3.5 Events Requiring Notice to Representatives. The Company will notify
the Underwriters immediately and confirm the notice in writing (i) of the
effectiveness of the Registration Statement and any amendment thereto, (ii) of
the issuance by the Commission of any stop order or of the initiation, or the
threatening, of any proceeding for that purpose, (iii) of
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the issuance by any state securities commission of any proceedings for the
suspension of the qualification of the Public Securities for offering or sale in
any jurisdiction or of the initiation, or the threatening, of any proceeding for
that purpose, (iv) of the mailing and delivery to the Commission for filing of
any amendment or supplement to the Registration Statement or Prospectus, (v) of
the receipt of any comments or request for any additional information from the
Commission, and (vi) of the happening of any event during the period described
in Section 3.4 hereof that, in the judgment of the Company, makes any statement
of a material fact made in the Registration Statement or the Prospectus untrue
or that requires the making of any changes in the Registration Statement or the
Prospectus in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. If the Commission or
any state securities commission shall enter a stop order or suspend such
qualification at any time, the Company will make every reasonable effort to
obtain promptly the lifting of such order.
3.6 Review of Financial Statements. For a period of five years from the
Effective Date, the Company, at its expense, shall cause its regularly engaged
independent certified public accountants to review (but not audit) the Company's
financial statements for each of the first three fiscal quarters prior to the
announcement of quarterly financial information, the filing of the Company's
Form 10-QSB quarterly report and the mailing of quarterly financial information
to stockholders.
3.7 Reserved.
3.8 Secondary Market Trading and Standard & Poors. The Company will
take all necessary and appropriate action to maintain publication in Standard &
Poor's Corporation Records Corporate Descriptions with updated quarterly
information for a period of five years from the Effective Date, including the
payment of any necessary fees and expenses. The Company shall take such action
as may be reasonably requested by the Underwriters to obtain a secondary market
trading exemption in such States as may be requested by the Underwriters.
3.9 Nasdaq and PSE Maintenance. For a period of five years from the
date hereof, the Company will use its best efforts to maintain the quotation by
Nasdaq SmallCap Market and the listing by the PSE of the Common Stock.
3.10 Reserved.
3.11 Reserved.
3.12 Reports to the Underwriters.
3.12.1 Periodic Reports, Etc. For a period of five years from
the Effective Date, the Company will promptly furnish to the Underwriters copies
of such financial statements and other periodic and special reports as the
Company from time to time files with any governmental authority or furnishes
generally to holders of any class of its securities, and promptly furnish to the
Underwriters (i) a copy of each periodic report the Company shall be required to
file with the Commission, (ii) a copy of every press release and every news item
and article with respect to
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the Company or its affairs that was released by the Company, (iii) a copy of
each Form 8-K or Schedules 13D, 13G, 14D-1 or 13E-4 received or prepared by the
Company, (iv) a copy of monthly statements setting forth such information
regarding the Company's results of operations and financial position (including
balance sheet, profit and loss statements and data regarding outstanding
purchase orders) as is regularly prepared by management of the Company, and (v)
such additional documents and information with respect to the Company and the
affairs of any future subsidiaries of the Company as the Underwriters may from
time to time reasonably request.
3.12.2 Transfer Sheets and Weekly Position Listings. For a
period of five years from the Closing Date, the Company will furnish to the
Underwriters at the Company's sole expense such transfer sheets and position
listings of the Company's securities as the Underwriters may request, including
the daily, weekly and monthly consolidated transfer sheets of the transfer agent
of the Company and the weekly security position listings of the Depository Trust
Company.
3.12.3 Secondary Market Trading Memorandum. Until such time as
the Public Securities are listed or quoted, as the case may be, on the New York
Stock Exchange, the American Stock Exchange or Nasdaq National Market, the
Company shall cause the Underwriters' legal counsel to deliver to the
Underwriters at the times set forth below a written memorandum detailing those
states in which Public Securities may be traded in non-issuer transactions under
the Blue Sky laws of the fifty states ("Secondary Market Trading Memorandum").
The Secondary Market Trading Memorandum shall be delivered to the Underwriters
on the Effective Date and on the first day of every calendar quarter thereafter.
The Company shall pay to Underwriters' legal counsel a one-time fee of $5,000
for such services at the Closing.
3.13 Underwriters' Purchase Option. On the Effective Date, the Company
will execute and deliver the Underwriters' Purchase Option to the Underwriters
substantially in the form filed as an exhibit to the Registration Statement.
3.14 Disqualification of Form SB-2 (or other appropriate form). For a
period equal to five years from the date hereof, the Company will not take any
action or actions which may prevent or disqualify the Company's use of Form SB-2
(or other appropriate form) for the registration of the Underwriters' Securities
under the Act.
3.15 Payment of Expenses.
3.15.1 General Expenses. The Company hereby agrees to pay on
each of the Closing Date and the Option Closing Date, if any, to the extent not
paid at Closing Date, all expenses incident to the performance of the
obligations of the Company under this Agreement, including but not limited to
(i) the preparation, printing, filing, delivery and mailing (including the
payment of postage with respect to such mailing) of the Registration Statement,
the Prospectus and the Preliminary Prospectuses and the printing and mailing of
this Agreement and related documents, including the cost of all copies thereof
and any amendments thereof or supplements
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<PAGE> 18
thereto supplied to the Underwriters in quantities as may be required by the
Underwriters, (ii) the printing, engraving, issuance and delivery of the shares
of Common Stock and the Underwriters' Purchase Option, including any transfer or
other taxes payable thereon, (iii) the qualification of the Public Securities
under state or foreign securities or Blue Sky laws, including the filing fees
under such Blue Sky laws, the costs of printing and mailing the "Preliminary
Blue Sky Memorandum," and all amendments and supplements thereto, fees up to an
aggregate of $25,000 and disbursements of Underwriters' counsel, and a one-time
fee of $5,000 payable to the Underwriters' counsel for the preparation of the
Secondary Market Trading Memorandum, (iv) costs associated with applications for
assignments of a rating of the Public Securities by qualified rating agencies,
(v) filing fees, costs and expenses (including reasonable fees and disbursements
of the Underwriters' counsel) incurred in registering the offering with the
NASD, (vi) costs (up to an aggregate of $15,000) of placing "tombstone"
advertisements in the Wall Street Journal and The New York Times, (vii) fees and
disbursements of the transfer agent, (viii) the Company's expenses associated
with "due diligence" meetings arranged by the Underwriters, (ix) the
preparation, binding and delivery of transaction "bibles," in quantity, form and
style satisfactory to the Underwriters and transaction lucite cubes or similar
commemorative items in a style and quantity as reasonably requested by the
Underwriters, (x) any listing of the Public Securities on the Nasdaq SmallCap
Market and any securities exchange, or any listing in Standard & Poor's, and
(xi) all other costs and expenses incident to the performance of its obligations
hereunder that are not otherwise specifically provided for in this Section
3.15.1. The Underwriters may deduct from the net proceeds of the offering
payable to the Company on the Closing Date, or the Option Closing Date, if any,
the expenses set forth herein to be paid by the Company to the Underwriters
and/or to third parties.
3.15.2 Non-Accountable Expenses. The Company further agrees
that, in addition to the expenses payable pursuant to Section 3.15.1, it will
pay to the Underwriters a non-accountable expense allowance equal to two percent
(2%) of the gross proceeds received by the Company from the sale of the Public
Securities, of which $50,000 has been paid to date, and the Company will pay the
balance on the Closing Date and any additional monies owed attributable to the
Option Securities or otherwise on the Option Closing Date by certified or bank
cashier's check or, at the election of the Underwriters, by deduction from the
proceeds of the offering contemplated herein. If the offering contemplated by
this Agreement is not consummated for any reason whatsoever then the following
provisions shall apply: The Company's liability for payment to the Underwriters
of the non-accountable expense allowance shall be equal to the sum of the
Underwriters' actual out-of-pocket expenses (including, but not limited to,
counsel fees, "road-show" and due diligence expenses). The Underwriters shall
retain such part of the non-accountable expense allowance previously paid as
shall equal their actual out-of-pocket expenses. If the amount previously paid
is insufficient to cover such actual out-of-pocket expenses, the Company shall
remain liable for and promptly pay any other actual out-of-pocket expenses. If
the amount previously paid exceeds the amount of the actual out-of-pocket
expenses, the Underwriters shall promptly remit to the Company any such excess.
3.16 Application of Net Proceeds. The Company will apply the net
proceeds from the offering received by it in a manner consistent with the
application described under the caption "USE OF PROCEEDS" in the Prospectus. The
Company hereby agrees that, except as so
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described, the Company will not apply any net proceeds from the offering to pay
(i) any debt for borrowed funds or (ii) any debt or obligation owed to any
Insider.
3.17 Delivery of Earnings Statements to Security Holders. The Company
will make generally available to its security holders as soon as practicable,
but not later than the first day of the fifteenth full calendar month following
the Effective Date, an earnings statement (which need not be certified by
independent public or independent certified public accountants unless required
by the Act or the Regulations, but which shall satisfy the provisions of Rule
158(a) under Section 11(a) of the Act) covering a period of at least twelve
consecutive months beginning after the Effective Date.
3.18 Reserved.
3.19 Stabilization. Neither the Company, nor, to its knowledge, any of
its employees, directors or stockholders has taken or will take, directly or
indirectly, any action designed to or which has constituted or which might
reasonably be expected to cause or result in, under the Exchange Act, or
otherwise, stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Public Securities.
3.20 Internal Controls. The Company maintains and will continue to
maintain a system of internal accounting controls sufficient to provide
reasonable assurances that: (i) transactions are executed in accordance with
management's general or specific authorization, (ii) transactions are recorded
as necessary in order to permit preparation of financial statements in
accordance with generally accepted accounting principles and to maintain
accountability for assets, (iii) access to assets is permitted only in
accordance with management's general or specific authorization, and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
3.21 Sale of Securities. The Company agrees not to permit or cause a
private or public sale or private or public offering of any of its securities
(in any manner, including pursuant to Rule 144 under the Act) owned nominally or
beneficially by the Insiders for a period of 12 months following the Effective
Date without obtaining the prior written consent of GKN; provided, however, that
(a) at any time after the six month anniversary of the Effective Date, each of
the Insiders may sell, without GKN's consent, up to 20% of the shares of Common
Stock owned by such Insider, if (i) the last sales price of the Common Stock has
been at least 125% of the per share public offering price for at least the ten
consecutive trading days ending the day prior to the proposed sale and (ii) the
sales price of the shares to be sold is no less than 125% of the per share
public offering price, (b) at any time after the three month anniversary of the
Effective Date, (i) Richard T. Bueschel may sell up to an aggregate of 7,500
shares of Common Stock, (ii) Harry Kaplowitz may sell up to an aggregate of
12,500 shares of Common Stock, (iii) Dr. Robert J. Loane may sell up to an
aggregate of 2,500 shares of Common Stock and (iv) Robert M. Leopold may sell up
to an aggregate of 7,500 shares of Common Stock, in each case without GKN's
consent, and (c) at any time after the Effective Date Richard M. Tworek may sell
up to an aggregate of 15,000 shares of Common Stock without GKN's consent.
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3.22 Nasdaq Filing. On the Closing Date, simultaneously with the
closing of the offering of Securities contemplated by this Agreement, the
Company shall file with The Nasdaq Stock Market, Inc. and the Commission a
report on Form 8-K evidencing the satisfaction of the conditions for continued
listing on the Nasdaq Small Cap Market described in that certain letter from The
Nasdaq Stock Market, Inc. dated November 24, 1997, including (i) the closing of
the offering, (ii) that the Company has at least $5,500,000 in net tangible
assets, and (iii) the Company's compliance with all of the new requirements for
continued listing on the Nasdaq SmallCap Market that become applicable to
companies listed thereon on February 22, 1998. Such filing shall include a
balance sheet and corresponding statement of operations no older than December
31, 1997, with pro forma adjustments for any significant events or transactions
occurring on or before the date such report is filed.
4. Conditions of Underwriters' Obligations. The obligations of the Underwriters
to purchase and pay for the Securities, as provided herein, shall be subject to
the continuing accuracy of the representations and warranties of the Company as
of the date hereof and as of each of the Closing Date and the Option Closing
Date, if any, to the accuracy of the statements of officers of the Company made
pursuant to the provisions hereof and to the performance by the Company of its
obligations hereunder and to the following conditions:
4.1 Regulatory Matters.
4.1.1 Effectiveness of Registration Statement. The
Registration Statement has been declared effective on the date of this Agreement
and, at each of the Closing Date and the Option Closing Date, no stop order
suspending the effectiveness of the Registration Statement shall have been
issued and no proceedings for such purpose shall have been instituted or shall
be pending or contemplated by the Commission and any request on the part of the
Commission for additional information shall have been complied with to the
reasonable satisfaction of Graubard Mollen & Miller, counsel to the
Underwriters.
4.1.2 NASD Clearance. By the Effective Date, the Underwriters
shall have received clearance from the NASD as to the amount of compensation
allowable or payable to the Underwriters as described in the Registration
Statement.
4.1.3 No Blue Sky Stop Orders. No order suspending the sale of
the Securities in any jurisdiction designated by you pursuant to Section 3.3
hereof shall have been issued on either on the Closing Date or the Option
Closing Date, and no proceedings for that purpose shall have been instituted or
shall be contemplated.
4.1.4 Unaudited Financials. The Company shall have furnished
to the Underwriters as early as practicable prior to the date hereof a copy of
the latest available unaudited interim financial statements ("Unaudited
Financials") of the Company (which in no event shall be as of a date more than
30 days prior to the Effective Date) which have been read by the Company's
independent accountants, as stated in their letter to be furnished pursuant to
Section 4.3 hereof.
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4.1.5 Employment Agreements. The Company and each of Richard
M. Tworek, James Ungerleider and Razi Mohiuddin shall have entered into an
employment agreement reasonably satisfactory to GKN.
4.2 Company Counsel Matters.
4.2.1 Effective Date Opinion of Counsel. On the Effective
Date, the Underwriters shall have received the favorable opinion of Kramer,
Levin, Naftalis & Frankel, counsel to the Company, dated the Effective Date,
addressed to the Underwriters and in form and substance satisfactory to Graubard
Mollen & Miller, counsel to the Underwriters, to the effect that:
(i) The Company has been duly organized and is
validly existing as a corporation and is in good standing under the laws of its
state of incorporation. The Company is duly qualified and licensed and in good
standing as a foreign corporation in each jurisdiction in which it owns or
leases any real property or the character of its operations requires such
qualification or licensing.
(ii) The Company has all requisite corporate power
and authority, and has all necessary authorizations, approvals, orders,
licenses, certificates and permits of and from all governmental or regulatory
officials and bodies to own or lease its properties and conduct its business as
described in the Prospectus, and the Company is and has been doing business in
compliance with all such authorizations, approvals, orders, licenses,
certificates and permits and all federal, state and local laws, rules and
regulations. The Company has all corporate power and authority to enter into
this Agreement and to carry out the provisions and conditions hereof, and all
consents, authorizations, approvals and orders required in connection therewith
have been obtained. No consents, approvals, authorizations or orders of, and no
filing with any court or governmental agency or other body (other than such as
may be required under the Act and applicable Blue Sky laws), is required for the
valid authorization, issuance, sale and delivery of the Securities, and the
consummation of the transactions and agreements contemplated by this Agreement
and the Underwriters' Purchase Option, and as contemplated by the Prospectus or
if so required, all such authorizations, approvals, consents, orders,
registrations, licenses and permits have been duly obtained and are in full
force and effect and have been disclosed to the Underwriters.
(iii) All issued and outstanding securities of the
Company have been duly authorized and validly issued and are fully paid and
non-assessable; the holders thereof have no rights of rescission with respect
thereto, and are not subject to personal liability by reason of being such
holders; and none of such securities were issued in violation of the statutory
preemptive rights of any holders of any security of the Company or similar
contractual rights granted by the Company. The outstanding options and warrants
to purchase shares of Common Stock constitute the valid and binding obligations
of the Company, enforceable in accordance with their terms. The offers and sales
of the outstanding Common Stock and options and warrants to purchase shares of
Common Stock were at all relevant times either registered under the Act and the
applicable state securities or Blue Sky Laws or exempt from such
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registration requirements. The authorized and outstanding capital stock of the
Company is as set forth under the caption "Capitalization" in the Prospectus.
(iv) The Securities have been duly authorized and,
when issued and paid for, will be validly issued, fully paid and non-assessable;
the holders thereof are not and will not be subject to personal liability by
reason of being such holders. The Securities are not and will not be subject to
the preemptive rights of any holders of any security of the Company or, to the
best of such counsel's knowledge after due inquiry, similar contractual rights
granted by the Company. All corporate action required to be taken for the
authorization, issuance and sale of the Securities has been duly and validly
taken. When issued, the Underwriters' Purchase Option will constitute valid and
binding obligations of the Company to issue and sell, upon exercise thereof and
payment therefor, the number and type of securities of the Company called for
thereby and such Underwriters' Purchase Option when issued will be enforceable
against the Company in accordance with its terms, except (a) as such
enforceability may be limited by bankruptcy, insolvency, reorganization or
similar laws affecting creditors' rights generally, (b) as enforceability of any
indemnification provision may be limited under the federal and state securities
laws, and (c) that the remedy of specific performance and injunctive and other
forms of equitable relief may be subject to the equitable defenses and to the
discretion of the court before which any proceeding therefor may be brought. The
certificates representing the Securities are in due and proper form.
(v) To the best of such counsel's knowledge, after
due inquiry, except as set forth in the Prospectus, no holders of any securities
of the Company or of any options, warrants or securities of the Company
exercisable for or convertible or exchangeable into securities of the Company
have the right to require the Company to register any such securities of the
Company under the Act or to include any such securities in a registration
statement to be filed by the Company.
(vi) To the best of such counsel's knowledge, after
due inquiry, the shares of Common Stock are eligible for quotation on the Nasdaq
SmallCap Market and have been approved for listing on the PSE.
(vii) This Agreement and the Underwriters' Purchase
Option have each been duly and validly authorized and, when executed and
delivered by the Company, will constitute valid and binding obligations of the
Company, enforceable against the Company in accordance with their respective
terms, except (a) as such enforceability may be limited by bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally, (b) as enforceability of any indemnification provisions may be
limited under the federal and state securities laws, and (c) that the remedy of
specific performance and injunctive and other forms of equitable relief may be
subject to the equitable defenses and to the discretion of the court before
which any proceeding therefor may be brought.
(viii) The execution, delivery and performance by the
Company of this Agreement and the Underwriters' Purchase Option, the issuance
and sale of the Securities, the consummation of the transactions contemplated
hereby and thereby and the compliance by the
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Company with the terms and provisions hereof and thereof, do not and will not,
with or without the giving of notice or the lapse of time, or both, (a) conflict
with, or result in a breach of, any of the terms or provisions of, or constitute
a default under, or result in the creation or modification of any lien, security
interest, charge or encumbrance upon any of the properties or assets of the
Company pursuant to the terms of, any material mortgage, deed of trust, note,
indenture, loan, contract, commitment or other material agreement or instrument,
to which the Company is a party or by which the Company or any of its properties
or assets may be bound, (b) result in any violation of the provisions of the
Certificate of Incorporation or the By-Laws of the Company, (c) violate any
Laws, or (d) have a material adverse effect on any permit, certification,
registration, approval, consent, license or franchise of the Company.
(ix) The Registration Statement, each Preliminary
Prospectus and the Prospectus and any post-effective amendments or supplements
thereto (other than the financial statements included therein, as to which no
opinion need be rendered) comply as to form in all material respects with the
requirements of the Act and Regulations. The Securities and all other securities
issued or issuable by the Company conform in all material respects to the
description thereof contained in the Registration Statement and the Prospectus.
The statements in the Prospectus under "Risk Factors," "Business," "Management,"
"Certain Transactions," "Principal Shareholders," "Description of Securities"
and "Shares Eligible for Future Sale" have been reviewed by such counsel, and
insofar as they refer to statements of law, descriptions of statutes, licenses,
Intangibles, rules or regulations or legal conclusions are correct in all
material respects. No statute or regulation or legal or governmental proceeding
required to be described in the Prospectus is not described as required, nor are
any contracts or documents of a character required to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement not so described or filed as required.
(x) Counsel has participated in conferences with
officers and other Underwriters of the Company, representatives of the
independent public accountants for the Company and representatives of the
Underwriters at which the contents of the Registration Statement, the Prospectus
and related matters were discussed and although such counsel is not passing upon
and does not assume any responsibility for, the accuracy, completeness or
fairness of the statements contained in the Registration Statement and
Prospectus (except as otherwise set forth in counsel's opinion), no facts have
come to the attention of such counsel which lead them to believe that either the
Registration Statement or the Prospectus or any amendment or supplement thereto,
as of the date of such opinion, contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading (it being understood that such counsel need
express no opinion with respect to the financial statements and schedules and
other financial and statistical data included in the Registration Statement or
Prospectus).
(xi) The Registration Statement is effective under
the Act, and, to the best of such counsel's knowledge, no stop order suspending
the effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been instituted or are pending or threatened
under the Act or applicable state securities laws.
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(xii) The Company has good and marketable title to,
or valid and enforceable leasehold estates in, all items of real and personal
property (tangible and intangible) stated in the Prospectus to be owned or
leased by it, free and clear of all liens, encumbrances, claims, security
interests, defects and restrictions of any material nature whatsoever, other
than those referred to in the Prospectus and liens for taxes not yet due and
payable.
(xiii) No default exists in the due performance and
observance of any term, covenant or condition of any license, contract,
indenture, mortgage, deed of trust, note, loan or credit agreement, or any other
material agreement or instrument evidencing an obligation for borrowed money, or
any other material agreement or instrument to which the Company is a party or by
which the Company may be bound or to which any of the properties or assets of
the Company is subject. The Company is not in violation of any term or provision
of its Certificate of Incorporation or By-Laws or of any franchise, license,
permit, applicable law, rule, regulation, judgment or decree of any governmental
agency or court, domestic or foreign, having jurisdiction over the Company or
any of its properties or business, except for such violations which, singly or
in the aggregate, would not have a material adverse effect on the Company.
(xiv) To the best of such counsel's knowledge, after
due inquiry, except as described in SCHEDULE 2.25 to this Agreement, the Company
does not own an interest in any corporation, partnership, joint venture, trust
or other business entity.
(xv) To the best of such counsel's knowledge, after
due inquiry, except as set forth in the Prospectus, there is no action, suit or
proceeding before or by any court or governmental agency or body, domestic or
foreign, now pending, or threatened against the Company, which might result in
any material adverse change in the condition (financial or otherwise), business
or prospects of the Company, or might materially and adversely affect the
properties or assets thereof.
(xvi) To the best of such counsel's knowledge, after
due inquiry, neither the Company nor any of its officers, employees, agents or
other persons acting on their behalf has, directly or indirectly, given or
agreed to give any money, gift or similar benefit (other than legal price
concessions to customers in the ordinary course of business) to any customer,
supplier, employee or agent of a customer or supplier, or official or employee
of any governmental agency or instrumentality of any government (domestic or
foreign), any political party or candidate for office (domestic or foreign) or
any other person who was, is or may be in a position to help or hinder the
business of the Company (or assist it in connection with any actual or proposed
transaction) that (a) might subject the Company to any damage or penalty in any
civil, criminal or governmental litigation or proceeding, (b) if not given in
the past, might have had a material adverse effect on the assets, business or
operations of the Company as reflected in the financial statements contained in
the Registration Statement or (c) if not continued in the future, might
adversely affect the assets, business, operations or prospects of the Company.
The Company's internal accounting controls and procedures are sufficient to
cause the Company to comply with the Foreign Corrupt Practices Act of 1977, as
amended.
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(xvii) To the best of such counsel's knowledge, after
due inquiry, except as described in the Prospectus, there are no claims,
payments, issuances, arrangements or understandings for services in the nature
of a finder's or origination fee with respect to the sale of the Securities
hereunder or financial consulting arrangements or any other arrangements,
agreements, understandings, payments or issuances that may affect the
Underwriters' compensation, as determined by the NASD.
Intellectual Property Counsel's Opinion. On the Effective
Date, the Underwriters shall have received the opinion of Fenwick & West,
intellectual property counsel to the Company, addressed to the Underwriters and
in form and substance satisfactory to Graubard Mollen & Miller, counsel to the
Underwriters, to the effect that:
To the best of such counsel's knowledge, after due inquiry,
the Company owns or possesses, free and clear of all liens or encumbrances and
rights thereto or therein by third parties, other than as described in the
Prospectus, the requisite licenses or other rights to use all Intangibles and
other rights necessary to conduct its business (including, without limitation,
any such licenses or rights described in the Prospectus as being licensed to or
owned or possessed by the Company), and there is no claim or action by any
person pertaining to, or proceeding pending or, to the best of such counsel's
knowledge after due inquiry, threatened, that challenges the exclusive rights of
the Company with respect to any Intangibles used in the conduct of the Company's
business (including without limitation any such licenses or rights described in
the Prospectus as being owned or possessed by the Company); to the best of such
counsel's knowledge after due inquiry, the Company's current products, services
and processes do not infringe on any Intangibles held by any third parties
except as discussed in the Prospectus; and the Company's Intangibles that have
been registered in the United States Patent and Trademark Office have been fully
maintained and are in full force and effect.
Unless the context clearly indicates otherwise, the term
"Company" as used in this Section 4.2.1 shall include each subsidiary of the
Company.
4.2.2 Closing Date and Option Closing Date Opinions of
Counsel. On each of the Closing Date and the Option Closing Date, if any, the
Underwriters shall have received the favorable opinions of Kramer, Levin,
Naftalis & Frankel, counsel to the Company, and Fenwick & West, intellectual
property counsel to the Company, dated the Closing Date or the Option Closing
Date, as the case may be, addressed to the Underwriters and in form and
substance satisfactory to Graubard Mollen & Miller, counsel to the Underwriters,
confirming as of the Closing Date and, if applicable, the Option Closing Date,
the statements made by Kramer, Levin, Naftalis & Frankel and Fenwick & West in
their opinions delivered on the Effective Date.
4.2.3 Reliance. In rendering such opinions, such counsel may
rely (i) as to matters involving the application of laws other than the laws of
the United States and jurisdictions in which they are admitted, to the extent
such counsel deems proper and to the extent specified in such opinions, if at
all, upon an opinion or opinions (in form and substance reasonably satisfactory
to Underwriters' counsel) of other counsel reasonably acceptable to
Underwriters' counsel, familiar with the applicable laws, and (ii) as to matters
of fact, to the extent they deem
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<PAGE> 26
proper, on certificates or other written statements of officers of departments
of various jurisdiction having custody of documents respecting the corporate
existence or good standing of the Company, provided that copies of any such
statements or certificates shall be delivered to Underwriters' counsel if
requested. The opinions relied upon by counsel to the Company and intellectual
property counsel to the Company shall include statements to the effect that they
may be relied upon by counsel to the Underwriters in its opinion delivered to
the Underwriters.
4.2.4 Secondary Market Trading Memorandum. On the Effective
Date the Underwriters shall have received the Secondary Market Trading
Memorandum.
4.3 Cold Comfort Letter. At the time this Agreement is executed, and at
each of the Closing Date and the Option Closing Date, if any, you shall have
received a letter, addressed to the Underwriters and in form and substance
satisfactory in all respects (including the non-material nature of the changes
or decreases, if any, referred to in clause (iii) below) to you and to Graubard
Mollen & Miller, counsel to the Underwriters, from Arthur Andersen LLP dated,
respectively, as of the date of this Agreement and as of the Closing Date and
the Option Closing Date, if any:
(i) Confirming that they are independent accountants with
respect to the Company within the meaning of the Act and the applicable
Regulations;
(ii) Stating that in their opinion the financial statements of
the Company included in the Registration Statement and Prospectus comply as to
form in all material respects with the applicable accounting requirements of the
Act and the published Regulations thereunder;
(iii) Stating that, based on the performance of procedures
specified by the American Institute of Certified Public Accountants for a review
of the latest available unaudited interim financial statements of the Company
(as described in SAS No. 71 Interim Financial Information), with an indication
of the date of the latest available unaudited interim financial statements, a
reading of the latest available minutes of the stockholders and board of
directors and the various committees of the board of directors, consultations
with officers and other employees of the Company responsible for financial and
accounting matters and other specified procedures and inquiries, nothing has
come to their attention which would lead them to believe that (a) the unaudited
financial statements of the Company included in the Registration Statement do
not comply as to form in all material respects with the applicable accounting
requirements of the Act and the Regulations or any material modification should
be made to the unaudited interim financial statements included in the
Registration Statement for them to be in conformity with generally accepted
accounting principles applied on a basis substantially consistent with that of
the audited financial statements of the Company included in the Registration
Statement, (b) at a date not later than five days prior to the Effective Date,
Closing Date or Option Closing Date, as the case may be, there was any change in
the capital stock or long-term debt of the Company, or any decrease in the
shareholders' equity of the Company as compared with amounts shown in the
September 30, 1997 balance sheet included in the Registration Statement, other
than as set forth in or contemplated by the Registration Statement, or, if there
was any decrease, setting forth the amount of such decrease, and (c) during the
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<PAGE> 27
period from October 1, 1997 to a specified date not later than five days prior
to the Effective Date, Closing Date or Option Closing Date, as the case may be,
there was any decrease in revenues, net earnings or net earnings per share of
Common Stock, in each case as compared with the corresponding period in the
preceding year and as compared with the corresponding period in the preceding
quarter, other than as set forth in or contemplated by the Registration
Statement, or, if there was any such decrease, setting forth the amount of such
decrease;
(iv) Setting forth, at a date not later than five days prior
to the Effective Date, the amount of liabilities of the Company (including a
break-down of commercial papers and notes payable to banks);
(v) Stating that they have compared specific dollar amounts,
numbers of shares, percentages of revenues and earnings, statements and other
financial information pertaining to the Company set forth in the Prospectus in
each case to the extent that such amounts, numbers, percentages, statements and
information may be derived from the general accounting records and work sheets,
of the Company with the results obtained from the application of specified
readings, inquiries and other appropriate procedures (which procedures do not
constitute an examination in accordance with generally accepted auditing
standards) set forth in the letter and found them to be in agreement;
(vi) Stating that they have not during the immediately
preceding five year period brought to the attention of the Company's management
any reportable condition related to internal structure, design or operation as
defined in the Statement on Auditing Standards No. 60 -- "Communication of
Internal Control Structure Related Matters Noted in an Audit," in the Company's
internal controls; and
(vii) Statements as to such other matters incident to the
transaction contemplated hereby as you may reasonably request.
4.4 Officers' Certificates.
4.4.1 Officers' Certificate. At each of the Closing Date and
the Option Closing Date, if any, the Underwriters shall have received a
certificate of the Company signed by the Chairman of the Board or the President
and the Secretary of the Company, dated the Closing Date or the Option Closing
Date, as the case may be, respectively, to the effect that the Company has
performed all covenants and complied with all conditions required by this
Agreement to be performed or complied with by the Company prior to and as of the
Closing Date, or the Option Closing Date, as the case may be, and that the
conditions set forth in Section 4.5 hereof have been satisfied as of such date
and that, as of Closing Date and the Option Closing Date, as the case may be,
the representations and warranties of the Company set forth in Section 2 hereof
are true and correct. In addition, the Underwriters will have received such
other and further certificates of officers of the Company as the Underwriters
may reasonably request.
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<PAGE> 28
4.4.2 Secretary's Certificate. At each of the Closing Date and
the Option Closing Date, if any, the Underwriters shall have received a
certificate of the Company signed by the Secretary of the Company, dated the
Closing Date or the Option Date, as the case may be, respectively, certifying
(i) that the By-Laws and Certificate of Incorporation, as amended, of the
Company are true and complete, have not been modified and are in full force and
effect, (ii) that the resolutions relating to the public offering contemplated
by this Agreement are in full force and effect and have not been modified, (iii)
all correspondence between the Company or its counsel and the Commission, (iv)
all correspondence between the Company or its counsel and the NASD concerning
inclusion on Nasdaq, (v) all correspondence between the Company or its counsel
and the PSE concerning listing on the PSE, and (vi) as to the incumbency of the
officers of the Company. The documents referred to in such certificate shall be
attached to such certificate.
4.5 No Material Changes. Prior to and on each of the Closing Date and
the Option Closing Date, if any, (i) there shall have been no material adverse
change or development involving a prospective material change in the condition
or prospects or the business activities, financial or otherwise, of the Company
from the latest dates as of which such condition is set forth in the
Registration Statement and Prospectus, (ii) there shall have been no
transaction, not in the ordinary course of business, entered into by the Company
from the latest date as of which the financial condition of the Company is set
forth in the Registration Statement and Prospectus which is materially adverse
to the Company, taken as a whole, (iii) the Company shall not be in default
under any provision of any instrument relating to any outstanding indebtedness
which default would have a material adverse effect on the Company, (iv) no
material amount of the assets of the Company shall have been pledged or
mortgaged, except as set forth in the Registration Statement and Prospectus, (v)
no action suit or proceeding, at law or in equity, shall have been pending or
threatened against the Company or affecting any of its property or business
before or by any court or federal or state commission, board or other
administrative agency wherein an unfavorable decision, ruling or finding may
materially adversely affect the business, operations, prospects or financial
condition or income of the Company, except as set forth in the Registration
Statement and Prospectus, (vi) no stop order shall have been issued under the
Act and no proceedings therefor shall have been initiated or threatened by the
Commission, and (vii) the Registration Statement and the Prospectus and any
amendments or supplements thereto contain all material statements which are
required to be stated therein in accordance with the Act and the Regulations and
conform in all material respects to the requirements of the Act and the
Regulations, and neither the Registration Statement nor the Prospectus nor any
amendment or supplement thereto contains any untrue statement of a material fact
or omits to state any material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading.
4.6 Delivery of Underwriters' Purchase Option. The Company has
delivered to the Underwriters an executed copy of the Underwriters' Purchase
Option dated the Effective Date.
4.7 Opinion of Counsel for Underwriters. All proceedings taken in
connection with the authorization, issuance or sale of the Securities as herein
contemplated shall be reasonably satisfactory in form and substance to you and
to Graubard Mollen & Miller, counsel for the
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<PAGE> 29
Underwriters, and you shall have received from such counsel a favorable opinion,
dated the Closing Date and the Option Closing Date, if any, with respect to such
of these proceedings as you may reasonably require. On or prior to the Effective
Date, the Closing Date and the Option Closing Date, as the case may be, counsel
for the Underwriters shall have been furnished such documents, certificates and
opinions as they may reasonably require for the purpose of enabling them to
review or pass upon the matters referred to in this Section 4.7, or in order to
evidence the accuracy, completeness or satisfaction of any of the
representations, warranties or conditions herein contained.
5. Indemnification.
5.1 Indemnification of the Underwriters.
5.1.1 General. Subject to the conditions set forth below, the
Company agrees to indemnify and hold harmless each of the Underwriters, its
directors, officers, agents and employees and each person, if any, who controls
any Underwriter ("controlling person") within the meaning of Section 15 of the
Act or Section 20(a) of the Exchange Act, against any and all loss, liability,
claim, damage and expense whatsoever (including but not limited to any and all
legal or other expenses reasonably incurred in investigating, preparing or
defending against any litigation, or any claims whatsoever commenced or
threatened, whether arising out of any action between either of the Underwriters
and the Company or between either of the Underwriters and any third party or
otherwise) to which they or any of them may become subject under the Act, the
Exchange Act or any other statute or at common law or otherwise or under the
laws of foreign countries, arising out of or based upon any untrue statement or
alleged untrue statement of a material fact contained in (i) any Preliminary
Prospectus, the Registration Statement or the Prospectus (as from time to time
each may be amended and supplemented); (ii) in any post-effective amendment or
amendments or any new registration statement and prospectus in which is included
securities of the Company issued or issuable upon exercise of the Underwriters'
Purchase Option; or (iii) any application or other document or written
communication (in this Section 5 collectively called "application") executed by
the Company or based upon written information furnished by the Company in any
jurisdiction in order to qualify the Securities under the securities laws
thereof or filed with the Commission, any state securities commission or agency,
Nasdaq or any securities exchange; or the omission or alleged omission therefrom
of a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, unless such statement or omission was made in reliance
upon, and in strict conformity with, written information furnished to the
Company with respect to any Underwriter by or on behalf of such Underwriter
expressly for use in any Preliminary Prospectus, the Registration Statement or
Prospectus, or any amendment or supplement thereof, or in any application, as
the case may be. The Company agrees promptly to notify the Underwriters of the
commencement of any litigation or proceedings against the Company or any of its
officers, directors or controlling persons in connection with the issue and sale
of the Securities or in connection with the Registration Statement or
Prospectus.
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<PAGE> 30
5.1.2 Procedure. If any action is brought against an
Underwriter or controlling person in respect of which indemnity may be sought
against the Company pursuant to Section 5.1.1, such Underwriter shall promptly
notify the Company in writing of the institution of such action and the Company
shall assume the defense of such action, including the employment and fees of
counsel (subject to the approval of such Underwriter) and payment of actual
expenses. Such Underwriter or controlling person shall have the right to employ
its or their own counsel in any such case, but the fees and expenses of such
counsel shall be at the expense of such Underwriter or such controlling person
unless (i) the employment of such counsel shall have been authorized in writing
by the Company in connection with the defense of such action, or (ii) the
Company shall not have employed counsel to have charge of the defense of such
action, or (iii) such indemnified party or parties shall have reasonably
concluded that there may be defenses available to it or them which are different
from or additional to those available to the Company (in which case the Company
shall not have the right to direct the defense of such action on behalf of the
indemnified party or parties), in any of which events the fees and expenses of
not more than one additional firm of attorneys selected by the Underwriter
and/or controlling person shall be borne by the Company. Notwithstanding
anything to the contrary contained herein, if an Underwriter or controlling
person shall assume the defense of such action as provided above, the Company
shall have the right to approve the terms of any settlement of such action which
approval shall not be unreasonably withheld.
5.2 Indemnification of the Company. Each Underwriter, severally and not
jointly, agrees to indemnify and hold harmless the Company against any and all
loss, liability, claim, damage and expense described in the foregoing indemnity
from the Company to the several Underwriters, as incurred, but only with respect
to untrue statements or omissions, or alleged untrue statements or omissions
directly relating to the transactions effected by the Underwriters in connection
with this offering made in any Preliminary Prospectus, the Registration
Statement or Prospectus or any amendment or supplement thereto or in any
application in reliance upon, and in strict conformity with, written information
furnished to the Company with respect to such Underwriter by or on behalf of
such Underwriter expressly for use in such Preliminary Prospectus, the
Registration Statement or Prospectus or any amendment or supplement thereto or
in any such application. In case any action shall be brought against the Company
or any other person so indemnified based on any Preliminary Prospectus, the
Registration Statement or Prospectus or any amendment or supplement thereto or
any application, and in respect of which indemnity may be sought against an
Underwriter, such Underwriter shall have the rights and duties given to the
Company, and the Company and each other person so indemnified shall have the
rights and duties given to the several Underwriters by the provisions of Section
5.1.2.
5.3 Contribution.
5.3.1 Contribution Rights. In order to provide for just and
equitable contribution under the Act in any case in which (i) any person
entitled to indemnification under this Section 5 makes claim for indemnification
pursuant hereto but it is judicially determined (by the entry of a final
judgment or decree by a court of competent jurisdiction and the expiration of
time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
this Section 5 provides for indemnification in such
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<PAGE> 31
case, or (ii) contribution under the Act, the Exchange Act or otherwise may be
required on the part of any such person in circumstances for which
indemnification is provided under this Section 5, then, and in each such case,
the Company and the Underwriters shall contribute to the aggregate losses,
liabilities, claims, damages and expenses of the nature contemplated by said
indemnity agreement incurred by the Company and the Underwriters, as incurred,
in such proportions that the Underwriters are responsible for that portion
represented by the percentage that the underwriting discount appearing on the
cover page of the Prospectus bears to the initial offering price appearing
thereon and the Company is responsible for the balance; provided, that, no
person guilty of a fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. Notwithstanding the provisions of
this Section 5.3, neither Underwriter shall be required to contribute any amount
in excess of the amount by which the total price at which the Public Securities
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages which such Underwriter has otherwise been
required to pay in respect of such losses, liabilities, claims, damages and
expenses. For purposes of this Section, each director, officer and employee of
an Underwriter, and each person, if any, who controls an Underwriter within the
meaning of Section 15 of the Act shall have the same rights to contribution as
such Underwriter.
5.3.2 Contribution Procedure. Within fifteen days after
receipt by any party to this Agreement (or its representative) of notice of the
commencement of any action, suit or proceeding, such party will, if a claim for
contribution in respect thereof is to be made against another party
("contributing party"), notify the contributing party of the commencement
thereof, but the omission to so notify the contributing party will not relieve
it from any liability which it may have to any other party other than for
contribution hereunder. In case any such action, suit or proceeding is brought
against any party, and such party notifies a contributing party or its
representative of the commencement thereof within the aforesaid fifteen days,
the contributing party will be entitled to participate therein with the
notifying party and any other contributing party similarly notified. Any such
contributing party shall not be liable to any party seeking contribution on
account of any settlement of any claim, action or proceeding which was effected
by the party seeking contribution without the written consent of such
contributing party. The contribution provisions contained in this Section are
intended to supersede, to the extent permitted by law, any right to contribution
under the Act, the Exchange Act or otherwise available.
6. Default by an Underwriter.
6.1 If either Underwriter shall default in its obligations to purchase
Securities hereunder, the non-defaulting Underwriter may, in its discretion,
arrange for itself or another party or parties to purchase such Securities on
the terms contained herein. In the event that within one business day after such
default the non-defaulting Underwriter does not arrange for the purchase of the
Securities as to which such default relates, this Agreement will thereupon
terminate automatically (but only with respect to the obligations relating to
the Option Securities if such default occurs after the Closing Date) without
liability on the part of the Company (except as provided in Sections 3.15 and
5.1 hereof) or the non-defaulting Underwriter, but nothing herein
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<PAGE> 32
shall relieve the defaulting Underwriter of its liability, if any, to the
non-defaulting Underwriter and to the Company for damages occasioned by its
default.
6.2 Postponement of Closing Date. In the event that the Firm Securities
or Option Securities to which the default relates are to be purchased by the
non-defaulting Underwriter, or are to be purchased by another party or parties
as aforesaid, the non-defaulting Underwriter or the Company shall have the right
to postpone the Closing Date or Option Closing Date for a reasonable period, but
not in any event exceeding five business days, in order to effect whatever
changes may thereby be made necessary in the Registration Statement or the
Prospectus or in any other documents and arrangements, and the Company agrees to
file promptly any amendment to the Registration Statement or the Prospectus
which in the opinion of counsel for the Underwriters may thereby be made
necessary. The term "Underwriter" as used in this Agreement shall include any
party substituted under this Section 6 with like effect as if it had originally
been a party to this Agreement with respect to such Securities.
7. Reserved.
8. Representations and Agreements to Survive Delivery. Except as the context
otherwise requires, all representations, warranties and agreements contained in
this Agreement shall be deemed to be representations, warranties and agreements
at the Closing Dates and such representations, warranties and agreements of the
Underwriters and Company, including the indemnity agreements contained in
Section 5 hereof, shall remain operative and in full force and effect regardless
of any investigation made by or on behalf of any Underwriter, the Company or any
controlling person, and shall survive termination of this Agreement or the
issuance and delivery of the Securities to the several Underwriters until the
earlier of the expiration of any applicable statute of limitations and the
seventh anniversary of the later of the Closing Date or the Option Closing Date,
if any, at which time the representations, warranties and agreements shall
terminate and be of no further force and effect.
9. Effective Date of This Agreement and Termination Thereof.
9.1 Effective Date. This Agreement shall become effective on the
Effective Date at the time that the Registration Statement is declared
effective.
9.2 Termination. You shall have the right to terminate this Agreement
at any time prior to any Closing Date, (i) if any domestic or international
event or act or occurrence has materially disrupted, or in your opinion will in
the immediate future materially disrupt, general securities markets in the
United States; or (ii) if trading on the New York Stock Exchange, the American
Stock Exchange or in the over-the-counter market shall have been suspended, or
minimum or maximum prices for trading shall have been fixed, or maximum ranges
for prices for securities shall have been fixed, or maximum ranges for prices
for securities shall have been required on the over-the-counter market by the
NASD or by order of the Commission or any other government authority having
jurisdiction, or (iii) if the United States shall have become involved in a war
or major hostilities, or (iv) if a banking moratorium has been declared by a New
York State or federal authority, or (v) if a moratorium on foreign exchange
trading has been
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<PAGE> 33
declared which materially adversely impacts the United States securities market,
or (vi) if the Company shall have sustained a material loss by fire, flood,
accident, hurricane, earthquake, theft, sabotage or other calamity or malicious
act which, whether or not such loss shall have been insured, will, in your
opinion, make it inadvisable to proceed with the delivery of the Securities, or
(vii) if either Richard M. Tworek or Razi Mohiuddin shall no longer serve the
Company in his present capacity, or (viii) if the Company has breached any of
its representations, warranties or obligations hereunder, or (ix) if either
Underwriter shall have become aware after the date hereof of such a material
adverse change in the condition (financial or otherwise), business, or prospects
of the Company, or such adverse material change in general market conditions as
in the Underwriters' judgment would make it impracticable to proceed with the
offering, sale and/or delivery of the Securities or to enforce contracts made by
the Underwriters for the sale of the Securities.
9.3 Notice. If you elect to prevent this Agreement from becoming
effective or to terminate this Agreement as provided in this Section 9, the
Company shall be notified on the same day as such election is made by you by
telephone or telecopy, confirmed by letter.
9.4 Expenses. In the event that this Agreement shall not be carried out
for any reason whatsoever, within the time specified herein or any extensions
thereof pursuant to the terms hereof, the obligations of the Company to pay the
expenses related to the transactions contemplated herein shall be governed by
Section 3.15 hereof.
9.5 Indemnification. Notwithstanding any contrary provision contained
in this Agreement, any election hereunder or any termination of this Agreement,
and whether or not this Agreement is otherwise carried out, the provisions of
Section 5 shall not be in any way affected by such election or termination or
failure to carry out the terms of this Agreement or any part hereof.
10. Miscellaneous.
10.1 Notices. All communications hereunder, except as herein otherwise
specifically provided, shall be in writing and shall be mailed, delivered or
telecopied and confirmed
If to the Underwriters:
GKN Securities Corp.
61 Broadway
New York, New York 10006
Attention: Deborah S. Novick
Copy to:
Graubard Mollen & Miller
600 Third Avenue
New York, New York 10016
Attention: David Alan Miller, Esq.
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<PAGE> 34
If to the Company:
Infodata Systems Inc.
12150 Monument Drive
Suite 400
Fairfax, Virginia 22033-4058
Attention: James Ungerleider
Copy to:
Kramer, Levin, Naftalis & Frankel
919 Third Avenue
New York, New York 10022
Attention: Monica C. Lord, Esq.
10.2 Headings. The headings contained herein are for the sole purpose
of convenience of reference, and shall not in any way limit or affect the
meaning or interpretation of any of the terms or provisions of this Agreement.
10.3 Amendment. This Agreement may be amended only by a written
instrument executed by each of the parties hereto.
10.4 Entire Agreement. This Agreement (together with the other
agreements and documents being delivered pursuant to or in connection with this
Agreement) constitutes the entire agreement of the parties hereto with respect
to the subject matter hereof and supersedes all prior agreements and
understandings of the parties, oral and written, with respect to the subject
matter hereof.
10.5 Binding Effect. This Agreement shall inure solely to the benefit
of and shall be binding upon, the Underwriters, the Company and the controlling
persons, directors and officers referred to in Section 5 hereof, and their
respective successors, legal representatives and assigns, and no other person
shall have or be construed to have any legal or equitable right, remedy or claim
under or in respect of or by virtue of this Agreement or any provisions herein
contained.
10.6 Governing Law; Jurisdiction. This Agreement shall be governed by
and construed and enforced in accordance with the law of the State of New York,
without giving effect to conflicts of law. The Company hereby agrees that any
action, proceeding or claim against it arising out of, relating in any way to
this Agreement shall be brought and enforced in the courts of the State of New
York or the United States District Court for the Southern District of New York,
and irrevocably submits to such jurisdiction, which jurisdiction shall be
exclusive. The Company hereby waives any objection to such exclusive
jurisdiction and that such courts represent an inconvenient forum. Any such
process or summons to be served upon the Company may be served by transmitting a
copy thereof by registered or certified mail, return receipt requested, postage
prepaid, addressed to it at the address set forth in Section 10.1 hereof. Such
mailing
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<PAGE> 35
shall be deemed personal service and shall be legal and binding upon the Company
in any action, proceeding or claim. The Company agrees that the prevailing
party(ies) in any such action shall be entitled to recover from the other
party(ies) all of its reasonable attorneys' fees and expenses relating to such
action or proceeding and/or incurred in connection with the preparation
therefor.
10.7 Execution in Counterparts. This Agreement may be executed in one
or more counterparts, and by the different parties hereto in separate
counterparts, each of which shall be deemed to be an original, but all of which
taken together shall constitute one and the same agreement, and shall become
effective when one or more counterparts has been signed by each of the parties
hereto and delivered to each of the other parties hereto.
10.8 Waiver, Etc. The failure of any of the parties hereto to at any
time enforce any of the provisions of this Agreement shall not be deemed or
construed to be a waiver of any such provision, nor to in any way affect the
validity of this Agreement or any provision hereof or the right of any of the
parties hereto to thereafter enforce each and every provision of this Agreement.
No waiver of any breach, non-compliance or non-fulfillment of any of the
provisions of this Agreement shall be effective unless set forth in a written
instrument executed by the party or parties against whom or which enforcement of
such waiver is sought; and no waiver of any such breach, non-compliance or
non-fulfillment shall be construed or deemed to be a waiver of any other or
subsequent breach, non-compliance or non-fulfillment.
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<PAGE> 36
If the foregoing correctly sets forth the understanding
between the Underwriters and the Company, please so indicate in the space
provided below for that purpose, whereupon this letter shall constitute a
binding agreement between us.
Very truly yours,
INFODATA SYSTEMS INC.
By: _________________________
Name: James Ungerleider
Title: President
Accepted as of the date first above written.
New York, New York
SOUTHEAST RESEARCH PARTNERS, INC.
By: ____________________________
Name:
Title:
GKN SECURITIES CORP.
By: ____________________________
Name: Deborah S. Novick
Title: Senior Vice President
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<PAGE> 1
Exhibit 4.1
THE REGISTERED HOLDER OF THIS PURCHASE OPTION BY ITS ACCEPTANCE HEREOF,
AGREES THAT IT WILL NOT SELL, TRANSFER OR ASSIGN THIS PURCHASE OPTION
EXCEPT AS HEREIN PROVIDED.
NOT EXERCISABLE PRIOR TO __________ __, 1999. VOID AFTER 5:00 P.M. EASTERN
TIME, ________ __, 2003.
PURCHASE OPTION
FOR THE PURCHASE OF
100,000 SHARES OF COMMON STOCK
OF
INFODATA SYSTEMS INC.
(A VIRGINIA CORPORATION)
1. Purchase Option.
THIS CERTIFIES THAT, in consideration of $100.00 duly paid by
or on behalf of Southeast Research Partners, Inc. ("Holder"), as registered
owner of this Purchase Option, to Infodata Systems Inc. ("Company"), Holder is
entitled, at any time or from time to time at or after ___________, 1999 [one
year anniversary of the effective date] ("Commencement Date"), and at or before
5:00 p.m., Eastern Time, _________, 2003 ("Expiration Date"), but not
thereafter, to subscribe for, purchase and receive, in whole or in part, up to
100,000 shares ("Shares") of common stock ("Common Stock") of the Company. The
Shares are sometimes referred to herein as the "Securities." If the Expiration
Date is a day on which banking institutions are authorized by law to close, then
this Purchase Option may be exercised on the next succeeding day which is not
such a day in accordance with the terms herein. During the period commencing on
the date of issue of the Purchase Option and ending on the Expiration Date, the
Company agrees not to take any action that would terminate this Purchase Option.
This Purchase Option is initially exercisable at $____ per Share purchased;
provided, however, that upon the occurrence of any of the events specified in
Section 6 hereof, the rights granted by this Purchase Option, including the
exercise price and the number of shares of Common Stock to be received upon such
exercise, shall be adjusted as therein specified. The term "Exercise Price"
shall mean the initial exercise price or the adjusted exercise price, depending
on the context.
2. Exercise.
2.1. Exercise Form. In order to exercise this Purchase Option, the
exercise form attached hereto must be duly executed and completed and delivered
to the Company, together with this Purchase Option and payment of the Exercise
Price in cash or by certified check or official bank check for the Shares being
purchased. If the subscription rights represented hereby shall not be exercised
at or before 5:00 p.m., Eastern time, on the Expiration Date, this Purchase
<PAGE> 2
Option shall become void without further force or effect, and all rights
represented hereby shall cease and expire.
2.2. Legend. Each certificate for Securities purchased under this
Purchase Option shall bear a legend as follows unless such Securities have been
registered under the Securities Act of 1933, as amended ("Act"):
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended
("Act"), or applicable state law. The securities may not be
offered for sale, sold or otherwise transferred except
pursuant to an effective registration statement under the Act,
or pursuant to an exemption from registration under the Act
and applicable state law."
2.3. Conversion Right.
2.3.1. Determination of Amount. In lieu of the payment of the
Exercise Price in the manner required by Section 2.1, the Holder shall have the
right (but not the obligation) to convert any exercisable but unexercised
portion of this Purchase Option into securities ("Conversion Right") as follows:
Upon exercise of the Conversion Right, the Company shall deliver to the Holder
(without payment by the Holder of any of the Exercise Price in cash) that number
of shares of Common Stock equal to the quotient obtained by dividing (x) the
"Value" (as defined below) of the portion of the Purchase Option being converted
by (y) the Market Price (as defined below). The "Value" of the portion of the
Purchase Option being converted shall equal the remainder derived from
subtracting (a) the Exercise Price multiplied by the number of shares of Common
Stock underlying the portion of the Purchase Option being converted from (b) the
Market Price of the Common Stock multiplied by the number of shares of Common
Stock underlying the portion of the Purchase Option being converted. As used
herein, the term "Market Price" shall be deemed to be the last reported sale
price of the Common Stock on the date prior to the date the Conversion Right is
exercised, or, in case no such reported sale takes place on such day, the
average of the last reported sale prices for the immediately preceding three
trading days, in either case as officially reported by the principal securities
exchange on which the Common Stock is listed or admitted to trading, or, if the
Common Stock is not listed or admitted to trading on any national securities
exchange or if any such exchange on which the Common Stock is listed is not its
principal trading market, the last reported sale price as furnished by the
National Association of Securities Dealers, Inc. ("NASD") through the Nasdaq
National Market or SmallCap Market, or, if applicable, the OTC Bulletin Board,
or if the Common Stock is not listed or admitted to trading on any of the
foregoing markets, or similar organization, as determined in good faith by
resolution of the Board of Directors of the Company, based on the best
information available to it.
2.3.2. Mechanics of Cashless Exercise. The Conversion Right
may be exercised by the Holder on any business day on or after the Commencement
Date and not later than the Expiration Date by delivering to the Company this
Purchase Option with a duly executed exercise form attached hereto with the
cashless exercise section completed.
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<PAGE> 3
3. Transfer.
3.1. General Restrictions. The registered Holder of this Purchase
Option, by its acceptance hereof, agrees that it will not sell, transfer or
assign or hypothecate this Purchase Option prior to the Commencement Date to
anyone other than (i) an officer of Southeast Research Partners, Inc. ("SERP")
or GKN Securities Corp. ("GKN" and, together with SERP, the "Underwriters") or
an officer or partner of any selected dealer ("Selected Dealer") in connection
with the Company's public offering with respect to which this Purchase Option
has been issued, or (ii) the Underwriters or any Selected Dealer. On and after
the Commencement Date, transfers to others may be made subject to compliance
with or exemptions from applicable securities laws. In order to make any
permitted assignment, the Holder must deliver to the Company the assignment form
attached hereto duly executed and completed, together with the Purchase Option
and payment of all transfer taxes, if any, payable in connection therewith. The
Company shall immediately transfer this Purchase Option on the books of the
Company and shall execute and deliver a new Purchase Option or Purchase Options
of like tenor to the appropriate assignee(s) expressly evidencing the right to
purchase the aggregate number of Shares purchasable hereunder or such portion of
such number as shall be contemplated by any such assignment.
3.2. Restrictions Imposed by the Act. This Purchase Option and the
Securities underlying this Purchase Option shall not be transferred unless and
until (i) the Company has received the opinion of counsel for the Holder that
this Purchase Option or the Securities, as the case may be, may be transferred
pursuant to an exemption from registration under the Act and applicable state
law, the availability of which is established to the reasonable satisfaction of
the Company (the Company hereby agreeing that the opinion of Graubard Mollen &
Miller shall be deemed satisfactory evidence of the availability of an
exemption), or (ii) a registration statement relating to such Purchase Option or
Securities, as the case may be, has been filed by the Company and declared
effective by the Securities and Exchange Commission ("Commission") and is in
compliance with applicable state law.
4. New Purchase Options to be Issued.
4.1. Partial Exercise, Conversion or Transfer. Subject to the
restrictions in Section 3 hereof, this Purchase Option may be exercised,
converted or assigned in whole or in part. In the event of the exercise,
conversion or assignment hereof in part only, upon surrender of this Purchase
Option for cancellation, together with the duly executed exercise or assignment
form and funds (except in the case of conversion) sufficient to pay any Exercise
Price and/or transfer tax, the Company shall cause to be delivered to the Holder
without charge a new Purchase Option of like tenor to this Purchase Option in
the name of the Holder evidencing the right of the Holder to purchase the
aggregate number of Shares purchasable hereunder as to which this Purchase
Option has not been exercised, converted or assigned.
4.2. Lost Certificate. Upon receipt by the Company of evidence
satisfactory to it of the loss, theft, destruction or mutilation of this
Purchase Option and of reasonably satisfactory indemnification, the Company
shall execute and deliver a new Purchase Option of like tenor and date. Any such
new Purchase Option executed and delivered as a result of such loss, theft,
mutilation or destruction shall constitute a substitute contractual obligation
on the part of the Company.
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<PAGE> 4
5. Registration Rights.
5.1. Demand Registration.
5.1.1. Grant of Right. The Company, upon written demand
("Initial Demand Notice") of the Holder(s) of at least 51% of the Purchase
Options and/or the underlying shares of Common Stock ("Majority Holders"),
agrees to register, on one occasion, all or any portion of the Purchase Options
requested by the Majority Holders in the Initial Demand Notice and all of the
Securities underlying such Purchase Options (collectively, the "Registrable
Securities"). On such occasion, the Company will file a registration statement
covering the Registrable Securities within sixty days after receipt of the
Initial Demand Notice and use its best efforts to have such registration
statement declared effective promptly thereafter. If the Company fails to comply
with the provisions of this Section 5.1.1, the Company shall, in addition to any
other equitable or other relief available to the Holder(s), be liable for any
and all incidental, special and consequential damages sustained by the
Holder(s). The demand for registration may be made at any time commencing one
year from the Effective Date and terminating on the fifth anniversary of the
Effective Date. The Company covenants and agrees to give written notice of its
receipt of any Initial Demand Notice by any Holder(s) to all other registered
Holders of the Purchase Options and/or the Registrable Securities within ten
days from the date of the receipt of any such Initial Demand Notice.
5.1.2. Terms. The Company shall bear all fees and expenses
attendant to registering the Registrable Securities, but the Holders shall pay
any and all underwriting commissions and the expenses of any legal counsel
selected by the Holders to represent them in connection with the sale of the
Registrable Securities. The Company agrees to use its best efforts to cause the
filing required herein to become effective promptly and to qualify or register
the Registrable Securities in such States as are reasonably requested by the
Holder(s); provided, however, that in no event shall the Company be required to
register the Registrable Securities in a State in which such registration would
cause (i) the Company to be obligated to register or license to do business in
such State, or (ii) the principal stockholders of the Company to be obligated to
escrow their shares of capital stock of the Company. The Company shall cause any
registration statement filed pursuant to the demand rights granted under Section
5.1.1 to remain effective until all of the Registrable Securities covered by
such registration statement have been sold.
5.2. "Piggy-Back" Registration.
5.2.1. Grant of Right. In addition to the demand right of
registration, the Holders of the Purchase Options shall have the right at any
time commencing one year from the Effective Date and terminating on the seventh
anniversary of the Effective Date to include the Registrable Securities as part
of any other registration of securities filed by the Company (other than in
connection with a transaction contemplated by Rule 145(a) promulgated under the
Act or pursuant to Form S-8 or any equivalent form).
5.2.2. Terms. The Company shall bear all fees and expenses
attendant to registering the Registrable Securities, but the Holders shall pay
any and all underwriting commissions and the expenses of any legal counsel
selected by the Holders to represent them in connection with the sale of the
Registrable Securities. In the event of such a proposed registration, the
Company shall furnish the then Holders of outstanding Registrable Securities
with not less than thirty days' written notice prior to the proposed date of
filing of such registration state-
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<PAGE> 5
ment. Such notice to the Holders shall continue to be given for each
registration statement filed by the Company until such time as all of the
Registrable Securities have been sold by the Holder. The holders of the
Registrable Securities shall exercise the "piggy-back" rights provided for
herein by giving written notice within twenty days of the receipt of the
Company's notice of its intention to file a registration statement. The Company
shall cause any registration statement filed pursuant to the above "piggyback"
rights to remain effective until all of the Registrable Securities covered by
such registration statement have been sold.
5.3. General Terms.
5.3.1. Indemnification. The Company shall indemnify the
Holder(s) of the Registrable Securities to be sold pursuant to any registration
statement hereunder and each person, if any, who controls such Holders within
the meaning of Section 15 of the Act or Section 20(a) of the Securities Exchange
Act of 1934, as amended ("Exchange Act"), against all loss, claim, damage,
expense or liability (including all reasonable attorneys' fees and other
expenses reasonably incurred in investigating, preparing or defending against
any claim whatsoever) to which any of them may become subject under the Act, the
Exchange Act or otherwise, arising from such registration statement but only to
the same extent and with the same effect as the provisions pursuant to which the
Company has agreed to indemnify the Underwriters contained in Section 5 of the
Underwriting Agreement between the Underwriters and the Company, dated the
Effective Date. The Holder(s) of the Registrable Securities to be sold pursuant
to such registration statement, and their successors and assigns, shall
severally, and not jointly, indemnify the Company, against all loss, claim,
damage, expense or liability (including all reasonable attorneys' fees and other
expenses reasonably incurred in investigating, preparing or defending against
any claim whatsoever) to which they may become subject under the Act, the
Exchange Act or otherwise, arising from information furnished by or on behalf of
such Holders, or their successors or assigns, in writing, for specific inclusion
in such registration statement to the same extent and with the same effect as
the provisions contained in Section 5 of the Underwriting Agreement pursuant to
which the Underwriters have agreed to indemnify the Company.
5.3.2. Exercise of Purchase Option. Nothing contained in this
Purchase Option shall be construed as requiring the Holder(s) to exercise their
Purchase Options prior to or after the initial filing of any registration
statement or the effectiveness thereof.
5.3.3. Exclusivity. The Company shall not permit the inclusion
of any securities other than the Registrable Securities in any registration
statement filed pursuant to Section 5.1 hereof without the prior written consent
of the Majority Holders of the Registrable Securities.
5.3.4. Documents Delivered to Holders. The Company shall
furnish to each Holder participating in any of the foregoing offerings and to
each underwriter of any such offering, if any, a signed counterpart, addressed
to such Holder or underwriter, of (i) an opinion of counsel to the Company,
dated the effective date of such registration statement (and, if such
registration includes an underwritten public offering, an opinion dated the date
of the closing under any underwriting agreement related thereto), and (ii) a
"cold comfort" letter dated the effective date of such registration statement
(and, if such registration includes an underwritten public offering, a letter
dated the date of the closing under the underwriting agreement) signed by the
independent public accountants who have issued a report on the Company's
financial statements included in such registration statement, in each case
covering substantially the same matters with respect to such registration
statement (and the prospectus included therein) and, in the case of
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<PAGE> 6
such accountants' letter, with respect to events subsequent to the date of such
financial statements, as are customarily covered in opinions of issuer's counsel
and in accountants' letters delivered to underwriters in underwritten public
offerings of securities. The Company shall also deliver promptly to each Holder
participating in the offering requesting the correspondence and memoranda
described below and to the managing underwriter copies of all correspondence
between the Commission and the Company, its counsel or auditors and all
memoranda relating to discussions with the Commission or its staff with respect
to the registration statement and permit each Holder and underwriter to do such
investigation, upon reasonable advance notice, with respect to information
contained in or omitted from the registration statement as it deems reasonably
necessary to comply with applicable securities laws or rules of the NASD. Such
investigation shall include access to books, records and properties and
opportunities to discuss the business of the Company with its officers and
independent auditors, all to such reasonable extent and at such reasonable times
and as often as any such Holder shall reasonably request.
5.3.5. Underwriting Agreement. The Company shall enter into an
underwriting agreement with the managing underwriter selected by any of the
Holders whose Registrable Securities are being registered pursuant to this
Section 5. Such agreement shall be reasonably satisfactory in form and substance
to the Company, each Holder and such managing underwriter, and shall contain
such representations, warranties and covenants by the Company and such other
terms as are customarily contained in agreements of that type used by the
underwriter. The Holders shall be parties to any underwriting agreement relating
to an underwritten sale of their Registrable Securities and may, at their
option, require that any or all of the representations, warranties and covenants
of the Company to or for the benefit of such underwriter shall also be made to
and for the benefit of such Holders. Such Holders shall not be required to make
any representations or warranties to or agreements with the Company or the
underwriter except as they may relate to such Holders, their shares and their
intended methods of distribution.
5.3.6. Documents to be Delivered by Holder(s). Each of the
Holder(s) participating in any of the foregoing offerings shall furnish to the
Company a completed and executed questionnaire provided by the Company
requesting information customarily sought of selling security holders.
6. Adjustments.
6.1. Adjustments to Exercise Price and Number of Securities. The
Exercise Price and the number of Shares underlying the Purchase Option shall be
subject to adjustment from time to time as hereinafter set forth:
6.1.1. Stock Dividends, Recapitalization, Reclassification,
Split-Ups. If after the date hereof, and subject to the provisions of Section
6.3 below, the number of outstanding shares of Common Stock is increased by a
stock dividend payable in shares of Common Stock or by a split-up,
recapitalization or reclassification of shares of Common Stock or other similar
event, then, on the effective date thereof, the number of Shares issuable on
exercise of this Purchase Option shall be increased in proportion to such
increase in outstanding shares.
6.1.2. Aggregation of Shares. If after the date hereof, and
subject to the provisions of Section 6.3, the number of outstanding shares of
Common Stock is decreased by a consolidation, combination or reclassification of
shares of Common Stock or other similar event,
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<PAGE> 7
then, upon the effective date thereof, the number of Shares issuable on exercise
of this Purchase Option shall be decreased in proportion to such decrease in
outstanding shares.
6.1.3. Adjustments in Exercise Price. Whenever the number of
shares of Common Stock issuable upon exercise of this Purchase Option is
adjusted, as provided in this Section 6.1, the Exercise Price shall be adjusted
(to the nearest cent) by multiplying such Exercise Price immediately prior to
such adjustment by a fraction (x) the numerator of which shall be the number of
Shares purchasable upon the exercise of this Purchase Option immediately prior
to such adjustment, and (y) the denominator of which shall be the number of
Shares so purchasable immediately thereafter.
6.1.4. Replacement of Securities upon Reorganization, etc. In
case of any reclassification or reorganization of the outstanding shares of
Common Stock other than a change covered by Section 6.1.1 hereof or which solely
affects the par value of such shares of Common Stock, or in the case of any
merger or consolidation of the Company with or into another corporation (other
than a consolidation or merger in which the Company is the continuing
corporation and which does not result in any reclassification or reorganization
of the outstanding shares of Common Stock), or in the case of any sale or
conveyance to another corporation or entity of the property of the Company as an
entirety or substantially as an entirety in connection with which the Company is
dissolved, the Holder of this Purchase Option shall have the right thereafter
(until the expiration of the right of exercise of this Purchase Option) to
receive upon the exercise hereof, for the same aggregate Exercise Price payable
hereunder immediately prior to such event, the kind and amount of shares of
stock or other securities or property (including cash) receivable upon such
reclassification, reorganization, merger or consolidation, or upon a dissolution
following any such sale or other transfer, by a Holder of the number of shares
of Common Stock of the Company obtainable upon exercise of this Purchase Option
immediately prior to such event; and if any reclassification also results in a
change in shares of Common Stock covered by Section 6.1.1, then such adjustment
shall be made pursuant to Sections 6.1.1, 6.1.3 and this Section 6.1.4. The
provisions of this Section 6.1.4 shall similarly apply to successive
reclassifications, reorganizations, mergers or consolidations, sales or other
transfers.
6.1.5. Changes in Form of Purchase Option. This form of
Purchase Option need not be changed because of any change pursuant to this
Section, and Purchase Options issued after such change may state the same
Exercise Price and the same number of Shares as are stated in the Purchase
Options initially issued pursuant to this Agreement. The acceptance by any
Holder of the issuance of new Purchase Options reflecting a required or
permissive change shall not be deemed to waive any rights to a prior adjustment
or the computation thereof.
6.2. Elimination of Fractional Interests. The Company shall not be
required to issue certificates representing fractions of Shares upon the
exercise or transfer of this Purchase Option, nor shall it be required to issue
scrip or pay cash in lieu of any fractional interests, it being the intent of
the parties that all fractional interests shall be eliminated by rounding any
fraction up or down to the nearest whole number of Shares or other securities,
properties or rights.
7. Reservation and Listing. The Company shall at all times reserve and keep
available out of its authorized shares of Common Stock, solely for the purpose
of issuance upon exercise of the Purchase Options, such number of shares of
Common Stock or other securities, properties or rights as shall be issuable upon
the exercise thereof. The Company covenants and agrees that, upon exercise of
the Purchase Options and payment of the Exercise Price therefor, all shares of
Common Stock and other securities issuable upon such exercise, shall be duly and
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<PAGE> 8
validly issued, fully paid and non-assessable and not subject to preemptive
rights of any stockholder. The Company further covenants and agrees that upon
exercise of this Purchase Option, all shares of Common Stock and other
securities issuable upon such exercise shall be duly and validly issued, fully
paid and non-assessable and not subject to preemptive rights of any shareholder.
As long as the Purchase Options shall be outstanding, the Company shall use its
best efforts to cause all Shares issuable upon exercise of the Purchase Option
to be listed (subject to official notice of issuance) on all securities
exchanges (or, if applicable on Nasdaq) on which the Common Stock issued to the
public in connection herewith are then listed and/or quoted.
8. Certain Notice Requirements.
8.1. Holder's Right to Receive Notice. Nothing herein shall be
construed as conferring upon the Holders the right to vote or consent or to
receive notice as a stockholder for the election of directors or any other
matter, or as having any rights whatsoever as a stockholder of the Company. If,
however, at any time prior to the expiration of the Purchase Options and their
exercise, any of the events described in Section 8.2 shall occur, then, in one
or more of said events, the Company shall give written notice of such event at
least fifteen days prior to the date fixed as a record date or the date of
closing the transfer books for the determination of the stockholders entitled to
such dividend, distribution, conversion or exchange of securities or
subscription rights, or entitled to vote on such proposed dissolution,
liquidation, winding up or sale. Such notice shall specify such record date or
the date of the closing of the transfer books, as the case may be.
8.2. Events Requiring Notice. The Company shall be required to give the
notice described in this Section 8 upon one or more of the following events: (i)
if the Company shall take a record of the holders of its shares of Common Stock
for the purpose of entitling them to receive a dividend or distribution payable
otherwise than in cash, or a cash dividend or distribution, or (ii) the Company
shall offer to all the holders of its Common Stock any additional shares of
capital stock of the Company or securities convertible into or exchangeable for
shares of capital stock of the Company, or any option, right or warrant to
subscribe therefor, or (iii) a dissolution, liquidation or winding up of the
Company (other than in connection with a consolidation or merger) or a sale of
all or substantially all of its property, assets and business shall be proposed.
8.3. Notice of Change in Exercise Price. The Company shall, promptly
after an event requiring a change in the Exercise Price pursuant to Section 6
hereof, send notice to the Holders of such event and change ("Price Notice").
The Price Notice shall describe the event causing the change and the method of
calculating same and shall be certified as being true and accurate by the
Company's President and Chief Financial Officer.
8.4. Transmittal of Notices. All notices, requests, consents and other
communications under this Purchase Option shall be in writing and shall be
deemed to have been duly made on the date of delivery if delivered personally or
sent by overnight courier, with acknowledgment of receipt to the party to which
notice is given, or on the fifth day after mailing if mailed to the party to
whom notice is to be given, by registered or certified mail, return receipt
requested, postage prepaid and properly addressed as follows: (i) if to the
registered Holder of the Purchase Option, to the address of such Holder as shown
on the books of the Company, or (ii) if to the Company, to its principal
executive office.
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<PAGE> 9
9. Miscellaneous.
9.1. Amendments. The Company and the Underwriters may from time to time
supplement or amend this Purchase Option without the approval of any of the
Holders in order to cure any ambiguity, to correct or supplement any provision
contained herein which may be defective or inconsistent with any other
provisions herein, or to make any other provisions in regard to matters or
questions arising hereunder which the Company and the Underwriters may deem
necessary or desirable and which the Company and the Underwriters deem shall not
adversely affect the interest of the Holders. All other modifications or
amendments shall require the written consent of the party against whom
enforcement of the modification or amendment is sought.
9.2. Headings. The headings contained herein are for the sole purpose
of convenience of reference, and shall not in any way limit or affect the
meaning or interpretation of any of the terms or provisions of this Purchase
Option.
9.3. Entire Agreement. This Purchase Option (together with the other
agreements and documents being delivered pursuant to or in connection with this
Purchase Option) constitutes the entire agreement of the parties hereto with
respect to the subject matter hereof, and supersedes all prior agreements and
understandings of the parties, oral and written, with respect to the subject
matter hereof.
9.4. Binding Effect. This Purchase Option shall inure solely to the
benefit of and shall be binding upon, the Holder and the Company and their
respective successors, legal representatives and assigns, and no other person
shall have or be construed to have any legal or equitable right, remedy or claim
under or in respect of or by virtue of this Purchase Option or any provisions
herein contained.
9.5. Governing Law; Submission to Jurisdiction. This Purchase Option
shall be governed by and construed and enforced in accordance with the laws of
the State of New York, without giving effect to conflict of laws. The Company
hereby agrees that any action, proceeding or claim against it arising out of, or
relating in any way to, this Purchase Option shall be brought and enforced in
the courts of the State of New York or of the United States of America for the
Southern District of New York, and irrevocably submits to such jurisdiction,
which jurisdiction shall be exclusive. The Company hereby waives any objection
to such exclusive jurisdiction and that such courts represent an inconvenient
forum. Any process or summons to be served upon the Company may be served by
transmitting a copy thereof by registered or certified mail, return receipt
requested, postage prepaid, addressed to it at the address set forth in Section
8.4 hereof. Such mailing shall be deemed personal service and shall be legal and
binding upon the Company in any action, proceeding or claim. The Company agrees
that the prevailing party(ies) in any such action shall be entitled to recover
from the other party(ies) all of its reasonable attorneys' fees and expenses
relating to such action or proceeding and/or incurred in connection with the
preparation therefor.
9.6. Waiver, Etc. The failure of the Company or the Holder to at any
time enforce any of the provisions of this Purchase Option shall not be deemed
or construed to be a waiver of any such provision, nor to in any way affect the
validity of this Purchase Option or any provision hereof or the right of the
Company or any Holder to thereafter enforce each and every provision of this
Purchase Option. No waiver of any breach, non-compliance or non-fulfillment of
any of the provisions of this Purchase Option shall be effective unless set
forth in a written instrument
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<PAGE> 10
executed by the party or parties against whom or which enforcement of such
waiver is sought; and no waiver of any such breach, non-compliance or
non-fulfillment shall be construed or deemed to be a waiver of any other or
subsequent breach, non-compliance or non-fulfillment.
9.7. Execution in Counterparts. This Purchase Option may be executed in
one or more counterparts, and by the different parties hereto in separate
counterparts, each of which shall be deemed to be an original, but all of which
taken together shall constitute one and the same agreement, and shall become
effective when one or more counterparts has been signed by each of the parties
hereto and delivered to each of the other parties hereto.
9.8. Exchange Agreement. As a condition of the Holder's receipt and
acceptance of this Purchase Option, Holder agrees that, at any time prior to the
complete exercise of this Purchase Option by Holder, if the Company and GKN
enter into an agreement ("Exchange Agreement") pursuant to which they agree that
all outstanding Purchase Options will be exchanged for securities or cash or a
combination of both, then Holder shall agree to such exchange and become a party
to the Exchange Agreement.
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<PAGE> 11
IN WITNESS WHEREOF, the Company has caused this Purchase Option to be
signed by its duly authorized officer as of the _____ day of ________, 1998.
Infodata Systems Inc.
By: ______________________________
Name: James Ungerleider
Title: President
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Form to be used to exercise Purchase Option:
Infodata Systems Inc.
12150 Monument Drive
Fairfax, Virginia 22033
Date:_________________, _____
The undersigned hereby elects irrevocably to exercise the
within Purchase Option and to purchase ________ shares of common stock of
Infodata Systems Inc. and hereby makes payment of $____________ (at the rate of
$____ per share) in payment of the Exercise Price pursuant thereto. Please issue
the common stock as to which this Purchase Option is exercised in accordance
with the instructions given below.
or
The undersigned hereby elects irrevocably to convert the
Purchase Option to purchase ___________ shares of common stock into _________
shares of Common Stock of Infodata Systems Inc. The portion of this Purchase
Option being converted has a "Value" of $_____ based on a "Market Price" of
$____ per share of Common Stock. Please issue the common stock in accordance
with the instructions given below.
___________________________________
Signature
NOTICE: THE SIGNATURE TO THIS FORM MUST CORRESPOND WITH THE
NAME AS WRITTEN UPON THE FACE OF THE WITHIN PURCHASE OPTION IN EVERY PARTICULAR
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER.
INSTRUCTIONS FOR REGISTRATION OF SECURITIES
Name _______________________________________________________
(Print in Block Letters)
Address _______________________________________________________
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<PAGE> 13
Form to be used to assign Purchase Option:
ASSIGNMENT
(To be executed by the registered Holder to effect a transfer
of the within Purchase Option):
FOR VALUE RECEIVED,____________________________________ does
hereby sell, assign and transfer unto _______________________________ the right
to purchase _______________________ shares of common stock of Infodata Systems
Inc. ("Company") evidenced by the within Purchase Option and does hereby
authorize the Company to transfer such right on the books of the Company.
Dated:___________________, 19__
___________________________________
Signature
NOTICE: THE SIGNATURE TO THIS FORM MUST CORRESPOND WITH THE
NAME AS WRITTEN UPON THE FACE OF THE WITHIN PURCHASE OPTION IN EVERY PARTICULAR
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER.
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EXHIBIT 5.1
[LETTERHEAD OF FREEDMAN, LEVY, KROLL & SIMONDS]
CABLE "ATTORNEYS"
TELECOPIER: 202-457-5151
January 8, 1998
Infodata Systems Inc.
12151 Monument Drive
Fairfax, Virginia 22033
Gentlemen:
Re: Infodata Systems Inc.
Registration Statement on Form SB-2
We have been engaged as special counsel to Infodata Systems Inc. (the
"Company") for the purpose of rendering an opinion as to the legality of the
issuance of shares of the Company's Common Stock. In connection with the
Registration Statement on Form SB-2 (Registration No. 333-42611) filed by the
Company with the Commission (together with all exhibits thereto, the
"Registration Statement"). The Registration Statement relates to an
underwritten public offering by the Company of up to 1,000,000 shares of the
Company's common stock, par value of $.03 per share, (the "Shares") to be made
through a group of underwriters represented by Southeast Research Partners,
Inc. and GKN Securities Corp. Such amount includes 150,000 Shares underlying an
over-allotment option granted to the underwriters. A form of underwriting
agreement has been filed as Exhibit 1 to the Registration Statement (the
"Underwriting Agreement").
This opinion is being delivered to the Commission as Exhibit 5 to the
Registration Statement.
We have examined (1) the Articles of Incorporation, and all amendments
thereto, certified by the Secretary of State of the Commonwealth of Virginia,
(2) the By-Laws of the Company, certified by the Secretary of the Company as
being those currently in effect, (3) the Registration Statement, and (4) such
other corporate records, certificates, documents and other instruments as in
our opinion are necessary or appropriate in connection with expressing the
opinions set forth below.
<PAGE> 1
EXHIBIT 10.14
[Letterhead of Infodata Systems Inc.]
Mr. Richard M. Tworek
3856 St. Clair Court
Monrovia, MD 21770
Dear Richard,
Reference is made to your employment agreement with Infodata Systems Inc. dated
October 11, 1995. The undersigned hereby agree that the agreement is hereby
extended for a two year term to expire October 11, 1999.
Infodata Systems Inc.
By: /s/ Richard T. Bueschel
------------------------------------
(Signature)
Name: Richard T. Bueschel
----------------------------------
(Printed)
Agreed: /s/ Richard M. Tworek
--------------------------------
Richard M. Tworek
Date: 12/14/97
----------------------------------
Infodata Systems Inc. 12150 Monument Drive, Fairfax, Virginia 22033-4058
(703) 934-5205 fax: (703) 934-7154 www.infodata.com
<PAGE> 1
Exhibit 10.15
INFODATA SYSTEMS INC. EMPLOYMENT AGREEMENT
ON CONFIDENTIAL INFORMATION, INVENTIONS AND IDEAS
THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into between
Infodata Systems Inc. ("Infodata") and the undersigned employee ("me," "my" or
"I"). To induce Infodata to employ me and in consideration of my employment or
continued employment at will by Infodata, the sufficiency of which consideration
I expressly acknowledge, Infodata and I, intending to be legally bound, hereby
agree as follows:
1.0 EMPLOYMENT RELATIONSHIP.
1.1 Nature of Employment. The employment relationship between Infodata
and me is one of an "employment at will." This means that the offer of
employment is not for a definite period of time and that after the employment
relationship is established by my acceptance of this offer, either party may
terminate this relationship at any time and for any reason which is not
specifically prohibited by state or federal laws. This condition of employment
may not be varied or modified except in writing and signed by an officer of
Infodata. Nothing found in any policy manual, policy statement, letter, or other
writing I may receive from, or that may be issued by, Infodata, or that may be
contained in any oral statement made on behalf of Infodata, shall vary or modify
this condition of employment unless the phrase "employment at will" is
specifically referred to and specifically modified, varied, or canceled. In
addition, nothing contained therein, or in other written or verbal
communications from Infodata, such as a statement referring to the manner in
which my salary and/or other benefits will be paid or accrued (e.g., salary paid
on a monthly or annual basis, or vacation to accrue at a certain rate for each
of the first two years of employment) or any stock option shall in any way
modify, vary, or supersede the previously stated "employment at will"
relationship between me and Infodata, in the event I accept Infodata's offer of
employment.
1.2 Intellectual Property. I recognize that it is essential to
Infodata's success for Infodata to acquire all rights arising from the
development, discoveries or improvements made by me hereunder and for Infodata
to protect all trade secret and other confidential information that comes to my
knowledge during the course of my employment.
1.3 No Conflict. I represent and warrant that I am not subject to any
contractual obligations that can either prevent me from performing my duties
under this Agreement, or give rise to any claim of damages as a result of my
affiliation with Infodata.
1.4 Prior Proprietary Information. I agree not to disclose to Infodata
or use in Infodata's business any information or material relating to the
business of any third person and intended by that person not to be disclosed to
Infodata.
<PAGE> 2
1.5 No "Moonlighting." During my employment with Infodata, I agree not
to accept or continue in any job, consulting work, directorship, or employment
other than with Infodata, without prior written approval of an officer of
Infodata.
1.6 Computer Security. During my employment with Infodata, I agree only
to use computer resources (both on and off Infodata's premises) for which I have
been granted access and then only to the extent authorized. I agree to comply
with Infodata's policies and procedures concerning computer security.
1.7 Electronic Mail Policy. I understand that Infodata maintains an
electronic mail system and related facilities for the purpose of business
communications. I acknowledge that Infodata retains the right to review any and
all electronic mail communications, with or without notice, at any time.
2.0 CONFIDENTIAL INFORMATION.
2.1 Acknowledgement. During my employment with Infodata I acknowledge I
will have access to Confidential Information, as defined in Section 2.3 below,
and will occupy a position of trust and confidence with respect to Infodata's
affairs and business.
2.2 Obligations. I agree to take the following steps to preserve the
confidential and proprietary nature of Confidential Information.
(a) Non-Disclosure. During and after my employment with
Infodata, I will not use, disclose or transfer any Confidential Information
other than as authorized by Infodata within the scope of my duties with
Infodata, and will not use in any way other than in Infodata's business any
Confidential Information, including information or material received by Infodata
from others and intended to be kept in confidence by its recipients. I
understand that I am not allowed to sell, license or otherwise exploit any
products (including software in any form) which embody or otherwise exploit in
whole or in part any Confidential Information.
(b) Disclosure Prevention. I will take all reasonable
precautions to prevent the inadvertent or accidental exposure of Confidential
Information.
(c) Removal. I will not remove transmit or transport any
Confidential Information from Infodata's premises or make copies of such
materials, except for use in Infodata's business, without the express written
permission of an officer of Infodata.
(d) Return. I will return to Infodata all Confidential
Information and copies thereof at any time upon the request of Infodata, and in
any event and without such request, prior to the termination of my employment by
Infodata. I agree not to retain any tangible or intangible copies of any
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<PAGE> 3
Confidential Information after my termination of employment for any reason.
2.3 Confidential Information. The following materials and information,
whether having existed, now existing, or to be developed or created during the
term of my employment by Infodata (herein referred to collectively as the
"Confidential Information") are covered by this Agreement and acknowledged by me
to be valuable, special and unique assets of Infodata, the disclosure of any
aspect of which may be materially damaging.
(a) Software. All information relating to existing software
products and software in various stages of research and development which are
not generally known to the public or within the computer industry or trade in
which Infodata competes (such as know-how, design specifications, algorithms,
technical formulas, engineering data, special effects, benchmark test results,
methodologies, procedures, techniques, and information processing processes) and
the physical embodiments of such information (such as drawings, specification
sheets, design notes, source code, object code, load modules, schematics, flow
charts, logic diagrams, procedural diagrams, coding sheets, work sheets,
documentation, annotations, printouts, studies, manuals, proposals and any other
written or machine-readable manuals, proposals and any other written or machine
readable expressions of such information as are fixed in any tangible media).
(b) Other Products and Services. All information relating to
consulting, research and development and other proprietary products or services,
whether existing or in various stages of research and development, which are not
generally known to the public or within the computer industry or trade in which
Infodata competes (such as know-how, specifications, technical data, images,
special engineering data, processes, techniques, methodologies, and strategies)
and the physical embodiments of such information (such as photographs,
schematics, specification sheets, instruction manuals, course materials,
training aids, video cassettes, transparencies, slides, taped recordings of
presentations, proposals, printouts, studies, contracts, maintenance manuals,
documentation, and any other written or machine-readable expressions of such
information as are fixed in any tangible media).
(c) Business Procedures. All information concerning or
relating to the way Infodata conducts its business which is not generally known
to the public (such as internal business procedures, policies, practices,
controls, internal telephone numbers, plans, licensing techniques and practices,
supplier, subcontractor and prime contractor names and contracts and other
vendor information, computer system passwords and other computer security
controls, financial information, distributor information, and employee data) and
the physical embodiments of such information (such as check lists, samples,
services and operational manuals, contracts, proposals, print-outs,
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<PAGE> 4
correspondence, forms, listings, ledgers, financial statements, financial
reports, financial and operational analyses, financial and operational studies,
management reports of every kind, databases, employment records pertaining to
employees other than me, and any other written or machine-readable expressions
of such information as are fixed in any tangible media).
(d) Marketing Plans and Customer Lists. All information
pertaining to Infodata's marketing plans and strategies; forecasts and
projections; marketing practices, procedures and policies; financial data;
discounts; margins; costs; credit terms; pricing practices, procedures and
policies; goals and objectives; quoting practices, procedures and policies; and
customer data including customer lists, contracts, representatives, requirements
and needs, specifications, data provided by or about prospective existing or
past customers and contract terms applicable to such customers, and the physical
embodiments of such information (such as license agreements, consulting
agreements, customer lists, print-outs, databases, marketing plans, marketing
reports, strategic business plans, marketing analyses and management reports,
seminar and class attendee rosters, trade show or exhibit attendee listings,
listings of potential customers and leads, and any other written or
machine-readable expressions of such information as are fixed in any tangible
media).
(e) Not Generally Known. Any information in addition to the
foregoing which is not generally known to the public or within the industry or
trade in which Infodata competes, and the physical embodiments of such
information in any tangible form, whether written or machine-readable in nature.
2.4 General Knowledge. Neither the general skills, knowledge and
experience gained during my employment with Infodata, nor information publicly
available or generally known within the industry or trade in which Infodata
competes are considered to be Confidential Information.
2.5 Information Disclosed Remains Infodata Property. I agree and
acknowledge that all ideas, concepts, information, and written material
disclosed to me by Infodata, or acquired from a customer or prospective customer
or prospective customer of Infodata are and shall remain the sole and exclusive
property and Confidential Information of Infodata or such customers, and are
disclosed in confidence by Infodata or permitted to be acquired from such
customers in reliance on my agreement to maintain them in confidence and not to
use any such property and Confidential Information to the detriment of Infodata,
or use or disclose them to any other person except in furtherance of Infodata's
business and for the benefit of the Infodata.
3.0 NON-COMPETITION COVENANT.
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<PAGE> 5
3.1 Competitor Defined. The term "Competitor" shall refer to any
person, firm, corporation, partnership or other business entity engaged in or
about to become engaged in the production, licensing, sale or marketing of
document management software or services directly related to document
management:
(i) which is similar to or directly competitive with
Infodata's proprietary computer software, research
and development activities or consulting services
with which I have been directly concerned through my
work for Infodata during the preceding two (2) years;
or
(ii) with respect to which I have acquired Confidential
Information.
3.2 Restrictive Covenant. As a material inducement to Infodata to enter
into this Agreement, I covenant and agree that, during my employment with
Infodata and for a period of one (1) year following the termination of my
employment, either by Infodata with cause, or by me without cause, I shall not
engage during such period, directly or indirectly, voluntarily or involuntarily,
as an individual, principal, agent, officer, employee, independent contractor,
partner, lender, director or in any other capacity, anywhere in the United
States, in any actions to solicit, divert or take away any client, consultant or
supplier of Infodata, or otherwise compete with Infodata in the sale or
licensing, of any products or services that are competitive with the products or
services developed or marketed by Infodata in the United States.
3.3 Employee Acknowledgements and Agreements. I acknowledge that this
covenant in Section 3.2 has a unique, very substantial and immeasurable value to
Infodata. I acknowledge and agree that the software developed by Infodata is or
is intended to be marketed and licensed to customers worldwide, including
domestically throughout the United States. I further acknowledge and agree to
the reasonableness of this covenant not to compete and the reasonableness of the
geographic area and duration of time which are a part of said covenant. I also
acknowledge and agree that this covenant will not impair me from becoming
gainfully employed, or otherwise earning a livelihood following termination of
my employment with Infodata.
4.0 NON-SOLICITATION OF EMPLOYEES.
I acknowledge that any attempt on my part to induce others to leave
Infodata's employ, or any effort by me to interfere with Infodata's relationship
with its other employees would be harmful and damaging to Infodata. I agree that
during the term of employment and for a period of one (1) year thereafter, I
will not in any way, directly or indirectly (i) induce or attempt to induce any
employee of Infodata to quit employment with Infodata;
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<PAGE> 6
or (ii) otherwise interfere with or disrupt Infodata's relationship with its
employees.
5.0 ENFORCEMENT.
I acknowledge that in the event of the unauthorized use or disclosure
of any Confidential Information or materials by me, Infodata's business
interests will be irreparably injured, the full extent of Infodata's damages
will be impossible to ascertain, monetary damages will not be an adequate remedy
for Infodata, and Infodata will be entitled to enforce this Agreement by an
injunction or other equitable relief, without the necessity of posting bond or
security, which I expressly waive. I understand that Infodata may waive some of
the requirements expressed in this Agreement, but that such a waiver to be
effective must be made in writing by an officer of Infodata and will not in any
way be deemed a waiver of Infodata's right to enforce any other requirements or
provisions of this Agreement. I agree that each of my obligations specified in
this Agreement is a separate and independent covenant that shall survive any
termination of this Agreement and that the unenforceability of any of them shall
not preclude the enforcement of any other covenants in hits Agreement.
6.0 INNOVATIONS.
6.1 Assignment of Innovations. Infodata shall have the unlimited and
exclusive rights in any products, designs, layouts, specifications,
developments, notes, improvements, innovations, inventions, formulas, processes,
techniques, know-how, data, discoveries, Confidential Information or other work
developed by me in the performance of my work for Infodata, whether now existing
or later developed for Infodata (all of the foregoing being reference in this
Agreement, collectively as "Innovations"). I hereby assign to Infodata, without
further consideration or royalty, all my right, title and interest in any
Innovations and ideas, patentable or not, that I make, reduce to practice, learn
or conceive, alone or with others, during the period of time in which I am
employed by Infodata and that relate in any wy to the actual or prospective
business of Infodata. I shall maintain notebooks and other records adequate to
describe my Innovations to others conversant with the technology and to
establish the date and circumstances of my discovery or creation. I agree to
disclose routinely to Infodata all Innovations covered by this Agreement, and I
will, upon request, execute specific assignments and take any action necessary
to enable Infodata to secure patents, copyrights or otherwise secure its
proprietary rights in such Innovations.
6.2 Power of Attorney. In the event Infodata is unable to secure my
signature on any document necessary to apply for, prosecute, obtain or enforce
any patent, copyright or other right or protection relating to any Innovation in
any country of the world, whether due to death, mental or physical incapacity or
any
- 6 -
<PAGE> 7
other cause, I hereby irrevocably designate and appoint Infodata and its
Secretary as my agent and attorney-in fact, to act for and in my behalf and
stead, for the limited purpose of executing and filing any such document and
doing all other lawfully permitted acts to further the prosecution, issuance and
enforcement of patents, copyrights or other projections which employ or are
based on Innovations with the same force and effect as if executed and delivered
by me. This power of attorney shall not be affected by my subsequent death or
incapacity.
7.0 WRITTEN MATERIALS.
7.1 Ownership. I acknowledge and agree that all writings, including
without limitation, software program code, logic diagrams, flow charts, decision
charts, drawings, procedural diagrams, coding sheets, manuals, documentation and
written, literary, graphic, sound or artistic works of any kind produced by me
in the course of my work for Infodata are works produced for hire and the sole
and exclusive property of Infodata including, without limitation, any copyrights
subsisting in those writings; but to the extent any such writings may not, by
operation of law or otherwise, be a work made for hire, I hereby assign to
Infodata the ownership of copyright in such works, whether published or
unpublished from the moment any such works were created and fixed in any form of
tangible media. I further agree upon request to execute such specific
assignments or instruments and take any action necessary to enable Infodata to
secure its copyright rights in such works.
7.2 Moral Rights. I understand that the term "moral rights" means any
rights of paternity or integrity, including any right to claim authorship of a
copyrightable work, to object to a modification of such copyrightable work, and
any similar right existing under the judicial or statutory law of any country in
the world or under any treaty, regardless of whether or not such right is
denominated or generally referred to as a "moral right." I forever hereby waive
and agree never to assert any moral rights I may have in any copyrightable work
that is assigned to Infodata as a result of Section 8.1 hereof, even after any
termination of my employment with Infodata.
8.0 WAIVER OF BREACH.
Any waiver by either party of compliance with any provision of this
Agreement by the other shall not operate or be construed as a waiver of any
other provision of this Agreement, or of any subsequent breach by such party of
a provision of this Agreement. No waiver by the Infodata shall be valid unless
in writing and signed by a duly authorized officer of Infodata.
9.0 GOVERNING LAW.
This Agreement shall be construed and enforced in accordance with, and
the rights of the parties shall be governed by, the
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<PAGE> 8
laws of the Commonwealth of Virginia, without regard to conflict of law
provisions.
10.0 SEVERABILITY.
Should any provision of this Agreement not be enforceable in any
jurisdiction, the remainder of the Agreement shall not be affected thereby. If
the scope of any of the restrictions in Sections 3, 4, or 5 are determined by a
court of competent jurisdiction to be too broad to permit enforcement of such
restrictions to their full extent, then such restrictions shall be construed or
rewritten (blue-lined) so as to be enforceable to the maximum extent permitted
by law and I hereby consent, to the extent I may lawfully do so, to the judicial
modification of the scope of any such restrictions in any proceeding brought to
enforce them.
11.0 ASSIGNMENT.
My rights, interests and benefits hereunder shall not be assigned,
transferred, pledged, or hypothecated in any way by me. The rights and
obligations of Infodata under this Agreement shall inure to the benefit of and
be binding upon the successors of Infodata. If Infodata shall at any time be
merged or consolidated with or into another corporation, or if substantially all
the assets of Infodata are transferred to another corporation, the provisions of
this Agreement shall be binding on and shall inure to the benefit of the
corporation resulting from such merger or consolidation or to which such assets
shall be transferred.
12.0 HEADINGS AND PRONOUNS.
Headings and subheadings and paragraphs are for convenience of
reference only and shall not be of any effect in construing the meanings of the
paragraphs and subparagraphs. All pronouns and any variation thereof shall be
deemed to refer to the masculine, feminine or neuter, singular or plural, as the
identity of the person, persons, entity or entities may require.
13.0 PUBLICATION.
I agree not to submit any writing for publication or deliver any speech
that contains any information relating to the business of Infodata, unless I
receive advance written clearance from an authorized representative of Infodata.
14.0 CONFLICTING OBLIGATIONS AND RIGHTS.
I agree to inform Infodata of any apparent conflicts between my work
for Infodata and (a) any obligations I may have to preserve the confidentiality
of another's proprietary information or materials or (b) any rights I claim to
any inventions or ideas before using the same on Infodata's behalf. Otherwise,
Infodata
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<PAGE> 9
may conclude that no such conflict exists and I agree thereafter to make no such
claim against Infodata. Infodata shall receive such disclosures in confidence
and consistent with the objectives of avoiding any conflict of obligations and
rights or the appearance of any conflict of interest.
15.0 ENTIRE AGREEMENT.
This is my entire agreement with Infodata with respect to its subject
matter as of its date, superseding any prior or contemporaneous, oral or
written, express or implied negotiations, representations, understandings or
agreements.
16.0 FURTHER ACKNOWLEDGEMENT.
I understand and accept the terms set forth in this Agreement,
including, but not limited to, the condition that my employment is not for any
definite period of time, but may be terminated by me or by Infodata at any time
and for any reason which is not specifically prohibited by state or federal law.
I further understand that my employment may be terminated by Infodata, in its
sole discretion, if I have misstated, misrepresented or omitted any material
fact in my application for employment or in any related documentation or
information provided by me, whether verbally or in writing, to Infodata.
By my signature below, I acknowledge that I have reviewed this
Agreement carefully and understand that the covenants and obligations it
contains are binding on me.
INFODATA SYSTEMS INC. AGREED TO BY EMPLOYEE
/s/Eva Franklin /s/ James A. Ungerleder
- ------------------- -----------------------
Signature Signature
Eva Franklin /s/ James A. Ungerleder
- -------------------- -----------------------
Print Name Print Name
12-17-97 12-17-97
- -------------------- ------------------------
Date Date
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<PAGE> 1
EXHIBIT 21.1
The following is a list of subsidiaries of the Company and the states
in which they are incorporated:
Subsidiary State of Incorporation
Infodata Systems International Inc. New York
Infodata Systems Research and Development, Inc. New York
AMBIA Corporation California
<PAGE> 1
EXHIBIT 23.1
[LETTERHEAD OF ARTHUR ANDERSEN LLP]
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
registration statement.
/s/ Arthur Andersen LLP
-------------------
Arthur Andersen LLP
Washington, D.C.
January 9, 1998
<PAGE> 1
Exhibit 23.2
[LETTERHEAD OF SEILER & COMPANY, LLP]
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Amended Registration
Statement on Form SB-2, of Infodata Systems, Inc. filed December 16, 1997 and
amended on January 8, 1998 of our reports dated June 3, 1997 with respect to
the financial statements of AMBIA for the years ended December 31, 1995 and
December 31, 1996.
SEILER & COMPANY, LLP
/s/ SEILER & COMPANY, LLP
Redwood City, California
January 8, 1998
<PAGE> 1
Exhibit 23.4
[LETTERHEAD OF KRAMER, LEVIN, NAFTALIS & FRANKEL]
January 9, 1998
Infodata Systems Inc.
12150 Monument Drive
Fairfax, Virginia 22033
Re: Infodata Systems Inc.
Registration Statement on Form SB-2
Ladies and Gentlemen::
We have acted as counsel to Infodata Systems Inc., a Virginia
corporation (the "Company"), in connection with the preparation and filing of
the above-captioned Registration Statement on Form SB-2 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
covering 1,000,000 shares of common stock, par value $.03 per share, of the
Company (the "Shares"), including up to 150,000 shares of common stock to be
sold upon exercise of an over-allotment option granted by the Company to
Southeast Research Partners, Inc. and GKN Securities Corp. (the "Underwriters").
As such counsel, we consent to the use of our name under the
heading "Legal Matters" in the Prospectus. In giving such consent we do not
thereby concede that we are
<PAGE> 2
KRAMER, LEVIN, NAFTALIS & FRANKEL
Infodata Systems Inc.
January 5, 1998
Page 2
within the category of persons whose consent is required under Section 7 of the
Securities Act or the rules and regulations promulgated thereunder.
Very truly yours,
/s/ Kramer, Levin, Naftalis,
& Frankel
