<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-10416
----------------------------------------------------
INFODATA SYSTEMS INC.
(Exact Name of Small Business Issuer in its Charter)
VIRGINIA 16-0954695
(State of Incorporation) (I.R.S. Employer Identification No.)
12150 MONUMENT DRIVE, FAIRFAX, VIRGINIA 22033
(Address of Principal Executive Office) (Zip Code)
(703) 934-5205 (Issuer's Telephone Number)
--------------------------------------------------
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- ---------------------
None Not applicable
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK-$.03 PAR VALUE
-----------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of Common Stock on November 1,
1999 as reported on the Nasdaq Small Cap market, was approximately $4,072,000.
Shares of Common Stock held by each director and officer and by each person who
owns 5% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
The number of outstanding shares of the Company's Common Stock, par value $0.03
per share, was 4,555,851 on November 1, 1999.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
<PAGE> 2
INFODATA SYSTEMS INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page (s)
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Operations 3
Three Months Ended September 30, 1999 and 1998
Consolidated Statements of Operations 4
Nine Months Ended September 30, 1999 and 1998
Condensed Consolidated Balance Sheets 5
September 30, 1999 and December 31, 1998
Consolidated Statements of Cash Flows 6
Nine Months Ended September 30, 1999 and 1998
Notes to Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis 9-16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 17
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1.
INFODATA SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------------
1999 1998
----------- ------------
<S> <C> <C>
Revenues $ 2,444 $ 3,842
Cost of revenues 1,940 2,659
----------- ------------
Gross profit 504 1,183
----------- ------------
Operating expenses:
Research and development 29 264
Selling, general and administrative 1,353 1,469
----------- ------------
1,382 1,733
----------- ------------
Operating loss (878) (550)
Interest income 44 71
----------- ------------
Net loss $ (834) $ (479)
=========== ============
Net loss per share:
Basic $(0.18) $ (0.11)
=========== ============
Diluted $(0.18) $ (0.11)
=========== ============
Weighted average shares outstanding 4,541 4,490
=========== ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
3
<PAGE> 4
INFODATA SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
1999 1998
----------- ------------
<S> <C> <C>
Revenues $ 8,118 $ 10,418
Cost of revenues 6,065 6,892
----------- ------------
Gross profit 2,053 3,526
----------- ------------
Operating expenses:
Research and development 620 1,387
Selling, general and administrative 4,129 4,148
Goodwill impairment 1,941 --
----------- ------------
6,690 5,535
----------- ------------
Operating loss (4,637) (2,009)
Interest income 152 185
Interest expense -- (14)
----------- ------------
Net loss $(4,485) $(1,838)
=========== ============
Net loss per share:
Basic $ (0.99) $ (0.44)
=========== ============
Diluted $ (0.99) $ (0.44)
=========== ============
Weighted average shares outstanding 4,537 4,137
=========== ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
4
<PAGE> 5
INFODATA SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
----------------- ------------------
ASSETS
- ------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 639 $ 2,200
Short-term investments 2,644 2,673
Accounts receivable, net of allowance of $66 and $95 1,422 2,356
Other current assets 158 166
----------------- ------------------
Total current assets 4,863 7,395
----------------- ------------------
Property and equipment, at cost:
Furniture and equipment 2,988 2,861
Less accumulated depreciation and amortization (2,709) (2,442)
----------------- ------------------
279 419
Goodwill, net of accumulated amortization of $3,199 and $899 498 2,798
Other assets 149 171
----------------- ------------------
Total assets $ 5,789 $ 10,783
================= ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities
Accounts payable $ 614 $ 786
Accrued expenses 1,128 1,092
Deferred revenue 618 1,152
----------------- ------------------
Total current liabilities 2,360 3,030
Shareholders' equity
Common stock 135 135
Additional paid-in capital 19,709 19,548
Accumulated deficit (16,415) (11,930)
----------------- ------------------
Total shareholders' equity 3,429 7,753
----------------- ------------------
Total liabilities and shareholders' equity $ 5,789 $ 10,783
================= ==================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
5
<PAGE> 6
INFODATA SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1999 1998
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $(4,485) $ (1,838)
Adjustments to reconcile net loss to cash used in
operating activities:
Equity stock compensation 43 --
Depreciation and amortization 291 234
Software amortization -- 31
Goodwill impairment 1,941 --
Goodwill and other intangible amortization 359 426
Provision for doubtful accounts (29) --
Changes in operating assets and liabilities:
Accounts receivable 963 467
Other assets 54 (340)
Accounts payable (172) (917)
Accrued expenses 42 83
Deferred revenue (534) 124
Deferred rent -- (19)
------------- -------------
Net cash used in operating activities (1,527) (1,749)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (175) (124)
Purchases of short-term investments (4,330) (10,970)
Proceeds from maturity of short-term investments 4,359 8,500
------------- ------------
Net cash used in investing activities (146) (2,594)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations (6) (20)
Net repayments from short-term debt -- (880)
Issuance of common stock 118 6,934
------------- ------------
Net cash provided by financing activities 112 6,034
------------- ------------
Net (decrease) increase in cash and cash equivalents (1,561) 1,691
Cash and cash equivalents at beginning of period 2,200 284
------------- ------------
Cash and cash equivalents at end of period $ 639 $ 1,975
============= ============
Supplemental disclosure of cash flows information:
Non-cash investing activities:
Acquisition of investment in exchange for property and
equipment $ 24 --
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
6
<PAGE> 7
INFODATA SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310(b)
of Regulation S-B. Accordingly, the accompanying unaudited financial statements
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the three-month and nine-month periods ended September
30, 1999, are not necessarily indicative of the results for the year ending
December 31, 1999. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1998.
NOTE B - GOODWILL IMPAIRMENT
In July 1997, the Company purchased AMBIA Corporation ("Mountain View") for
approximately $3,461,000. Substantially all of the purchase price was allocated
to goodwill. During the second quarter of 1999, Mountain View did not achieve
its forecasted revenues for its DCS product. In addition, during the second
quarter of 1999 the Company decided to close its Mountain View office.
Accordingly, based on these events, the Company determined that Mountain View
would not achieve its future budgetary projections. As a result, the Company
revised the future operating plan for Mountain View. In accordance with
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of"
the Company evaluated the recoverability of the carrying value of the goodwill
related to the AMBIA Corporation acquisition. Based on this assessment, it was
determined that the anticipated future undiscounted cash flows from Mountain
View activities would not be sufficient to recover the remaining amount of
goodwill. Accordingly, during the second quarter of 1999, the Company adjusted
the carrying value of the goodwill to its estimated value of approximately
$370,000, resulting in an impairment loss of approximately $1,941,000. The loss
represents the difference between the estimated discounted future cash flows
and the recorded amount of the goodwill discounted at a rate commensurate with
the risk involved. Such change has been reflected in the accompanying Statement
of Operations.
NOTE C - LINE OF CREDIT
The Company maintains a line of credit with Merrill Lynch Business Financial
Services, Inc. for up to $1,000,000 based upon eligible receivables at a per
annum rate equal to the sum of 2.9% plus the 30 day commercial paper rate.
Currently, this per annum rate approximates prime. The facility expires in
April 2000. The Company did not have any borrowings under the line of credit as
of September 30, 1999.
NOTE D - RISKS AND UNCERTAINTIES
The Company's operations are subject to certain risks and uncertainties. This
includes the uncertainty of future operating results, fluctuations in quarterly
results, a change in the mix of products and services, a decline in
INQUIRE/Text sales, the Company's focus on professional services and the
related lengthy sales cycle, rapid technological changes and product
obsolescence, both technical hiring and market competition, and a dependence on
government contracts and security clearances.
7
<PAGE> 8
NOTE E - SEGMENT REPORTING
The table below presents information about reported segments for the three and
nine months ended September 30, 1999 and 1998, as well as a reconciliation to
the reported loss before income taxes.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1999
(AMOUNTS IN THOUSANDS)
--------------------------------------------------------------------
SOLUTIONS THIRD PARTY PROPRIETARY TOTAL
PRODUCTS PRODUCTS
----------------- --------------- ------------------ ---------------
<S> <C> <C> <C> <C>
Revenues $ 1,472 $ 484 $ 488 $ 2,444
Direct costs 810 451 35 1,296
Indirect costs 578 -- -- 578
-------- -------- -------- --------
Segmental profit $ 84 $ 33 $ 453 570
======== ======== ======== --------
Research and development (29)
Other costs not allocated to (1,419)
segments, primarily selling,
general and administrative
Interest income 44
--------
Loss before income taxes $ (834)
========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1998
(AMOUNTS IN THOUSANDS)
--------------------------------------------------------------------
SOLUTIONS THIRD PARTY PROPRIETARY TOTAL
PRODUCTS PRODUCTS
----------------- --------------- ------------------ ---------------
<S> <C> <C> <C> <C>
Revenues $ 1,411 $ 1,304 $ 1,127 $ 3,842
Direct costs 703 1,188 40 1,931
Indirect costs 511 -- -- 511
-------- -------- -------- --------
Segmental profit $ 197 $ 116 $ 1,087 1,400
======== ======== ======== --------
Research and development (264)
Other costs not allocated to (1,686)
segments, primarily selling,
general and administrative
Interest income - net 71
--------
Loss before income taxes $ (479)
========
</TABLE>
8
<PAGE> 9
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999
(AMOUNTS IN THOUSANDS)
--------------------------------------------------------------------
SOLUTIONS THIRD PARTY PROPRIETARY TOTAL
PRODUCTS PRODUCTS
----------------- --------------- ------------------ ---------------
<S> <C> <C> <C> <C>
Revenues $ 4,619 $ 1,345 $ 2,154 $ 8,118
Direct costs 2,306 1,285 116 3,707
Indirect costs 2,119 -- -- 2,119
-------- -------- -------- --------
Segmental profit $ 194 $ 60 $ 2,038 2,292
======== ======== ======== --------
Research and development (620)
Other costs not allocated to (4,368)
segments, primarily selling,
general and administrative
Goodwill impairment (1,941)
Interest income 152
--------
Loss before income taxes $(4,485)
========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998
(AMOUNTS IN THOUSANDS)
--------------------------------------------------------------------
SOLUTIONS THIRD PARTY PROPRIETARY TOTAL
PRODUCTS PRODUCTS
----------------- --------------- ------------------ ---------------
<S> <C> <C> <C> <C>
Revenues $ 4,831 $ 2,736 $ 2,851 $ 10,418
Direct costs 2,337 2,450 134 4,921
Indirect costs 1,597 -- -- 1,597
----- -------- -------- -----
Segmental profit $ 897 $ 286 $ 2,717 $ 3,900
======== ========= ========= ---------
Research and development (1,387)
Other costs not allocated to (4,522)
segments, primarily selling,
general and administrative
Interest income - net 171
--------
Loss before income taxes $(1,838)
========
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS RELATING TO PRODUCT DEVELOPMENT, FUTURE CONTRACTS,
REVENUE, THE ADEQUACY OF WORKING CAPITAL, AND YEAR 2000 ARE BASED ON CURRENT
EXPECTATIONS THAT INVOLVE UNCERTAINTIES AND RISKS ASSOCIATED WITH NEW PRODUCT
AND SERVICE OFFERINGS INCLUDING, BUT NOT LIMITED TO, MARKET CONDITIONS,
SUCCESSFUL PRODUCT DEVELOPMENT, SERVICE INTRODUCTION AND ACCEPTANCE, THE
INTRODUCTION OF COMPETITIVE PRODUCTS, ECONOMIC CONDITIONS, AND THE TIMING OF
ORDERS AND CONTRACT INITIATION. THE COMPANY'S ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM CURRENT EXPECTATIONS. READERS ARE CAUTIONED NOT TO PUT UNDUE
RELIANCE ON FORWARD-LOOKING STATEMENTS. THE COMPANY DISCLAIMS ANY INTENT OR
OBLIGATION TO UPDATE PUBLICLY THESE FORWARD-LOOKING STATEMENTS, WHETHER AS A
RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
9
<PAGE> 10
Company Overview
The Company provides its customers with complex information technology
solutions in the area of Knowledge Management. The company specializes in
creating solutions that are enabled for use over internal Intranets as well as
the public Internet. These products and services are provided to corporate and
government workgroups, departments and enterprises in three market segments.
The segments are information technology consulting services (Solutions), sales
of proprietary products (Proprietary Products), and the sale of third party
software and hardware (Third Party Products). Solutions includes systems
integration, document management analysis and implementation, training, and
consulting services surrounding the implementation of the Company's Proprietary
Products, Third Party Products, and other related services. Proprietary
Products include INQUIRE/Text software sales, Compose, Re:mark, Aerial, Signet
and their associated maintenance. Third Party Products include software and
hardware with some related services. For the three months ended September 30,
1999, Solutions accounted for 60% of total revenue, Proprietary Products
accounted for 20%, and Third Party Products accounted for the remaining 20%.
Starting in the third quarter of 1998, the Company identified professional IT
services as its primary area of focus. This business does not involve the same
amount of investment risk as product development, and it provides the Company
with greater opportunities for revenue growth. During the first half of 1999,
the Company added nine experienced sales and marketing personnel whose primary
focus is to increase revenue from Solutions. Given the three to nine month
sales cycle for the Company's solutions contracts, Infodata does not expect to
fully realize the benefits of this expansion until the latter part of 1999 and
beyond. As of September 30, 1999, the sales group has created a pipeline of
prospective business that has helped to validate the Company's Solutions
strategy.
In addition to the sales start-up phase, revenue for the quarter ended
September 30, 1999 was also impacted by the de-emphasis on the types of revenue
that are not complementary to Infodata's core Solutions business. In the third
quarter of 1998 the Company decided to no longer actively pursue Third Party
Product sales that do not produce related services revenue and which
historically provided nominal margin contributions. This resulted in a
significant decline in both revenue and the associated costs of revenue for
Third Party Products during the third quarter of 1999. A similar decision was
made about training services. During the second quarter of 1999, certain
training resources were either reduced or transferred to the Solutions group.
Management believes the realignment of resources affecting Third Party Products
and training reduced third quarter 1999 revenues compared to the same quarter
in 1998, but will have a positive long-term effect. Among the benefits the
Company anticipates from its focus on its Solutions business are higher
operating margins, improved utilization of professional staff, and a reduction
in product-related support costs.
The Company has also made the decision to invest in technical personnel where
management anticipates an increase in professional service revenue by the end
of the year. Since January 1999, 18 technical personnel have been hired and
trained. This had a negative impact on the Company's technical staff
utilization rates during the third quarter as these new hires were undergoing
extensive training. However, management believes this is a necessary cost to
incur in order to grow the Solutions business.
In December 1997, the Company entered into two agreements with Adobe Systems
Incorporated ("Adobe") to modify certain of the Company's proprietary
technologies so that they can be incorporated into future Adobe products and to
cross license the resultant technologies. Under these agreements, Infodata
received license fees in the amount of $1 million and approximately $900,000
10
<PAGE> 11
in services fees to modify the technologies. The Company recognized revenue due
under this agreement in the amount of $567,000 during the quarter ended March
31, 1999 when all obligations related to the contract were completed.
Starting in 1996, the Company began to invest in the development of the Virtual
File Cabinet ("VFC") software product. Development intensified in 1997, and the
product was introduced to the market in 1997. Refinements to the product
continued through the first half of 1998. During the latter half of 1998, the
Company determined that the revenue and profits generated by the VFC product
could not justify the Company's continued emphasis on it. As a result, the
sales, marketing and development effort related to VFC was decreased. Research
and development expenditures were also reduced. Based on this, and the growth
potential of the Solutions business, Infodata refocused its strategy toward its
services and systems integration businesses. Portions of VFC were embedded in
the product licensed to Adobe. The Company has forecasted no revenue for the
VFC product in 1999. The Company continues to support its plug-in based
products, Compose and Aerial.
At September 30, 1999, the Company had net operating loss ("NOL") carryforwards
for income tax reporting purposes available to affect future taxable income.
Under Section 382 of the Internal Revenue Code of 1986, as amended ("Code"),
utilization of prior NOLs is subject to certain limitations following a change
in ownership. As a result of the AMBIA acquisition in 1997, the Company is
subject to limitations on the use of its NOL. Accordingly, there can be no
assurance the Company will be able to utilize a significant amount of NOLs. Due
to uncertainty of taxable income to utilize the NOL, a full valuation allowance
has been established with respect to the deferred tax asset.
Revenues from professional services are recognized as the work progresses. Any
amounts paid by customers prior to the actual performance of services are
recorded as deferred revenue until earned, at which time they are recognized in
accordance with the type of contract. Revenues from software licenses are
recognized upon delivery or upon acceptance by the customer. Revenues from post
customer support and maintenance agreements are recognized over the period
during which support is provided.
Deferred revenue at September 30, 1999 was $618,000. This related primarily to
amounts from maintenance revenues on the INQUIRE/Text product. The margins that
will be realized on transactions involving deferred revenue depend on the type
of service rendered by the Company. Most of the Company's maintenance revenue
pertains to INQUIRE/Text, which is a mature software product.
The components of the Company's cost of revenue depend on the product or
service. For services, the most significant item is the direct labor cost of
the professional staff. Other cost components include subcontractor costs,
non-labor direct costs such as travel and any associated indirect costs (e.g.,
office rent, administration, etc.) allocated to the client engagement. Indirect
costs are allocated based on head-count and square footage of office space. For
Third Party Products, the cost of revenue includes the cost incurred by the
Company to acquire the product, shipping and delivery charges, associated
taxes, any customization work done by the Company, and any special packaging
costs incurred prior to shipment. For Proprietary Products, the cost of revenue
includes shipping, delivery, packaging, production, the direct labor of
personnel involved in delivering the product and any associated expenses
involved with the installation.
Future operating results will depend on many factors, including the demand for
the Company's services, the effectiveness of the Company's efforts to integrate
various product frameworks it has
11
<PAGE> 12
developed or acquired and to achieve the desired levels of sales from such
product framework integration, the level of service 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 ability of the Company to develop and market new service and
product framework offerings and control costs, and general domestic economic
and political conditions.
In July 1997, the Company purchased AMBIA Corporation ("Mountain View") for
approximately $3,461,000. Substantially all of the purchase price was allocated
to goodwill. During the second quarter of 1999 the Company decided to close its
Mountain View office because Mountain View did not achieve its forecasted
revenues for its DCS product. Furthermore, the Company determined that Mountain
View would not achieve its future budgetary projections. As a result, the
Company revised the future operating plan for Mountain View. In accordance with
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of",
the Company evaluated the recoverability of the carrying value of the goodwill
related to the AMBIA Corporation acquisition. Based on this assessment, it was
determined that the anticipated future undiscounted cash flows from Mountain
View activities would not be sufficient to recover the remaining amount of
goodwill. Accordingly, during the second quarter of 1999, the Company adjusted
the carrying value of the goodwill to its estimated value of approximately
$370,000, resulting in an impairment loss of approximately $1,941,000. The loss
represents the difference between the estimated discounted future cash flows
and the recorded amount of the goodwill discounted at a rate commensurate with
the risk involved. Such change has been reflected in the accompanying Statement
of Operations.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1998
Revenues
Total revenue decreased by $1,398,000, or 36%, from $3,842,000 for the three
months ended September 30, 1998 to $2,444,000 for the three months ended
September 30, 1999. The Company derived revenues from three segments,
Solutions, Proprietary Products and Third Party Products. The Solutions segment
includes professional services for both commercial and government customers
along with training. Proprietary Products include the Company's plug-in
software products and INQUIRE/Text product sales and their related maintenance.
Third Party Products includes both software and hardware sold to government and
commercial entities. Most of the revenue decrease for the quarter came from
Third Party Products, which were de-emphasized starting with the second quarter
of 1999. Third Party Product revenue decreased by $820,000, or 63%, from
$1,304,000 for the three months ended September 30, 1998 to $484,000 for the
three months ended September 30, 1999. Although this de-emphasis affected third
quarter revenue and will affect future revenue, the Company expects that it
will have a minimal impact on net income and cash flows due to the nominal
gross margin of Third Party Products. Revenues from Proprietary Products also
decreased during the quarter. Compared to the third quarter of 1998, they
decreased $639,000, or 57%, from $1,127,000 for the three months ended
September 30, 1998 to $488,000 for the three months ended September 30, 1999.
The decrease was due to a decline in INQUIRE maintenance revenue and
INQUIRE/Text software sales of $178,000 and a decline in other software sales
(principally VFC and Re:mark) of $461,000. The Company expects that
INQUIRE/Text-related revenue will continue to decline over time as customers
move applications off mainframes. The Company no longer licenses the VFC
product to customers. Revenues from Solutions increased by $61,000, or 4%, from
$1,411,000 for the three months ended September 30, 1998 to $1,472,000 for the
three month period ended September 30, 1999. This increase was due to
12
<PAGE> 13
growth in the core areas of professional services (commercial/government and
Intelligence) of $187,000, partially offset by decreases in Mountain View
consulting and overall training, two areas of the Company that have been
de-emphasized.
Gross Profit
Gross profit decreased by $679,000, or 57%, from $1,183,000 for the three
months ended September 30, 1998 to $504,000 for the three months ended
September 30, 1999. This decrease was due primarily to the decrease in
Proprietary Product revenue and Third Party revenue.
Gross margin as a percent of revenues decreased from 31% for the three months
ended September 30, 1998 to 21% for the three months ended September 30, 1999.
The decrease was due to the decrease in Proprietary Product revenue.
Research and Development Expenses
Research and development expenses decreased $235,000, or 89%, from $264,000 for
the three months ended September 30, 1998 to $29,000 for the three months ended
September 30, 1999. The decrease was due to the Company's decision in the
latter half of 1998 to discontinue further development on the Company's Virtual
File Cabinet (VFC) product.
Selling, General and Administrative Expenses (SG&A)
Selling, general and administrative expenses decreased $116,000, or 8%, from
$1,469,000 for the three months ended September 30, 1998 to $1,353,000 for the
three months ended September 30, 1999. The decrease was due to the reduction in
personnel and administrative costs associated with the de-emphasis of training
and the closing of the Mountain View office. Areas of cost savings included the
human resources department, the customer care department (decreased because of
the de-emphasis of the Virtual File Cabinet (VFC) product), goodwill
amortization, the Mountain View office, and the training department. Selling,
general and administrative expenses as a percentage of sales increased by 17%
due to the related decrease in Proprietary Product revenue and Third Party
Product revenue coupled with fixed costs associated with SG& A.
Interest Income and Expense
Net interest income decreased $27,000, or 38%, from $71,000 for the three
months ended September 30, 1998 to $44,000 for the three months ended September
30, 1999. The decrease was due to lower average cash balances and short-term
investments during the second quarter of 1999 than during the second quarter of
1998. There were no borrowings as of September 30, 1999. Cash, cash
equivalents, and short-term investment balances increased significantly as the
result of a public stock offering in February 1998. The Company has invested
its excess cash in short-term money market instruments, U.S. Treasuries, and
commercial paper.
Net Loss
Net loss increased $355,000, from $479,000 for the three months ended September
30, 1998 to $834,000 for the three months ended September 30, 1999. The
decrease was due to the factors discussed above.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1998
Revenues
Total revenue decreased by $2,300,000, or 22%, from $10,418,000 for the nine
months ended September 30, 1998 to $8,118,000 for the nine months ended
September 30, 1999. Most of the decrease came from a decline in Third Party
Product revenue and Proprietary Product revenue.
13
<PAGE> 14
Third Party Product revenue decreased $1,391,000, or 51%, from $2,736,000 from
the nine months ended September 30, 1998 to $1,345,000 for the nine months
ended September 30, 1999. The decrease was due to the de-emphasis of
stand-alone Third Party Products. Proprietary Product revenue decreased by
$697,000 or 24%, from $2,851,000 for the nine months ended September 30, 1998
to $2,154,000 for the nine months ended September 30, 1998 to $2,154,000 for
the nine months ended September 30, 1999. The decrease was due primarily to a
decline in INQUIRE/Text maintenance revenue. The Company expects that
INQUIRE/Text-related revenue will continue to decline over time as customers
move applications off mainframes. Revenue from Solutions decreased $212,000, or
4%, from $4,831,000 for the nine months ended September 30, 1998 to $4,619,000
for the nine months ended September 30, 1999. The decrease was due to the
completion of a non-recurring consulting agreement during the first quarter of
1999 related to the license with Adobe Systems Inc., the de-emphasis of the
training department, and the closing of the Mountain View office. This was
partially offset by increases in core professional services business.
Gross Profit
Gross profit decreased by $1,473,000, or 42%, from $3,526,000 for the nine
months ended September 30, 1998 to $2,053,000 for the nine months ended
September 30, 1999. The decrease in gross profit was due primarily to decreased
revenue in Third Party and Proprietary product sales.
Gross margin as a percent of revenues decreased from 34% for the nine months
ended September 30, 1998 to 25% for the nine months ended September 30, 1999.
The decrease was correlated with lower proprietary product sales.
Research and Development Expenses
Research and development expenses decreased $767,000, or 55%, from $1,387,000
for the nine months ended September 30,1998 to $620,000 for the nine months
ended September 30, 1999. The decrease was due to the Company's decision to
discontinue further development on the Company's VFC product.
Selling, General and Administrative Expenses (SG&A)
Selling, general and administrative expenses decreased $19,000 from $4,148,000
for the nine months ended September 30, 1998 to $4,129,000 for the nine months
ended September 30, 1999. The decrease was due to a reduction in administrative
costs associated with the de-emphasis of training and the closing of the
Mountain View office. Selling, general and administrative expenses as a
percentage of sales increased by 11% due to the related decrease in Proprietary
Product revenue and Third Party Product revenue coupled with fixed costs
associated with SG&A.
Goodwill Impairment
The Company incurred a non-cash writedown of $1,941,000 in goodwill associated
with the AMBIA acquisition during the second quarter of 1999.
Interest Income and Expense
Net interest decreased $19,000, or 11%, from $171,000 for the nine months ended
September 30, 1998 to $152,000 for the nine months ended September 30, 1999.
The decrease was due to lower average cash balances and short-term investments
during the third quarter of 1999. The Company invests only in short-term,
highly liquid money market instruments, U.S. Treasuries, and commercial paper.
Net Loss
14
<PAGE> 15
Net loss increased $2,647,000, from $1,838,000 for the nine months ended
September 30, 1998 to a net loss of $4,485,000 for the nine months ended
September 30, 1999. The increase was due to the factors discussed above,
including a non-cash charge of $1,941,000 in the second quarter of 1999.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company had cash, cash equivalents and short-term
investments of $3,283,000 and a working capital surplus of $2,503,000. The
Company had no borrowings as of September 30, 1999. The Company maintains a
line of credit with Merrill Lynch Business Financial Services, Inc. ("MLBFS")
for up to $1,000,000 based upon eligible receivables. Interest on any
outstanding debt under this line 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. This facility expires in April 2000. The line of
credit is contingent upon the Company continuing to meet certain general
funding requirements, including the absence of any material adverse change in
the Company's business or financial condition, the continued accuracy of the
Company's representations and warranties and the provision of quarterly and
monthly financial information. The Company is currently in compliance with
these funding requirements. During the first quarter of 1998, the Company paid
off the line of credit in full and has not had a balance at quarter-end since
then.
Net cash used in operating activities for the nine months ended September 30,
1999 of $1,527,000 was due to the Company's net loss for the period of
$4,485,000, together with a decrease in deferred revenue of $534,000. This was
partially offset by non-cash items of goodwill impairment, depreciation, and
amortization expenses of $2,591,000, and an increase in accounts receivable of
$963,000.
Net cash used in investing activities for the nine months ended September 30,
1999 of $146,000 was due to the net purchase of fixed assets of $175,000,
partially offset by a net decrease in short-term investments of $29,000.
Net cash provided by financing activities for the nine months ended September
30, 1999 of $112,000 was due to the issuance of common stock of $118,000,
partially offset by payments made on capital lease obligations of $6,000.
Net cash flow from operating activities for the three months ended September
30, 1999 was not sufficient to fund the operations of the business. However,
management believes that available working capital will be sufficient to meet
its requirements for the next twelve months. 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
products and services, the growth of the Company's revenues, the technological
advances and activities of competitors, and other factors. The Company is
reviewing areas to reduce costs without impacting its ability to grow Solutions
revenue.
YEAR 2000 READINESS
The Company currently has a program underway to ensure that all significant
computer systems are substantially Year 2000 compliant by December 31, 1999.
The program is divided into three major components: (1) identification of all
information technology systems ("IT Systems") and non-information technology
systems ("Non-IT Systems") that are not Year 2000 compliant; (2) repair or
replacement of any identified non-compliant systems; and (3) testing of the
repaired or replaced systems. The Company uses commercially developed software,
the majority of which is upgraded through existing maintenance contracts. The
Company also develops software for sale and or license to customers and uses
some of these software products internally.
15
<PAGE> 16
Part (1), identification, of the Year 2000 program has been completed. Part
(2), repair or replacement, has been substantially completed. The majority of
all software and systems have been found to be Year 2000 compliant. For those
systems not originally Year 2000 compliant, most significantly, the Company's
accounting system, the Company received updated software, which it has
successfully installed and tested. Internal products were either developed to
be Year 2000 compliant or have been upgraded for compliance. Part (3), testing,
started during the quarter ended December 31, 1998. The Company concluded
initial testing in the period ended June 30, 1999. The Company has also
reviewed all contracts where there may be Year 2000 issues. Virtually all
internally-developed software products and the Company's accounting system have
been successfully tested. The Company is in the process of reviewing code on
past customer projects where there may be Year 2000 compliance issues. Where
possible, repairs have been made or are planned to be made during the fourth
quarter. The Company also plans to evaluate any remaining issues by the end of
the fourth quarter.
The Company has contacted key suppliers and business partners about the Year
2000 issue. While no assurances can be given that key suppliers and business
partners will remedy their own Year 2000 issues, the Company has not identified
any material impact on its ability to continue normal operations with suppliers
or third parties who fail to address this issue.
The actual costs associated with the implementation of the Company's Year 2000
program have been insignificant to the Company's operations and financial
condition.
The Company will continue to monitor and evaluate the impact of the Year 2000
issue on its operations. Until the Company completes the final evaluation part
of its program, the risks from potential Year 2000 failures cannot be fully
assessed. Due to this situation, the Company has not finalized its contingency
plans. However, these plans will be developed as potential Year 2000 failures
are identified in the final evaluation.
The Company could be negatively impacted if some of its own customers are not
Year 2000 compliant. For example, should the federal government's systems not
be Year 2000 compliant, this could lead to delayed payments. The Company
continues to seek assurances that customer systems are either Year 2000
compliant or the customer is working toward compliance prior to year-end.
16
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8 - K
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT
<S> <C>
27 Financial Data Schedule
</TABLE>
(b) REPORTS ON FORM 8 - K. No reports on Form 8-K were filed during the
three month period ended September 30, 1999.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
<TABLE>
<CAPTION>
INFODATA SYSTEMS INC.
<S> <C>
BY: STEVEN M. SAMOWICH
------------------
Steven M. Samowich
President and CEO
Date: November 12, 1999
BY: CHRISTOPHER P. DETTMAR
----------------------
Christopher P. Dettmar
Chief Financial Officer
#74112
</TABLE>
17
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<MULTIPLIER> 1,000
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 639
<SECURITIES> 2,644
<RECEIVABLES> 1,580
<ALLOWANCES> 66
<INVENTORY> 0
<CURRENT-ASSETS> 4,863
<PP&E> 3,635
<DEPRECIATION> 2,709
<TOTAL-ASSETS> 5,789
<CURRENT-LIABILITIES> 2,360
<BONDS> 0
0
0
<COMMON> 135
<OTHER-SE> 3,294
<TOTAL-LIABILITY-AND-EQUITY> 5,789
<SALES> 2,444
<TOTAL-REVENUES> 2,444
<CGS> 1,940
<TOTAL-COSTS> 1,353
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<INCOME-PRETAX> (834)
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<NET-INCOME> (834)
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