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 MARCH 31, 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 July 30, 1999
as reported on the Nasdaq Small Cap market, was approximately $7,336,850.
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 4,541,162 on July 30, 1999.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
<PAGE>
INFODATA SYSTEMS INC. AND SUBSIDIARIES
INDEX
Page(s)
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Operations 3
Three Months Ended June 30, 1999 and 1998
Consolidated Statements of Operations 4
Six Months Ended June 30, 1999 and 1998
Condensed Consolidated Balance Sheets 5
June 30, 1999 and December 31, 1998
Consolidated Statements of Cash Flows 6
Six Months Ended June 30, 1999 and 1998
Notes to Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis 9-15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 16
2
<PAGE>
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
June 30,
---------------------------
1999 1998
---------------------------
<S> <C> <C>
Revenues $ 2,284 $ 3,666
Cost of revenues 1,955 2,461
-------- --------
Gross profit 329 1,205
-------- --------
Operating expenses:
Research and development 346 518
Selling, general and administrative 1,530 1,404
Goodwill impairment 1,941 --
-------- --------
3,817 1,922
-------- --------
Operating loss (3,488) (717)
Interest income 58 65
Interest expense -- (1)
-------- --------
Net loss $(3,430) $ (653)
======== ========
Net loss per share:
Basic $ (0.76) $ (0.15)
======== ========
Diluted $ (0.76) $ (0.15)
======== ========
Weighted average shares outstanding 4,534 4,460
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
3
<PAGE>
INFODATA SYSTEMS INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Amounts In Thousands, Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------
1999 1998
---------------------------
<S> <C> <C>
Revenues $ 5,674 $ 6,576
Cost of revenues 4,125 4,234
-------- --------
Gross profit 1,549 2,342
Operating expenses:
Research and development 581 1,122
Selling, general and administrative 2,786 2,679
Goodwill impairment 1,941 --
-------- --------
5,308 3,801
-------- --------
Operating loss (3,759) (1,459)
Interest income 108 114
Interest expense -- (14)
-------- --------
Net loss $(3,651) $(1,359)
======== ========
Net loss per share:
Basic $ (0.81) $ (0.34)
======== ========
Diluted $ (0.81) $ (0.34)
======== ========
Weighted average shares outstanding 4,529 3,965
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
4
<PAGE>
INFODATA SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(AMOUNTS IN THOUSANDS)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31
1999 1998
---------------------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 851 $ 2,200
Short-term investments 3,192 2,673
Accounts receivable, net of allowance of $66 and $95 1,465 2,356
Other current assets 148 166
--------- ---------
Total current assets 5,656 7,395
--------- ---------
Property and equipment, at cost:
Furniture and equipment 3,012 2,861
Less accumulated depreciation and amortization (2,633) (2,442)
--------- ---------
379 419
Goodwill, net of accumulated amortization of $3,129 and $899 568 2,798
Other assets 143 171
--------- ---------
Total assets $ 6,746 $ 10,783
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 701 $ 786
Accrued expenses 1,126 1,092
Deferred revenue 682 1,152
--------- ---------
Total current liabilities 2,509 3,030
Shareholders' equity
Common stock 135 135
Additional paid-in capital 19,683 19,548
Accumulated deficit (15,581) (11,930)
--------- ---------
Total shareholders' equity 4,237 7,753
--------- ---------
Total liabilities and shareholders' equity $ 6,746 $ 10,783
========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
5
<PAGE>
INFODATA SYSTEMS INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Amounts in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 1998
---------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,651) $(1,359)
Adjustments to reconcile net loss to cash used in
operating activities:
Equity stock compensation 38 --
Depreciation and amortization 191 119
Software amortization -- 21
Goodwill impairment 1,941 --
Goodwill and other intangible amortization 289 285
Provision for doubtful accounts (29) --
Changes in operating assets and liabilities:
Accounts receivable 920 (344)
Other assets 46 41
Accounts payable (85) (336)
Accrued expenses 40 (15)
Deferred revenue (470) (155)
Deferred rent -- (16)
-------- --------
Net cash used in operating activities (770) (1,759)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (151) (27)
Purchases of short-term investments (3,489) (2,986)
Proceeds from maturity of short-term investments 2,970 --
-------- --------
Net cash used in investing activities (670) (3,013)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations (6) (14)
Net repayments from short-term debt -- (880)
Issuance of common stock 97 6,906
-------- --------
Net cash provided by financing activities 91 6,012
-------- --------
Net (decrease) increase in cash and cash equivalents (1,349) 1,240
Cash and cash equivalents at beginning of period 2,200 284
-------- --------
Cash and cash equivalents at end of period $ 851 $ 1,524
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
6
<PAGE>
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 six-month
periods ended June 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"
("SFAS No. 121"), 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 June 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 consulting 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>
NOTE E - SEGMENT REPORTING
The table below presents information about reported segments for the three and
six months ended June 30, 1999 and 1998, as well as a reconciliation to the
reported loss before income taxes.
<TABLE>
<CAPTION>
Three Months Ended June 30, 1999
---------------------------------------------------------------
Solutions Third Party Proprietary Total
Products Products
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 1,286,000 $ 470,000 $ 528,000 $ 2,284,000
Direct costs 674,000 446,000 36,000 1,156,000
Indirect costs 831,000 -- -- 831,000
------------ ------------ ------------ ------------
Segmental profit (loss) $ (219,000) $ 24,000 $ 492,000 297,000
============ ============ ============ ------------
Research and development (346,000)
Other costs not allocated to
segments, primarily selling,
general and administrative (1,498,000)
Goodwill impairment (1,941,000)
Interest income 58,000
------------
Loss before income taxes $(3,430,000)
============
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended June 30, 1998
---------------------------------------------------------------
Solutions Third Party Proprietary Total
Products Products
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 1,528,000 $ 1,209,000 $ 929,000 $ 3,666,000
Direct costs 789,000 1,052,000 70,000 1,911,000
Indirect costs 588,000 -- -- 588,000
------------ ------------ ------------ ------------
Segmental profit $ 151,000 $ 157,000 $ 859,000 1,167,000
============ ============ ============ ------------
Research and development (518,000)
Other costs not allocated to
segments, primarily selling,
general and administrative (1,366,000)
Interest income - net 64,000
------------
Loss before income taxes $ (653,000)
============
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30, 1999
---------------------------------------------------------------
Solutions Third Party Proprietary Total
Products Products
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 3,147,000 $ 861,000 $ 1,666,000 $ 5,674,000
Direct costs 1,497,000 833,000 81,000 2,411,000
Indirect costs 1,541,000 -- -- 1,541,000
------------ ------------ ------------ ------------
Segmental profit $ 109,000 $ 28,000 $ 1,585,000 1,722,000
============ ============ ============ ------------
Research and development (581,000)
Other costs not allocated to
segments, primarily selling,
general and administrative (2,959,000)
Goodwill impairment (1,941,000)
------------
Interest income 108,000
------------
Loss before income taxes $(3,651,000)
============
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended June 30, 1998
---------------------------------------------------------------
Solutions Third Party Proprietary Total
Products Products
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 3,420,000 $ 1,432,000 $ 1,724,000 $ 6,576,000
Direct costs 1,634,000 1,262,000 94,000 2,990,000
Indirect costs 1,087,000 -- -- 1,087,000
------------ ------------ ------------ ------------
Segmental profit $ 699,000 $ 170,000 $ 1,630,000 $ 2,499,000
============ ============ ============ ------------
Research and development (1,122,000)
Other costs not allocated to
segments, primarily selling,
general and administrative (2,836,000)
Interest income - net 100,000
------------
Loss before income taxes $(1,359,000)
============
</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
MATERIALY FROM CURRENT EXPECTATIONS. READERS ARE CAUTIONED NOT TO PUT UNDUE
RELIANCE ON FORWARD-LOOKING STATEMENTS. THE COMPANY DISCLAIMS ANY INTENT OR
OBLIGATION TO UPDATE PUBLICLY THESE FORWARD-LOOKING STATEMENTS, WHETHER AS A
RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
COMPANY OVERVIEW
The Company provides consulting services, systems integration, and products in
the area of knowledge management. These products and services are provided to
corporate and government workgroups, departments and enterprises in three
market segments. The segments are consulting services and training
(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, 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 primarily with some related services. For the three
months ended June 30, 1999, Solutions accounted for 56% of total revenue,
Proprietary Products accounted for 23%, and Third Party Products accounted for
the remaining 21%.
Starting in the third quarter of 1998, the Company identified consulting as
its primary area of focus. Consulting does not involve the same amount of
investment risk as product development, and it provides expanded opportunities
for revenue growth. During the first half of 1999, the Company added six
experienced sales and marketing personnel whose primary focus is to increase
revenue from consulting. Given the three to nine month sales cycle for the
Company's consulting services, Infodata does not expect to fully realize the
benefits of this expansion until the latter part of 1999 and beyond. As of
9
<PAGE>
June 30, 1999, the sales group has created a pipeline of prospective business
that has helped to validate the Company's consulting strategy.
In addition to the sales start-up phase, revenue for the quarter ended June
30, 1999 was also impacted by the de-emphasis on the types of revenue that are
not complementary to Infodata's core consulting business. Specifically, the
Company decided to no longer actively pursue Third Party Product sales that do
not produce related consulting revenue. This resulted in a significant decline
in revenue and the associated costs of revenue during the second quarter of
1999. A similar decision was made about training. The Company views its
training as an area to complement its consulting. During the second quarter,
certain training resources were reduced or transferred to the consulting
group. Management believes the realignment of resources affecting Third Party
Products and training reduced second 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 consulting business are
higher operating margins along with a reduction in product development costs.
The Company has also made the decision to invest in technical personnel where
management anticipates an increase in consulting revenue by the end of the
year. Since January 1999, 11 technical personnel have been hired and trained.
This had a negative impact on the Company's technical staff utilization
measurement during the second quarter. However, management believes this is a
necessary cost to incur in order to grow the consulting business.
In December 1997, the Company entered into two agreements with Adobe Systems,
Inc. ("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 in consulting 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 contractual 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 consulting business, Infodata refocused its
strategy towards its consulting and systems integration businesses. Portions
of VFC were embedded in the product licensed to Adobe Systems. The Company has
forecasted no revenue for the VFC product in 1999. The Company continues to
support its plug-in based products, Compose, Aerial and Signet.
At June 30, 1999, the Company had a net operating loss ("NOL") carryforwards
for income tax reporting purposes aggregating approximately $13,359,000
available to affect future taxable income. Under Section 382 of the Internal
Revenue Code of 1986, as amended ("Code"), utilization of prior NOLs is
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.
10
<PAGE>
Revenues from consulting 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 that support is provided.
Deferred revenue at June 30, 1999 was $682,000. This related primarily to
amounts from maintenance revenues on the INQUIRE/Text product. The balance of
deferred revenue generally relates to consulting services. 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. Deferred
revenues from consulting services carry lower gross margins than deferred
revenues on maintenance agreements.
The components of the Company's cost of revenue depend on the product or
service. For consulting, the most significant item is the direct labor cost of
the consultants. Other cost components include any subcontractor costs, any
non-labor direct costs such as travel and any associated indirect costs (e.g.,
office rent, administration, etc.) allocated to the consulting engagement.
Indirect costs are allocated based on head count and square footage of office
space. For Third Party 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. The cost of maintenance revenue
includes the customer service and software engineering personnel supporting
the product and an allocation of associated indirect costs based on head count
and square footage of office space. For 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 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, 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"
("SFAS No. 121"), 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
11
<PAGE>
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 JUNE 30, 1999 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1998
REVENUES
Total revenue decreased by $1,382,000, or 38%, from $3,666,000 for the three
months ended June 30, 1998 to $2,284,000 for the three months ended June 30,
1999. The Company derived revenues from three segments, Solutions, Proprietary
Products and Third Party Products. The Solutions segment includes consulting
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 during the second quarter. Third Party
Product revenue decreased by $739,000, or 61%, from $1,209,000 for the three
months ended June 30, 1998 to $470,000 for the three months ended June 30,
1999. Although this de-emphasis affected second 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 second quarter of 1998, they decreased $401,000, or
43%, from $929,000 for the three months ended June 30, 1998 to $528,000 for
the three months ended June 30, 1999. The decrease was due to declines in
INQUIRE maintenance revenue and INQUIRE/Text software sales of $202,000 and a
decline in other software sales (principally VFC and Re:mark) of $189,000. 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 decreased by
$242,000, or 16%, from $1,528,000 for the three months ended June 30, 1998 to
$1,286,000 for the three month period ended June 30, 1999. This decrease was
due to the completion of a non-recurring consulting agreement prior to the
second quarter of 1999 related to the license with Adobe.
GROSS PROFIT
Gross profit decreased by $876,000, or 73%, from $1,205,000 for the three
months ended June 30, 1998 to $329,000 for the three months ended June 30,
1999. This decrease was due primarily to the decrease in Proprietary Product
revenue and Solutions revenue.
Gross margin as a percent of revenues decreased from 33% for the three months
ended June 30, 1998 to 14% for the three months ended June 30, 1999. The
decrease was due to the decrease in Proprietary Product and Solutions revenue.
Specifically, there is a smaller base to allocate certain direct costs. As a
result, the overall gross margin decreased.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses decreased $172,000, or 33%, from $518,000
for the three months ended June 30, 1998 to $346,000 for the three months
ended June 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.
12
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased $126,000, or 9%, from
$1,404,000 for the three months ended June 30, 1998 to $1,530,000 for the
three months ended June 30, 1999. The increase was due to the establishment
and operation of a marketing department designed to increase consulting
revenue.
GOODWILL IMPAIRMENT
As discussed above, the Company incurred a non-cash writedown of $1,941,000 in
goodwill associated with the AMBIA acquisition.
INTEREST INCOME AND EXPENSE
Net interest decreased $6,000, or 9%, from $64,000 for the three months ended
June 30, 1998 to $58,000 for the three months ended June 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 during the three months ended June 30, 1999. For the
three-month period ended June 30, 1998, interest expense of $1,000 was
incurred. 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
and commercial paper.
NET LOSS
Net loss increased $2,777,000, from $653,000 for the three months ended June
30, 1998 to $3,430,000 for the three months ended June 30, 1999. The decrease
was due to the factors discussed above.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1998
REVENUES
Total revenue decreased by $902,000, or 14%, from $6,576,000 for the six
months ended June 30, 1998 to $5,674,000 for the six months ended June 30,
1999. Most of the decrease came from a decline in Third Party Product revenue.
Third Party Product revenue decreased $571,000, or 40%, from $1,432,000 from
the six months ended June 30, 1998 to $861,000 for the six months ended June
30, 1999. The decrease was due to the de-emphasis of stand-alone Third Party
Products. Revenue from Solutions decreased $273,000, or 8%, from $3,420,000
for the six months ended June 30, 1998 to $3,147,000 for the six months ended
June 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. Proprietary Product revenue decreased by $58,000, or 3%, from
$1,724,000 for the six months ended June 30, 1998 to $1,666,000 for the six
months ended June 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.
GROSS PROFIT
Gross profit decreased by $793,000, or 34%, from $2,342,000 for the six months
ended June 30, 1998 to $1,549,000 for the six months ended June 30, 1999. The
decrease in gross profit was due primarily to decreased revenue.
Gross margin as a percent of revenues decreased from 36% for the six months
ended June 30, 1998 to 27% for the six months ended June 30, 1999. The
decrease was due to a lower number of sales and higher unit sales costs.
13
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses decreased $541,000, or 48%, from $1,122,000
for the six months ended June 30,1998 to $581,000 for the six months ended
June 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
Selling, general and administrative expenses increased $107,000, or 4%, from
$2,679,000 for the six months ended June 30, 1998 to $2,786,000 for the six
months ended June 30, 1999. The increase was due to the establishment and
operation of a marketing department designed to increase consulting revenue.
GOODWILL IMPAIRMENT
As discussed above, the Company incurred a non-cash writedown of $1,941,000 in
goodwill associated with the AMBIA acquisition.
INTEREST INCOME AND EXPENSE
Net interest increased $8,000, or 8%, from $100,000 for the six months ended
June 30, 1998 to $108,000 for the six months ended June 30, 1999. The increase
was due to a $14,000 decrease in interest expense offset in part by an $8,000
decrease in interest income during the six months ended June 30, 1999. The
Company had no borrowings during these six months. The Company invests only in
short-term, highly liquid money market instruments.
NET LOSS
Net loss increased $2,292,000, from $1,359,000 for the six months ended June
30, 1998 to a net loss of $3,651,000 for the six months ended June 30, 1999.
The increase was due to the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Company had cash, cash equivalents and short-term
investments of $4,043,000 and a working capital surplus of $3,147,000. The
Company had no borrowings as of June 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 borrowed against it since then.
Net cash used in operating activities for the six months ended June 30, 1999
of $770,000 was due to the Company's net loss for the period of $3,651,000,
and a decrease in deferred revenue of $470,000, partially offset by non-cash
items of goodwill impairment, depreciation, and amortization expenses of
$2,422,000, and an increase in accounts receivable of $920,000.
Net cash used in investing activities for the six months ended June 30, 1999
of $670,000 was due to a net increase in short-term investments of $519,000
and the purchase of fixed assets of $151,000.
14
<PAGE>
Net cash provided by financing activities for the six months ended June 30,
1999 of $91,000 was due to the issuance of common stock of $97,000, partially
offset by payments made on capital lease obligations of $6,000.
Net cash flow from operating activities for the three months ended June 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
consulting revenue.
YEAR 2000
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.
Part (1), identification, of the Year 2000 program has been substantially
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.
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 consulting projects where there may be Year 2000
compliance issues. Where possible, repairs are planned to be made during the
third quarter. The Company also plans to evaluate any remaining issues by the
end of the third 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.
15
<PAGE>
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 towards compliance prior to year end.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8 - K
EXHIBITS
(a) EXHIBITS
EXHIBIT NO. DOCUMENT
27 Financial Data Schedule
(b) REPORTS ON FORM 8 - K. No reports on Form 8-K were filed during the
three month period ended June 30, 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.
INFODATA SYSTEMS INC.
BY: /s/STEVEN M. SAMOWICH
---------------------
Steven M. Samowich
President and CEO
Date: August 11, 1999
BY: /s/CHRISTOPHER P. DETTMAR
-------------------------
Christopher P. Dettmar
Chief Financial Officer
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