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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-10416
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INFODATA SYSTEMS INC.
(Exact Name of Small Business Issuer in its Charter)
VIRGINIA 16-0954695
(State of Incorporation) (I.R.S. Employer Identification No.)
12150 MONUMENT DRIVE, FAIRFAX, VIRGINIA 22033
(Address of Principal Executive Office) (Zip Code)
(703) 934-5205 (Issuer's Telephone Number)
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SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- -------------------
None Not applicable
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK-$.03 PAR VALUE
---------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
The registrant's revenues for the fiscal year ending December 31, 1999 are
$10,271,000.
As of March 15, 2000, there were 4,620,502 common shares outstanding. As of
March 15, 2000, the aggregate market value (computed by reference to the average
bid and asked prices on such date) of voting common shares held by
non-affiliates was approximately $16,800,000.
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DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III of the Form 10-KSB is incorporated by
reference from the registrant's definitive proxy statement or amendment hereto
which will be filed not later than 120 days after the end of the fiscal year
covered by this report.
PART I
FORWARD-LOOKING STATEMENTS CONTAINED IN THIS FORM 10-KSB RELATING TO PRODUCT AND
SERVICE DEVELOPMENT, FUTURE CONTRACTS, REVENUE, AND THE ADEQUACY OF WORKING
CAPITAL ARE BASED ON CURRENT EXPECTATIONS THAT INVOLVE UNCERTAINTIES AND RISKS
ASSOCIATED WITH NEW PRODUCTS 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.
ITEM 1. BUSINESS DESCRIPTION
Infodata Systems Inc. ("Infodata" or the "Company") designs, develops and
delivers solutions that enable enterprises to share, maintain, and retrieve
electronic documents and their components. The Company provides consulting and
systems integration services and products in the area of knowledge management to
corporate and government workgroups, departments and enterprises.
Revenues were generated from three segments, including (i) consulting services,
systems integration and application frameworks ("Solutions"), (ii) sales of
proprietary products ("Proprietary Products"), and (iii) the sale of third party
software and hardware ("Third Party Products"). The Company is in the process of
implementing a refocused business strategy with an emphasis on providing
consulting, technology services, and application frameworks in the
Business-to-Business (B2B) e-business industry.
SOLUTIONS
The Solutions business consists of consulting, systems integration and
repeatable solutions, or "application frameworks." Consulting and systems
integration include requirements studies, the identification and analysis of
appropriate document management systems, and the implementation of such systems
which may include either the Company's Proprietary Products or Third Party
Products. Application frameworks are repeatable, reusable software components
that shorten implementation time, improve time-to-market for customers, and
improve profitability for Infodata. Solutions represent the largest segment of
the Company's business.
PROPRIETARY PRODUCTS
Proprietary Products include the Company's Adobe Acrobat plug-in products,
namely, Compose(R), Aerial(R), INQUIRE(R)/Text software sales, WebINQUIRE(R),
and the maintenance associated with each of these products.
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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 is a plug-in product that enables Adobe Acrobat to print any document
that needs to be formatted for printing on multiple pages that are then pieced
together to form one page, such as a large spreadsheet or a CAD drawing. Aerial
also enables Adobe Acrobat to format tables into spreadsheets, and converts PDF
to a text format that can be edited with Microsoft Word or other word
processors.
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 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 be a significant percentage of the Company's future
revenues.
THIRD PARTY PRODUCTS
Third Party Products include software and hardware. By offering products from
companies such as Documentum, Adobe and Verity, the Company is able to provide a
wide variety of solutions and tailor them to each customer's needs. As a result,
due to lower gross margins associated with the sale of Third Party Products, the
Company decided during 1999 to de-emphasize Third Party Product sales unless
directly tied to a solutions implementation.
INDUSTRY BACKGROUND
The knowledge management industry continues to grow rapidly and offer a great
deal of opportunity. According to the research firm IDC, the sales of electronic
document management systems (EDMS) will exceed $1 billion by the year 2002, and
will drive another $6 billion in services, maintenance and application revenue.
Document management products were originally introduced to solve problems
associated with the production of complex and mission-critical documentation.
These documents are characterized not only by complex content, such as graphs,
images, and text, but also by a heavily controlled or regulated process by which
documents are written and reviewed. These document management systems have been
expensive to procure and difficult to install and implement because they require
unique user interfaces and customized workflow. Companies with the expertise to
identify, analyze, recommend and implement document management solutions are
increasingly in demand as the industry evolves.
SALES AND MARKETING
As a result of its investment in sales and marketing in 1999, Infodata was able
to build a network of government, pharmaceutical and financial knowledge
management prospects. Infodata continues to build its sales pipeline in the
knowledge management solutions market through direct sales effort.
COMPETITORS
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The market for the Company's knowledge management solutions is intensely
competitive and subject to rapid change caused by technological advances, new
product introductions and other marketing activities of industry participants.
Infodata faces a number of competitors in the knowledge management solutions
market. In the Commercial market, the primary competitors are Documentum, FCG
and a number of Documentum service providers. In the government sector, the
Company faces competition from other government contractors who bid on
knowledge, document and records management projects.
Competitors have longer operating histories, significantly greater financial,
marketing, service, support, technical and other resources, better name
recognition and a larger installed customer base than the Company.
The Company believes that some of the competitive factors affecting the market
for its products and services include the fact that many current and potential
competitors have longer operating histories, significantly greater financial,
technical, marketing and other resources, and significantly greater name
recognition than the Company does. Several competitors have well-established
relationships with our current and potential customers and strategic partners,
as well as extensive resources and knowledge of the industry within which we
collectively compete. As a result, these 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 products
and services. Moreover, the Company's present or future competitors may be able
to develop products or services comparable or superior to those offered by the
Company, offer lower priced products or services 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, services, 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.
CUSTOMERS
The Company targets both commercial and government markets. Many major companies
and government organizations use the Company's products and services. Sales to
government customers represented approximately 65% of revenues in 1999 and
approximately 60% in 1998. However, only one government customer accounted for
more than 10% of the Company's revenue during 1999. No government customer
accounted for more than 10% of revenues during 1998.
Certain of the Company's contracts with government organizations are
competitively awarded after a formal bid and proposal competition among
qualified bidders. These government contracts may be either cost-reimbursement
contracts (both cost-plus-fixed-fee and cost-plus-award-fee), time and materials
contracts, and fixed price contracts. Cost-plus-fixed-fee contracts provide for
the reimbursement of incurred costs during contract performance, to the extent
that such costs are allowable and allocable, and the payment of a fixed fee. The
size of the fee is limited by federal guidelines to a set proportion of the
contract value. Cost-plus-award-fee contracts typically provide for the
reimbursement of costs and fee based upon a periodic evaluation of the Company's
performance against specified criteria. Under time and materials contracts, the
Company agrees to provide certain categories of labor that satisfy established
education and experience qualifications at a fixed hourly rate. In these cases,
the Company bears the risk that costs may exceed the fixed hourly rate, and the
Company realizes all of the benefits or detriment resulting from decreases or
increases in the cost per hour 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
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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.
FORWARD STRATEGY
Going forward, the Company plans to focus its efforts on two business segments:
[ ] Solutions
[ ] e-Business Solutions - Includes web-based knowledge management, or
"e-Content" Solutions, and business-to-business (B2B) e-Business
solutions.
[ ] Intelligence Solutions - Includes knowledge management consulting and
systems integration services provided to the U.S. Intelligence
Community.
[ ] Proprietary Products
[ ] Compose - Proprietary Adobe Acrobat Exchange plug-in product.
[ ] INQUIRE/Text - Proprietary mainframe text retrieval software.
As an information technology professional services firm with experience in the
design and development of web-based knowledge management (KM) systems and
electronic document management (EDM) systems, Infodata's experience is directly
applicable to the fast-growing B2B e-business market. Late in 1999, management
made a strategic business decision to leverage that experience and is refocusing
the Company as a B2B e-business solutions provider.
Infodata will begin to design and implement complex e-business systems for
emerging B2B companies with short time-to-market requirements. The Company now
targets both "dot.com" startups and traditional "brick-and-mortar" businesses
that value low-risk, high-reliability implementations. Infodata specializes in
building electronic marketplaces that are crafted from state-of-the-art,
best-of-breed components together with the Company's own Extensible Markup
Language-based application frameworks.
The launch of sophisticated B2B marketplaces requires a combination of technical
vision and business acumen. Infodata provides both, in the form of consulting
services, web-site design, system architecture, application development, and
turnkey implementations of complex B2B web infrastructures.
RESEARCH AND DEVELOPMENT
The Company reduced its research and development expenses during 1999 due to a
decision to stop the development of a proprietary product, Virtual File Cabinet.
Research and development efforts since then have been focused on re-useable
software modules, called "frameworks." Frameworks enable the Company to meet the
rapid development schedules of its consulting clients as well as to allow the
company to benefit from the economies of software reuse.
PROPRIETARY RIGHTS
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The Company has a registered service mark to protect its proprietary rights in
the name Infodata and it has registered trademarks with respect to the marks
INQUIRE, WEBINQUIRE and AMBIA. The Company also has registered trademarks for
VFC, Aerial, Re:mark and Compose. The Company relies primarily on a combination
of copyrights and trademarks, trade secrets, confidentiality procedures and
contractual provisions to protect its proprietary rights. The Company licenses
rather than sells its software. The licenses impose certain restrictions on the
licensees' ability to utilize the software. 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 to be increasingly subject to infringement claims as the number of
products and competitors in the Company's industry segment grows and the
functionality of products in different industry segments overlaps. Any such
claims, with or without merit, could be time-consuming, result in costly
litigation, cause product shipment delays or require the Company to enter into
royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company or at all,
which could have a material adverse effect upon the Company's business,
operating results and financial condition. In addition, the Company also relies
on certain software that it licenses from third parties, including software that
is integrated with internally developed software and used in the Company's
products to perform key functions. There can be no assurance that such firms
will remain in business, that they will continue to support their products or
that their products will otherwise continue to be available to the Company on
commercially reasonable terms.
EMPLOYEES
As of March 15, 2000, the Company had a total of 76 employees, of which 53 were
technical professionals, 5 comprised the sales and marketing staff, and the
remainder was involved in management, corporate security, administration,
contracts, and accounting. The Company's employees are not represented by any
unions and the Company has not experienced any work stoppages.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases 25,950 square feet of professional office space for its
headquarters and operations in Fairfax, Virginia. The term of the lease is
through July 31, 2003. Payments under the lease were approximately $550,000 in
1999 and are expected to be $579,000 in 2000.
The Company also leases approximately 4,800 square feet of office space in
Mountain View, California as a result of the AMBIA acquisition in July 1997. The
term of the lease is through May 31, 2001. Payments under the lease were
approximately $179,000 in 1999, are expected to be $185,000 in 2000, and will be
approximately $78,000 in 2001. Cash payments to the Company associated with
subleases for this office space were approximately $84,000 in 1999, are expected
to be $185,000 in 2000 and $64,000 in 2001.
ITEM 3. LEGAL PROCEEDINGS
The Company is presently not a party to any material legal proceedings.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 4a. EXECUTIVE OFFICERS
The following information relates to executive officers of the Registrant as of
March 15, 2000.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Steven M. Samowich 49 President and Chief Executive Officer
James W. Myers 45 Chief Operating Officer
Harry Kaplowitz 56 Executive Vice President
Robert J. Loane 61 Senior Vice President
Curtis D. Carlson 35 Secretary
</TABLE>
Steven M. Samowich has been the President, Chief Executive Officer, and a
director of the Company since November 1998. From January 1997 to October 1998,
he served as Vice President and General Manager of the Time Data Systems
Division of Simplex Time Recorder Company. From December 1995 through 1996, Mr.
Samowich was the North American General Manager of Sales, Marketing & Services
for Visix software and from 1984 to 1995 he was with Computervision where he
served as its National Sales Manager from 1993 to 1995. Mr. Samowich holds a BA
and an MBA from the University of Pittsburgh.
James W. Myers was elected Chief Operating Officer of the Company in October
1999. From July 1997 to June 1999, he served as Executive Vice President and
General Manager of the DynCorp subsidiary, DynSolutions, Inc., a software and
solutions provider. Mr. Myers was a co-founder of Vantage Technologies, Inc., (a
company primarily engaged in imaging, document management and business process
re-engineering), and served as its President from June 1994 to February 1997
when it was acquired by Wang Laboratories. Mr. Myers holds a BA and an MBA from
the University of Rochester.
Harry Kaplowitz, a founder of the Company, has been an Executive Vice President
of the Company since November 1997 and a director since 1980. From 1991 to
January 1993, Mr. Kaplowitz served as Chairman of the Board of Directors and
from 1991 to November 1997 he served as President of the Company. From 1980 to
1989, he served as Executive Vice President of the Company. From 1973 to 1980,
he was a Vice President of the Company. Mr. Kaplowitz has a BS in Electrical
Engineering from the Massachusetts Institute of Technology and an MBA from the
Wharton Graduate School.
Dr. Robert J. Loane has been Senior Vice President of the Company since 1981. He
is the principal architect and developer of the INQUIRE family of products and
in now involved with the architecture of future products and provides consulting
services to many of the Company's customers. Dr. Loane has a PhD in Computer
Sciences from Princeton University and a BEE from Cornell University.
Curtis D. Carlson has been the Secretary of the Company since February 1998.
From 1991 until joining the Company in August 1994, Mr. Carlson was associated
with the Federal Systems Division of International Business Machines (IBM)
Corporation and served in the Business Practices and Contracts function
supporting the U.S. Navy and Radiation-Hardened Semiconductor business areas.
Since 1992, Mr. Carlson has been on the Board of Directors of Synergy One
Federal Credit Union, and served as its Chairman from April 1994 to April 1998.
He has a BS in Finance from Rochester Institute of Technology and is completing
coursework at Virginia Polytechnic Institute and State University for his MBA.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Infodata's Common Stock has been quoted on the NASDAQ SmallCap Market under the
symbol "INFD" since September 16, 1994. The Company's Common Stock was
previously traded on the NASDAQ National Market. Market makers of the Company's
Common Stock include Herzog, Heine, Geduld, Inc., Mayer and Schweitzer Inc.,
Patterson Travis Inc., GKN Securities Corp., Investec Ernst & Company, Knight
Securities L.P., M.H. Meyerson & Co., and Spear Leeds & Kellogg.
The table below shows the range of closing bid prices for the Common Stock for
the quarters indicated.
<TABLE>
<CAPTION>
1999 1998
HIGH LOW HIGH LOW
<S> <C> <C> <C> <C>
First Quarter $3.75 2.00 $11.00 4.75
Second Quarter 2.75 2.09 5.34 4.25
Third Quarter 2.44 1.69 4.25 2.41
Fourth Quarter 2.38 0.97 3.25 2.25
</TABLE>
The market quotations reflected above are inter-dealer prices, without retail
mark-up, markdown or commissions and may not represent actual transactions.
The Company has not paid cash dividends on its Common Stock and presently has no
intention to do so. It believes that execution of its operating plan requires
the Company to retain available funds to support future business activities.
Payment of cash dividends on Common Stock in the future will be dependent upon
the earnings and financial condition of the Company, and other factors, which
the Board of Directors may deem appropriate.
As of March 15, 2000, there were approximately 2,886 holders of record of the
Company's Common Stock.
The Company agreed to issue shares of Common Stock on a quarterly basis to each
of Richard T. Bueschel, Alan S. Fisher, Laurence C. Glazer, Robert M. Leopold,
Millard H. Pryor, Jr., and Isaac M. Pollak, the non-employee directors of the
Company, in partial payment of director fees for 1999 in the amount of $10,000
per non-employee director. For the year ended December 31, 1999, each
non-employee director was entitled to 4,583 shares of Common Stock. Certificates
evidencing such shares were issued in January 2000. 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. Stock
issued to the Board of Directors for services amounted to $60,000 for the year
ended December 31, 1999.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS RELATING TO PRODUCT AND SERVICE DEVELOPMENT, FUTURE
CONTRACTS, REVENUE, AND THE ADEQUACY OF WORKING CAPITAL ARE BASED ON CURRENT
EXPECTATIONS THAT INVOLVE UNCERTAINTIES AND RISKS ASSOCIATED WITH NEW PRODUCTS
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.
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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, Aerial and their associated maintenance.
Third Party Products include software and hardware with some related services.
For the year ended December 31, 1999, Solutions accounted for 60% of total
revenue; Proprietary Products accounted for 26%, and Third Party Products
accounted for the remaining 14%. Revenues decreased by 28% for the overall
business in 1999 as compared to 1998. Revenues for the Solutions segment
decreased by $203,000 in 1999; however, the Solutions revenue was 60% of total
revenue for 1999 as compared to 44% for 1998.
In third quarter of 1998, the Company identified professional IT consulting
services as its primary area of focus. This business does not involve the same
level of capital expenditures related to the development of new products. It
also provides the Company with greater opportunities for revenue growth. In
1999, the Company added experienced sales and marketing personnel whose primary
focus was to increase revenue from Solutions. Given the three to nine month
sales cycle for the typical Solutions contracts, the Company did not fully
realize the benefits of this expansion until the fourth quarter of 1999. As of
December 31, 1999, the sales group had developed a network of prospective
business which management believes reinforces the Company's Solutions strategy.
In addition to the sales start-up phase, revenue for the year ended December 31,
1999 was also impacted by the de-emphasis of revenue types that are not
complementary to the Company's core Solutions business. This resulted in a
significant decline in both revenue and the associated costs of revenue for
Third Party Products during 1999 as compared to 1998. 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 1999 revenues compared to 1998, but
that it 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 made the decision to invest in technical personnel in anticipation
of future increases in professional service revenue. During 1999, 21 technical
personnel were hired and trained. Such personnel additions had a negative impact
on the Company's technical staff utilization rates during the third quarter of
1999 as these new hires were undergoing extensive training. During the fourth
quarter utilization rates continued to rise in our Solutions Segment.
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 under this agreement
in the amount of $350,000 and $1,023,000 in 1997 and 1998, respectively. The
revenue recognized in 1998 included $500,000 recognized in the fourth quarter of
1998 when certain amounts prepaid by Adobe became non-refundable. As of December
31, 1998, the Company had substantially completed all of its obligations under
the agreements. Adobe accepted the final product in the first quarter of 1999,
which resulted in additional revenue of $500,000 being recognized.
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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 de-emphasized. 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. With the
exception of this arrangement, the Company realized no revenue for the VFC
product in 1999. The Company continues to support its plug-in based products
Compose and Aerial. On February 9, 1999, the Company announced the release of an
upgraded version of Compose.
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 document conversion service (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 and 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. As of December 31 1999, the remaining
carrying value of goodwill for Mountain View is $247,000, which will be fully
amortized by December 31, 2000.
In October 1995, the Company purchased substantially all of the assets and
assumed certain liabilities of Merex, Inc. ("Merex") for approximately $361,000
of which approximately $312,000 was allocated to goodwill. In December 1999, a
certain key employee who focused on business activities of Merex tendered their
resignation. In the fourth quarter of 1999, the Company determined that pursuant
to its focus of the Solutions segment of its business that no active contracts
nor client prospects existed that were a result of or could reasonably be
determined to have resulted from the Merex acquisition. In addition, the Company
determined that its business focus was evolving away from lower margin business
and that the majority of Merex's former clients would not be pursued as
prospects for the Company's services. 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 and determined that the
anticipated future undiscounted cash flows from the activities acquired from
Merex would not be sufficient to recover the remaining amount of goodwill.
Accordingly, as of December 31, 1999 the Company adjusted the carrying value of
the goodwill to its estimated value of $0, resulting in an impairment loss of
approximately $181,000.
At December 31, 1999, the Company had a net operating loss ("NOL") aggregating
approximately $11,855,000 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, 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 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
-10-
<PAGE> 11
accordance with the type of contract. Revenues from software licenses are in
accordance with the provisions of the Statement of Position 97-2, "Software
Revenue Recognition"; as ammended. Revenues from post customer support and
maintenance agreements are recognized over the period that support is provided.
Deferred revenue is recognized with respect to pre-payments of maintenance
agreements.
Deferred revenue at December 31, 1999 was $621,000. 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 is dependent 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 Company includes
shipping, delivery, packaging, production, the direct labor of personnel
involved in delivering the product and any associated expenses involved with the
installation.
The Company's future operating results may vary significantly and are difficult
to predict due to a number of factors, of which many are beyond our control.
These factors include, the demand for our services and products, the level of
product and price competition, the length of the consulting services sales
cycle; the delay of deferral of customer implementation; the success of our
direct sales force and indirect distribution channels; the mix of products and
services sold; the timing of new hires; the ability of the Company to control
costs; and general domestic economic and political conditions which could have
an adverse effect on the Company's ability to meet its operating goals.
RESULTS OF OPERATIONS
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenues
Total revenue decreased by $3,971,000, or 28%, from $14,242,000 for the year
ended December 31, 1998 to $10,271,000 for the year ended December 31, 1999. The
Company derives revenues from Solutions, Proprietary Products and Third Party
Products. Solutions include commercial and government consulting, INQUIRE
consulting, and training. Proprietary Product revenue includes the sale of
INQUIRE/Text-related products and services and maintenance related thereto, and
sales of the Company's plug-in-based software products. Third Party Products
include software and hardware sold to both the government and commercial
entities. Revenues from Solutions decreased by $203,000, or 3%, from $6,322,000
for the year ended December 31, 1998 to $6,119,000 for the year ended December
31, 1999. The decrease was primarily due to the closing of the Mountain View
operation in the second quarter 1999. Solutions revenue was 60% of total
business in 1999 compared to 44% in 1998 as the Company focused its efforts and
resources in this segment of its business. Proprietary Product revenue decreased
by $1,546,000, from $4,243,000 for the year ended December 31, 1998 to
$2,697,000 for the year ended December 31, 1999. This decrease came from a
decline in VFC, Aerial and Re:mark products of $509,000 and a decline in
INQUIRE/Text maintenance revenue of $794,000 and a decline in licensing fees of
$243,000. The Company expects that INQUIRE/Text-related revenues will continue
to decline over time as customers move applications off mainframes. For the year
ended December 31, 1999,
-11-
<PAGE> 12
Third Party Product revenues decreased $2,222,000 from $3,677,000 in 1998 to
$1,455,000 in 1999, as the Company de-emphasized Third Party Products due to
lower gross margins associated with such sales.
Gross Profit
Gross profit decreased by $1,544,000, or 35%, from $4,379,000 for the year ended
December 31, 1998 to $2,835,000 for the year ended December 31, 1999. The
decrease was due to the declining sales of certain proprietary products (Aerial
and Re:mark) and a decline in INQUIRE/Text maintenance revenue. Gross margin as
a percent of revenues decreased by 3% from 31% for the year ended December 31,
1998 to 28% for the year ended December 31, 1999. The decrease in gross margins
was due to reductions in INQUIRE/Text maintenance revenue and proprietary
products, which have higher gross margins.
Research and Development Expenses
Research and development expenses decreased $1,081,000, or 61%, from $1,765,000
for the year ended December 31, 1998 to $684,000 for the year ended December 31,
1999. This decision resulted from the Company's reduction of further development
of the VFC, Aerial, and Re:mark products. Certain technical personnel previously
involved in research and development projects were redeployed to consulting
projects.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $647,000, or 14%, from
$4,602,000 for the year ended December 31, 1998 to $5,249,000 for the year ended
December 31, 1999. The increase was due to increased marketing expenditures
related to the Company's consulting services.
Goodwill Impairment
Goodwill impairment losses of $2,122,000 were recognized in the year ended
December 31, 1999. Of that amount, $1,941,000 resulted from the Company's
decision during the second quarter of 1999 to close the Ambia Mountain View
office and $181,000 was attributable to the write-off of goodwill relating to
Merex. No goodwill impairment expenses were recognized during 1998.
Interest Income and Expense
Interest income decreased $16,000, from $204,000 for the year ended December 31,
1998 to $188,000 for the year ended December 31, 1999. The decrease was due to
lower balances of cash, cash equivalents, and short-term investments during the
year ended December 31, 1999.
Interest expense decreased $12,000, or 86%, from $14,000 for the year ended
December 31, 1998 to $2,000 for the year ended December 31, 1999. The decrease
was due to the decreased utilization of a line of credit during the year ended
December 31, 1999.
Net Loss
As a result of the above, the company incurred a net loss of $5,034,000, or
$1.11 per share, for the year ended December 31, 1999, compared to a net loss of
$1,798,000, or $0.42 per share, for the prior year.
-12-
<PAGE> 13
Liquidity and Capital Resources
At December 31, 1999, the Company had cash, cash equivalents and short-term
investments of $2,629,000 and working capital of $2,309,000. The Company had no
borrowings as of December 31, 1999. 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 April 2000. The
Company is currently negotiating an extension to April 2001. The line of credit
is contingent upon the Company continuing to meet certain general funding
requirements, including the absence of any material adverse change in the
Company's business or financial condition, the continued accuracy of the
Company's representations and warranties and the provision of annual and
quarterly financial information. The Company is currently in compliance with
these funding requirements.
Net cash used in operating activities for the year ended December 31, 1999 of
$2,117,000 was due to the Company's net loss for the period of $5,034,000, a
decrease in accounts payable of $469,000, and a decrease in deferred revenue of
$531,000, partially offset by depreciation and amortization expenses including
goodwill impairments of $2,906,000, a decrease in accounts receivable of
$998,000, a decrease in other assets and prepaid expenses of $163,000 and a
decrease in accrued expenses of $253,000.
Net cash provided by investing activities of $779,000 for the year ended
December 31, 1999 was derived primarily by the maturing of various short-term
investments offset by the purchase of property and equipment and reinvestment of
proceeds from maturing investments.
Net cash provided by financing activities of $67,000 arose primarily from the
proceeds of the exercising of employee stock options and the employee stock
purchase plan which amounted to $73,000 for the year ended December 31, 1999.
Net cash flow from operating activities for the year ended December 31, 1999 was
not sufficient to fund the operations of the business. However, management
believes that its present cash balance and cash flows from operations will be
sufficient to fund its current working capital and other investment needs. The
Company's believes that its future working capital and other general corporate
requirements planned will depend upon numerous factors, including the general
market acceptance of the Company's existing products and services, the growth of
the Company's marketing channels, the technological advances and activities of
competitors, and other factors.
Impact of the Year 2000
To date, the Company has experienced no significant adverse effects related to
the Year 2000 computer issue. All important internal information technology
systems made a seamless transaction into the Year 2000 and there were no notable
problems with equipment or systems which may have been effected by Year 2000
problems. The Company is not aware of any significant Year 2000 problems at any
of its customers nor has the Company noted any disruption in its supply chain
related to Year 2000 issues.
The Company implemented a comprehensive project plan to identify internal and
external information technology and non-information technology systems which
required modification or upgrade to be made Year 2000 compliant. An inventory
and assessment of these systems was completed by the third quarter of 1999.
Remediation and testing of non-Year 2000 compliant systems was also completed
during the fourth quarter of 1999. The Company developed and tested contingency
plans which identified workarounds in the event of a malfunction of a system
designated as a priority system at the inventory stage. In addition, the Company
identified suppliers of key goods and services to all business areas, requested
information about their Year 2000 readiness, and audited certain key suppliers
for Year 2000 readiness.
-13-
<PAGE> 14
The Company has spent approximately $23,800 primarily for capital expenditures
as of December 31, 1999 to become Year 2000 compliant. These expenditures are
for external costs and do not include costs of Company employees who implemented
the comprehensive project plan described above. The Company believes that any
additional resources required to address Year 2000 issues will not be material.
However, there can be no assurance that currently unidentified Year 2000 issues,
if any, will not arise, especially in areas outside the Company; that these
issues will not have a material adverse effect on the Company; or, that
additional resources needed to address these issues will not be material.
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements required hereunder are listed under Item
13(a) below.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None in the fourth quarter of 1999.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Pursuant to General Instruction E(3) of Form 10-KSB, the information called for
by Item 9 is hereby incorporated by reference from the Company's definitive
proxy statement or amendment hereto to be filed pursuant to Regulation 14A not
later than 120 days after the end of the fiscal year covered by this report.
Information regarding the Company's executive officers is set forth under Item
4a of this Form 10-KSB.
ITEM 10. EXECUTIVE COMPENSATION
Pursuant to General Instruction E(3) of Form 10-KSB, the information called for
by Item 10 is hereby incorporated by reference from the Company's definitive
proxy statement or amendment hereto to be filed pursuant to Regulation 14A not
later than 120 days after the end of the fiscal year covered by this report.
ITEM 11. SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT
Pursuant to General Instruction E(3) of Form 10-KSB, the information called for
by Item 11 is hereby incorporated by reference from the Company's definitive
proxy statement or amendment hereto to be filed pursuant to Regulation 14A not
later than 120 days after the end of the fiscal year covered by this report.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to General Instruction E(3) of Form 10-KSB, the information called for
by Item 12 is hereby incorporated by reference from the Company's definitive
proxy statement or amendment hereto to be filed pursuant to Regulation 14A not
later than 120 days after the end of the fiscal year covered by this report.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) Financial Statements. The financial statements and exhibits required by
Item 7 and this Item 13 of Form 10-KSB are listed below.
-14-
<PAGE> 15
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS: PAGE
<S> <C>
Report of Independent Accountants....................................................... 19
Consolidated Statements of Operations - Each of the two years
in the period ended December 31, 1999................................................... 20
Consolidated Balance Sheets - December 31, 1999 and 1998................................ 21-22
Consolidated Statements of Shareholders' Equity for each of the two years
in the period ended December 31, 1999................................................... 23
Consolidated Statements of Cash Flows for each of the two years
in the period ended December 31, 1999................................................... 24
Notes to Consolidated Financial Statements - December 31, 1999 and 1998................. 25-36
</TABLE>
(b) Reports on Form 8-K.
The Company did not file any Current Reports on Form 8-K during the quarter
ended December 31, 1998.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
2.1 Plan and Agreement of Merger, dated as of March 10, 1995, by and
between Infodata Systems Inc. and Virginia Infodata Systems Inc.
(incorporated herein by reference to Exhibit 2.1 to the Company's
Registration Statement on Form SB-2 (Registration No. 333-42611)
dated December 18, 1997, as amended).
2.2 Asset Purchase Agreement and Plan of Reorganization, dated as of
October 6, 1995, among the Company, Merex, Inc. and Richard M.
Tworek, Mary Margaret Styer and Andrew M. Fregly (incorporated by
reference to the Company's Current Report on Form 8-K dated
October 11, 1995).
2.3 Agreement of Merger and Plan of Reorganization, dated as of July
22, 1997, by and among the Company, AMBIA Corporation, Alan Fisher
and Razi Mohiuddin, Software Partners, Inc. and AMBIA Acquisition
Corporation (incorporated by reference to the Company's Current
Report on Form 8-K dated August 6, 1997 and Form 8-K/A dated
October 6, 1997).
3.1 Articles of Incorporation (incorporated by reference to Exhibit A
of the Company's Proxy Statement dated April 10, 1995).
3.2 Articles of Amendment of Articles of Incorporation of the Company,
dated as of August 12, 1996 (incorporated herein by reference to
Exhibit 3.2 of the Company's Registration Statement on Form SB-2
(Registration No. 333-42611) dated December 18, 1997, as amended).
3.3 By-Laws (incorporated by reference to Exhibit B to the Company's
Proxy Statement dated April 10, 1995).
4.1 Form of Underwriters' Purchase Option (incorporated by reference
to Exhibit 4.1 to the Company's Registration Statement on Form
SB-2 (Registration No. 333-42611) dated December 18, 1997, as
amended).
</TABLE>
-15-
<PAGE> 16
10.1 Cross License Agreement, dated as of December 3, 1997, as amended,
by and between the Company and Adobe Systems Incorporated
(incorporated herein by reference to Exhibit 10.1 to the Company's
Registration Statement on Form SB-2 (Registration No. 333-42611)
dated December 18, 1997, as amended).
10.2 Office Building Lease, dated as of April 12, 1993, by and between
the Company and Monument Fairfax Associates for One Monument Drive
(incorporated by reference to Exhibit 10(dd) to the Company's
Annual Report on Form 10-KSB for the fiscal year ended December
31, 1994).
10.3 Lease Agreement, dated as of July 20, 1993, between The Landmark
and Software Partners, Inc. for 2013 Landings Drive, Mountain
View, California (incorporated herein by reference to Exhibit 10.3
to the Company's Registration Statement on Form SB-2 (Registration
No. 333-42611) dated December 18, 1997, as amended).
10.4 Lease for Data Processing Service Agreement, dated as of July 29,
1994, between the Company and Financial Technologies Inc.
(incorporated by reference to Exhibit 10(ee) to the Company's
Annual Report on Form 10-KSB for the fiscal year ended December
31, 1994).
10.5 Executive Separation Agreement, dated as of October 20, 1986,
between the Company and Harry Kaplowitz (incorporated by reference
to Exhibit 10(a) to the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1993).
10.6 Executive Separation Agreement, dated as of October 20, 1986,
between the Company and Robert Loane (incorporated by reference to
Exhibit 10(b) to the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1993).
10.7 Note, Loan and Security Agreement, dated as of October 31, 1997,
between the Company and Merrill Lynch Business Financial Services
Inc. (incorporated herein by reference to Exhibit 10.10 to the
Company's Registration Statement on Form SB-2 (Registration No.
333-42611) dated December 18, 1997, as amended).
10.8 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).
10.9 1997 Employee Stock Purchase Plan (incorporated herein by
reference to Exhibit 4(a) to the Company's Registration Statement
on Form S-8 dated as of June 27, 1997).
10.10 Consulting Agreement, dated as of October 24, 1997, between the
Company and Adobe Systems Incorporated (incorporated herein by
reference to Exhibit 10.11 to the Company's Registration Statement
on Form SB-2 (Registration No. 333-42611) dated December 18, 1997,
as amended).
10.11 Letter Employment Agreement, dated as of October 29, 1998, between
the Company and Steven M. Samowich (incorporated herein by
reference to Exhibit 10.17 to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1998).
10.12 Agreement on Confidential Information, Inventions, Ideas, dated as
of November 4, 1998, between the Company and Steven M. Samowich
(incorporat herein by reference to Exhibit 10.18 to the
Company's Annual Report on Form 10-KSB for the year ended
December 31, 1998).
21 Subsidiaries of the Company (incorporated herein by reference to
Exhibit 21.1 to the Company's Registration Statement on Form SB-2
(Registration No. 333-42611) dated December 18, 1997, as amended).
-16-
<PAGE> 17
23 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule
-17-
<PAGE> 18
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: March 30, 2000
INFODATA SYSTEMS INC.
BY: /s/ Steven M. Samowich
--------------------------------------
Steven M. Samowich
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Richard T. Bueschel Chairman of the Board March 30, 2000
- ---------------------------------
Richard T. Bueschel
/s/ Alan S. Fisher Director March 30, 2000
- ---------------------------------
Alan S. Fisher
/s/ Laurence C. Glazer Director March 30, 2000
- ---------------------------------
Laurence C. Glazer
/s/ Gary I. Gordon Controller (Principal Accounting Officer) March 30, 2000
- ---------------------------------
Gary I. Gordon
/s/ Harry Kaplowitz Executive Vice President and Director March 30, 2000
- ---------------------------------
Harry Kaplowitz
/s/ Robert M. Leopold Director March 30, 2000
- ---------------------------------
Robert M. Leopold
/s/ Isaac M. Pollak Director March 30, 2000
- ---------------------------------
Isaac M. Pollak
/s/ Millard H. Pryor, Jr. Director March 30, 2000
- ---------------------------------
Millard H. Pryor, Jr.
/s/ Steven M. Samowich President, Chief Executive Officer and March 30, 2000
- --------------------------------- Director (Principal Executive Officer)
Steven M. Samowich
</TABLE>
-18-
<PAGE> 19
Report of Independent Accountants
To the Board of Directors and Shareholders of Infodata Systems Inc.
In our opinion, the accompanying consolidated balance sheets the related
consolidated statements of operations, shareholders' equity and cash flows
present fairly, in all material respects, the financial position of Infodata
Systems Inc. and its subsidiaries at December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of two years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. 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 of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
McLean, Virginia
March 10, 2000
-19-
<PAGE> 20
INFODATA SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1999 1998
-------- --------
<S> <C> <C>
Revenues .................................................. $ 10,271 $ 14,242
Cost of revenues .......................................... 7,436 9,863
-------- --------
Gross profit ..................................... 2,835 4,379
-------- --------
Operating expenses:
Research and development .................... 684 1,765
Selling, general and administrative ......... 5,249 4,602
Goodwill impairments ........................ 2,122 -
-------- --------
8,055 6,367
Operating loss ................................... (5,220) (1,988)
Interest income ........................................... 188 204
Interest expense .......................................... (2) (14)
-------- --------
Loss before income taxes .................................. (5,034) (1,798)
Provision for income taxes ................................ - -
-------- --------
Net loss .................................................. $ (5,034) $ (1,798)
======== ========
Net loss per share:
Basic and diluted ............................... $ (1.11) $ (0.42)
======== ========
Weighted average shares outstanding (basic and diluted) ... 4,541 4,237
-------- --------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-20-
<PAGE> 21
INFODATA SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
ASSETS
- ------
DECEMBER 31,
1999 1998
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................ $ 929 $ 2,200
Short-term investments ................................... 1,700 2,673
Accounts receivable, net of allowance of $56 in 1999
and $95 in 1998 ................................. 1,358 2,356
Other current assets ..................................... 93 166
-------- --------
Total current assets ............................ 4,080 7,395
-------- --------
Property and equipment:
Furniture and equipment .................................. 3,006 2,861
Less accumulated depreciation and amortization ........... (2,773) (2,442)
-------- --------
233 419
Goodwill, net of accumulated amortization of $3,450 in 1999 and
$899 in 1998 ............................................. 247 2,798
Other assets ...................................................... 76 171
-------- --------
Total assets ...................................................... $ 4,636 $ 10,783
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-21-
<PAGE> 22
INFODATA SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
DECEMBER 31,
1999 1998
-------- --------
<S> <C> <C>
Current liabilities:
Capital lease obligations .................................. $ - $ 6
Accounts payable ........................................... 317 786
Accrued expenses ........................................... 833 1,086
Deferred revenue ........................................... 621 1,152
-------- --------
Total current liabilities ......................... 1,771 3,030
-------- --------
Commitments and contingencies ....................................... - -
Shareholders' equity:
Preferred stock, $1.00 par value, 340,000 shares
authorized, none issued and outstanding ................. - -
Common stock, $.03 par value, 12,000,000 shares
authorized; 4,552,075 and 4,507,117 shares issued and
outstanding in 1999 and 1998, respectively ............. 136 135
Additional paid-in capital ................................. 19,693 19,548
Accumulated deficit ........................................ (16,964) (11,930)
-------- --------
Total shareholders' equity .......................................... 2,865 7,753
-------- --------
Total liabilities and shareholders' equity .......................... $ 4,636 $ 10,783
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-22-
<PAGE> 23
INFODATA SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except share data)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON STOCK PAID-IN ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
---------- ---------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 ......... 2,754,784 $ 82 $ 12,670 $ (10,132) $ 2,620
Employee stock purchase plan ......... 41,202 1 101 -- 102
Issuance of common stock in public
offering, net ........................ 1,650,000 50 6,490 -- 6,540
Stock issued to Board of Directors
for services ......................... 5,988 -- 55 -- 55
Exercise of stock options and
warrants ............................. 60,143 2 194 -- 196
Options issued to consultant for
services ............................. -- -- 55 -- 55
Shares reacquired and cancelled ...... (5,000) -- (17) -- (17)
Net loss ............................. -- -- -- (1,798) (1,798)
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1998 ......... 4,507,117 135 19,548 (11,930) 7,753
Compensation expense ................. -- -- 43 -- 43
Employee stock purchase plan ......... 37,341 1 63 -- 64
Exercise of employee stock options .. 5,061 -- 9 -- 9
Shares received and cancelled for
consideration for notes receivable
by shareholder ....................... (15,000) -- (30) -- (30)
Stock issued to Board of Directors
for services ......................... 17,556 -- 60 -- 60
Net loss ............................. -- -- -- (5,034) (5,034)
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1999 ......... 4,552,075 $ 136 $ 19,693 $ (16,964) $ 2,865
---------- ---------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-23-
<PAGE> 24
INFODATA SYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1999 1998
-------- --------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss ......................................................... $ (5,034) $ (1,798)
Adjustments to reconcile net loss to net cash used in operating
activities:
Compensation expense ........................................ 43 -
Common stock issued to Board of Directors ................... 60 55
Depreciation and amortization ............................... 355 384
Goodwill and other intangible amortization .................. 429 626
Goodwill impairment ......................................... 2,122 -
Allowance for doubtful accounts ............................. (39) 53
Changes in operating assets and liabilities:
Accounts receivable ......................................... 1,037 363
Other assets ................................................ 163 190
Accounts payable ............................................ (469) (696)
Accrued expenses ............................................ (253) 139
Deferred revenue ............................................ (531) (440)
-------- --------
Net cash used in operating activities ................... (2,117) (1,124)
-------- --------
Cash Flows From Investing Activities:
Purchases of property and equipment .............................. (194) (206)
Purchases of short-term investments .............................. (4,330) (13,669)
Proceeds from maturity of short-term investments ................. 5,303 11,000
-------- --------
Net cash provided by (used in) investing activities ..... 779 (2,875)
-------- --------
Cash Flows From Financing Activities:
Payments on capital lease obligations ............................ (6) (26)
Net borrowings under short-term debt ............................. - (880)
Issuance of common stock ......................................... 73 6,838
Repurchase of common stock ....................................... - (17)
-------- --------
Net cash provided by financing activities ............... 67 5,915
-------- --------
Net (decrease) increase in cash and cash equivalents ................. (1,271) 1,916
Cash and cash equivalents at beginning of period ..................... 2,200 284
-------- --------
Cash and cash equivalents at end of period ........................... $ 929 $ 2,200
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
-24-
<PAGE> 25
INFODATA SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. Summary of Significant Accounting Policies
Nature of Business
The Company, a Virginia Corporation, is an information technology professional
services firm that provides design and development of web-based Knowledge
Management (KM) systems, Electronic Document Management Systems (EDMS) and
E-content Management Solutions through the sales of products and software
integration services.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Infodata Systems Inc. and its wholly owned subsidiaries, Infodata Systems
International Inc., Infodata Research and Development Corporation, and AMBIA
Corporation, which are all currently inactive. These entities are collectively
referred to herein as the Company. All significant intercompany accounts and
transactions have been eliminated in consolidation.
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.
Risk and Uncertainties
The Company's operations are subject to certain risks and uncertainties,
including those associated with the ability to meet obligations, continuing
losses, negative cash flow and fluctuations in operating results. Additional
risks and uncertainties relate to funding expansion; purchasing acquisitions and
strategic alliances, including their integration; managing rapid growth and
expansion; financing arrangement terms that may restrict operations; regulatory
issues; and competition in the technology services industry.
Revenue Recognition
The Company recognizes revenue from the sale of software licenses in accordance
with Statement of Positions No. 97-2, "Software Revenue Recognition", as
amended. Revenues from license arrangements are recognized upon shipment of the
product when persuasive evidence of an arrangement exists, delivery has
occurred, the fee is fixed and determinable and collectibility is probable. If
an ongoing vendor obligation exists under the license arrangement, revenue is
deferred based on vendor-specific objective evidence of the undelivered element.
If vendor-specific objective evidence does not exist for all undelivered
elements, all revenue is deferred until sufficient evidence exists or all
elements have been delivered. Revenues from annual maintenance and support are
deferred and recognized ratably over the term of the contract. Revenues from
consulting and training are deferred and recognized when the services are
performed and collectibility is deemed probable. Revenues from consulting and
professional services contracts are recognized on the percentage-of-completion
method for fixed price contracts and on the basis of hours incurred at contract
rates for time and materials contracts. Revenues from cost reimbursement
contracts are recognized as costs are incurred. Any amounts paid by customers
prior to the actual performance of services are recorded as deferred revenue
until earned, at which time the amounts are recognized in accordance with the
type of contract.
-25-
<PAGE> 26
INFODATA SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company also provides off-the-shelf hardware and software products to the
U.S. government under the GSA Schedule Contract and to commercial companies.
The related revenue is recognized when products are shipped or when customers
have accepted the products, depending on contractual terms.
Revenues from foreign customers totaled approximately $425,000 and $453,000 for
the years ended December 31, 1999 and 1998, respectively.
Stock Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation"("SFAS 123"), encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans at fair value. The
Company has chosen to account for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25.
"Accounting for Stock Issued to Employees", and related Interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the estimated fair value of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock. The Company has
adopted the "disclosure only" alternative described in SFAS 123 which requires
pro forma disclosures of net income and earnings per share as if the fair value
method of accounting has been applied.
Cash and Cash Equivalents
Highly liquid investments with an original maturity of three months or less are
classified as cash equivalents. These investments consist of income producing
securities, which are readily convertible to cash and are stated at cost, which
approximates fair value.
Short-term Investments
In addition to cash equivalents, the Company has investments in debt securities
(certificates of deposit and commercial paper) with original maturities of
greater than three months that are classified as short-term investments. These
investments are carried at amortized cost plus accrued interest. Accrued
interest on these investments as of December 31, 1999 and 1998 was $55,000 and
$53,000, respectively.
Supplemental Disclosures of Cash Flow Information
Cash payments for interest totaled $2,000 and $51,000 in 1999 and 1998,
respectively.
<TABLE>
<CAPTION>
Supplemental disclosure of cash flows information: 1999 1998
---- ----
<S> <C> <C>
Non-cash investing activities:
Acquisition of investment in exchange for property
and equipment $ 25 -
Stock received and cancelled in consideration of
notes receivable from shareholders ($30) -
</TABLE>
-26-
<PAGE> 27
INFODATA SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property and Equipment
Property and equipment is depreciated using the straight-line method.
Depreciation on equipment and furniture is computed using the estimated useful
lives of the assets, which range from three to six years. Leasehold improvements
are amortized over the shorter of the useful life of the asset or the lease
term.
Impairment of Long-lived Assets
The Company periodically evaluates the carrying value of long-lived assets to be
held and used, primarily property and equipment and goodwill, under the
provisions of Statement of Financial Accounting Standard No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of" (SFAS 121). The carrying value of long-lived assets is considered impaired
when the separately identifiable undiscounted cash flows from the asset is less
than its carrying value. In addition, the recoverability of goodwill is further
evaluated under the provisions of Accounting Principles Board Opinion No. 17,
"Intangible Assets", based upon undiscounted cash flows. In the event that the
carrying amount exceeds undiscounted cash flows, a loss is recognized based on
the amount by which the carrying value exceeds the fair value of the asset. Fair
value is determined using the anticipated cash flows discounted at a rate
commensurate with the risk involved.
Goodwill
Goodwill is being amortized using the straight-line method over a life ranging
from seven to ten years.
Research and Development
Research and development costs are expensed as incurred.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts and the tax basis of existing assets
and liabilities. A valuation allowance is recorded to reduce tax assets to an
amount whose realization is more likely than not.
Earnings Per Share
Basic earnings per share are based on the weighted average number of common
shares outstanding. Diluted earnings per share are based on the weighted average
number of common shares outstanding and all dilutive potential common shares
outstanding. Dilutive equivalent shares consist of stock options and warrants
using the treasury stock method.
Due to the loss in 1999 and 1998, the effect of options and warrants has not
been considered on dilutive earnings per share as it would have been
antidilutive.
Significant Customers
-27-
<PAGE> 28
INFODATA SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's largest customer is the federal government, and the Company has a
concentration of credit risk associated with its accounts receivable. The
Company does not believe the likelihood of a loss arising from such
concentration is significant. The Company performs ongoing credit evaluations on
its customers.
Sales to U.S. government agencies totaled approximately $6,680,000 and
$8,550,000 in 1999 and 1998, respectively. As of December 31, 1999 and 1998,
accounts receivable due from U.S. government agencies were approximately
$739,000 and $693,000, respectively.
Fair Value of Financial Instruments
Financial instruments include cash and cash equivalents, short-term investments,
accounts receivable, and accounts payable. The carrying amounts of financial
instruments approximate fair value due to the short maturity of these
instruments.
Segment Reporting
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information", during
1998. SFAS 131 replaces the "industry segment" approach with the "management"
approach to reporting financial information about an enterprise's segments. The
management approach designates the internal organization that is used by
management for allocating resources and assessing performance as the source of
the Company's reportable segments. SFAS 131 also requires disclosures about
products and services, geographic areas, and major customers.
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. There were no software development costs capitalized for the years
ended December 31, 1999 and 1998 as the costs incurred between technical
feasibility and general availability were not significant.
Comprehensive Income
The Company does not have any components of comprehensive income other than net
loss.
New Accounting Pronouncements
-28-
<PAGE> 29
INFODATA SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In December 1999, The Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101) which summarizes certain of the SEC
staff's views in applying generally accepted accounting principles to revenue
recognition in financial statements. In March 2000 the SEC issued Staff
Accounting Bulletin No. 101A, which defers the effective date of SAB 101 from
January 1, 2000 to April 1, 2000. The initial adoption of this guidance is not
anticipated to have a material impact on the Company's results of operations,
cash flows or financial position, however, the guidance may impact the way in
which the Company will account for future transactions.
NOTE 2. 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 document conversion service (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 SFAS 121, the Company evaluated the recoverability of the
carrying value and 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 charge has been reflected in the
accompanying Statements of Operations. As of December 31 1999, the remaining
carrying value of goodwill for Mountain View is $247,000, which will be fully
amortized by December 31, 2000.
In October 1995, the Company purchased substantially all of the assets and
assumed certain liabilities of Merex, Inc. ("Merex") for approximately $361,000
of which approximately $312,000 was allocated to goodwill. In December 1999, a
certain key employee who focused on business activities of Merex tendered their
resignation. In the fourth quarter of 1999, the Company determined that pursuant
to its focus on the Solutions segment of its business that no active contracts
nor client prospects existed that were a result of or could reasonably be
determined to have resulted from the Merex acquisition. In addition, the Company
determined that its business focus was evolving away from lower margin business
and that the majority of Merex's former clients would not be pursued as
prospects for the Company's services. In accordance with SFAS 121, the Company
evaluated the recoverability of the carrying value and determined that the
anticipated future undiscounted cash flows resulting from the activities
acquired from Merex would not be sufficient to recover the remaining amount of
goodwill. Accordingly, as of December 31, 1999 the Company adjusted the carrying
value of the goodwill to its estimated value of $0, resulting in an impairment
loss of approximately $181,000. Such charge has been reflected in the
accompanying Statement of Operations.
-29-
<PAGE> 30
INFODATA SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. Accounts Receivable
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
----------- -----------
<S> <C> <C>
U.S. government:
Amounts billed $ 739,000 $ 693,000
Recoverable costs and accrued profit
on progress completed but not billed 277,000 976,000
----------- -----------
1,016,000 1,669,000
----------- -----------
Commercial customers:
Amounts billed 215,000 466,000
Recoverable costs and accrued profit
on progress completed but not billed 183,000 316,000
----------- -----------
398,000 782,000
----------- -----------
Less allowance for doubtful accounts (56,000) (95,000)
----------- -----------
Total $ 1,358,000 $ 2,356,000
=========== ===========
</TABLE>
NOTE 4. Income Taxes
At December 31, 1999, the Company had approximately $11,855,000 in net operating
loss carryforwards for income tax reporting purposes. The operating loss
carryforwards expire in varying amounts from 2000 through 2013. In addition, at
December 31, 1999, the Company had $55,000 in investment tax credit
carryforwards expiring in 2000.
The actual income tax expense attributable to pretax income for the year ended
December 31, 2000, and December 31, 2001, respectively, differed from the amount
computed by applying the Federal statutory rate of 34% as a result of the
following:
<TABLE>
<CAPTION>
1999 1998
----------- ---------
<S> <C> <C>
Tax at statutory rate..................... $(1,712,000) $(678,000)
Change in valuation allowance ........... 1,212,000 523,000
Nondeductible amortization................ 867,000 217,000
</TABLE>
-30-
<PAGE> 31
INFODATA SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C>
Other..................................... (367,000) (62,000)
----------- ---------
$ - $ -
=========== =========
</TABLE>
The significant components of net deferred tax (liabilities) assets are as
follows as of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Deferred tax liabilities:
Net software development costs ............ $ - $ (42,000)
Deferred tax assets:
Net operating loss carryforward ........... 4,876,000 3,686,000
Investment tax credit and research and
development tax credits carryforward .. 55,000 55,000
Other ..................................... 160,000 180,000
----------- -----------
Valuation allowance ............................. (5,091,000) (3,879,000)
----------- -----------
Net deferred tax asset .......................... $ - $ -
=========== ===========
</TABLE>
Under the provisions of Statements of Financial Accounting Standards 109,
"Accounting for Income Taxes," the tax effect of the net operating loss and
investment tax credit carryforwards, together with net temporary differences,
represents a net deferred tax asset against which management has fully reserved
due to the uncertainty of future taxable income.
NOTE 5. Short-term Debt
The Company maintains 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 2.9 percent over the
30-day commercial paper rate. Currently, this per annum rate approximates the
prime rate (8.53% at December 31, 1999). Advances on the facility are based on
eligible billed accounts receivable less than 90 days old. The facility
presently expires in April 2000. However, the Company is currently negotiating
an extension to April 2001. As of December 31, 1999 and 1998, the Company had no
amounts borrowed against this line of credit. At December 31, 1999, the Company
had $702,000 available to it under the facility.
NOTE 6. Shareholders' Equity
Common Stock
On February 20, 1998, the Company consummated an underwritten public stock
offering that was declared effective on February 17, 1998. The gross proceeds
were $8,000,000, which consisted of 1,600,000 shares priced at $5.00 per share.
The expenses of the stock offering (including the underwriters' fee, legal fees,
accounting fees, blue sky fees, registration costs, printing and engraving
costs, and other miscellaneous fees) were approximately $1,710,000. On April 2,
1998, the underwriters exercised an over-allotment of its options for its 50,000
shares, resulting in an additional $250,000 in gross proceeds. Net proceeds
totaled approximately $6,540,000.
-31-
<PAGE> 32
INFODATA SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Options and Warrants
As a result of the acquisition of AMBIA Corporation ("AMBIA"), in July 1997 each
outstanding option ("AMBIA Stock Option") to purchase shares of AMBIA Common
Stock under the former AMBIA Equity Incentive Plan (as defined in the Merger
Agreement) was converted into an option ("Replacement Option") to acquire, on
the same terms and conditions as were applicable under such AMBIA Stock Option,
4/45 of a share of Common Stock of the Company, at an exercise price of $1.69
per share with the same expiration date as each such AMBIA Stock Option.
Replacement Options to purchase a total of 34,665 shares of the Company's Common
Stock were granted to replace the previously granted AMBIA Stock Options.
Pursuant to the Merger Agreement, each Replacement Option is to be treated as a
non-qualified stock option and, if possible, as granted pursuant to the terms
and conditions of the 1995 Plan and the AMBIA Stock Option agreement entered
into by AMBIA and the participant in the AMBIA Equity Incentive Plan. The 34,665
shares of the Company's Common Stock underlying the outstanding Replacement
Options are not included in the 2,011,000 shares presently authorized under the
1995 Stock Option Plan.
In April 1995, the Company's shareholders approved the adoption of the 1995
Stock Option Plan (the "1995 Plan"), which (i) consolidated the Company's 1991
Incentive Stock Option Plan and 1992 Non-Qualified Stock Option Plan and (ii)
provided for the automatic grant of stock options to the members of the
Compensation Committee of the Company's Board of Directors. A total of 2,011,000
shares of Common Stock have been authorized for issuance under options granted
and to be granted under the 1995 Plan at exercise prices which will not be less
than 100% of the fair market value of the underlying shares on the date of grant
of the option. Options vest over varying years of service. Vested options are
exercisable until the earlier of ten years from the date of grant or three
months after termination of employment for options granted under either the 1991
Incentive Stock Option Plan or the 1992 Non-Qualified Stock Option Plan. Options
granted under the 1995 Plan are exercisable until the earlier of ten years from
the date of grant or one month after termination of employment.
As of December 31, 1999, the Company had reserved a total of approximately
1,682,353 shares of Common Stock for future issuance upon the exercise of stock
options.
A summary of option activity under the 1995 Plan, the Predecessor Plans, and the
former AMBIA Equity Incentive Plan is presented below:
<TABLE>
<CAPTION>
Weighted Average
Number of Option Price Option Price
Shares Per Share Per Share
------------------------------------------------------
<S> <C> <C> <C>
Outstanding at December 31, 1997 1,090,025 $1.085-$11.000 $5.956
Granted 1,232,988 $2.250-$ 9.500 $4.450
Exercised (55,477) $1.085-$ 7.063 $3.072
Expired/Canceled (1,231,744) $1.090-$11.000 $6.636
------------------------------------------------------
Outstanding at December 31, 1998 1,035,792 $1.085-$11.000 $3.563
Granted 351,475 $1.126-$3.250 $2.327
Exercised (5,061) $1.690-$1.930 $1.751
Expired/Canceled (302,362) $1.690-$11.000 $3.857
</TABLE>
-32-
<PAGE> 33
<TABLE>
------------------------------------------------------
<S> <C> <C> <C>
Outstanding at December 31, 1999 1,079,844 $1.085-$11.000 $3.087
------------------------------------------------------
Exercisable at December 31, 1998 570,996 $1.085-$9.250 $3.210
Exercisable at December 31, 1999 642,821 $1.085-$9.250 $2.989
</TABLE>
-33-
<PAGE> 34
INFODATA SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Outstanding and Exercisable by Price Range as of 12/31/99
Options Outstanding
Weighted Options Exercisable
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
Range of as of Contractual Exercise as of Exercise
Exercise Prices 12/31/99 Life Price 12/31/99 Price
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.0850 $2.2000 342,521 6.25 $1.704 221,663 $1.616
$2.2345 $2.6250 115,695 6.55 $2.474 57,384 $2.482
$2.6565 $2.8750 374,756 7.09 $2.871 164,680 $2.874
$2.8905 $5.1250 174,830 4.45 $4.286 169,552 $4.323
$7.0630 $11.0000 72,042 2.33 $8.861 29,542 $7.264
--------------- --------------- ------------- -------------- ---------------
1,079,844 6.02 $3.087 642,821 $2.989
</TABLE>
The Company complies with the disclosure requirements of SFAS 123, "Accounting
for Stock-Based Compensation". The Company applies APB Opinion 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 Common Stock). Had compensation cost for the
Company's stock-based compensation plans been determined based on the fair value
at the grant dates for awards under those plans consistent with the method of
SFAS 123, the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below.
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Net loss as reported $(5,034,000) $(1,798,000)
Pro forma compensation expense (363,769) (266,000)
----------- -----------
Pro forma net loss $(5,397,769) $(2,064,000)
=========== ===========
</TABLE>
Net loss per share:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Basic and diluted, as reported $ (1.11) $ (0.42)
Basic and diluted, pro forma $ (1.19) $ (0.49)
</TABLE>
The weighted average fair value of options granted in 1999 and 1998 was $1.68
and $3.93, 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 1999 and 1998: no dividend yield and expected
life of five years, and expected volatility of 127 percent and 56 percent for
1999 and 1998, respectively. The risk-free interest rate for 1999 and 1998 was
5.5 percent.
In July 1998 outstanding options with exercise prices in excess of $3.50 per
share, held by employees other than executives and directors, were amended to
provide for an exercise price of $3.50 per share. In December 1998 outstanding
options with exercise prices in excess of $2.875 per share, held by employees
including certain executives, were amended to provide for an exercise price of
$2.875 per share. All other terms of the existing options remained unchanged. A
total of
-34-
<PAGE> 35
INFODATA SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
508,000 options were amended in 1998. Also in December 1998, the Board of
Directors offered to amend options held by certain other executives to provide
for an exercise price of $2.875 per share in exchange for the cancellation of 25
percent of the adjusted options. In February and March 1999, approximately
115,000 stock options to purchase shares of common stock were exchanged pursuant
to this offer for stock options to purchase 86,000 shares of common with an
exercise price of $2.875, compensation expense amounting to $43,000 was
recognized during 1999 related to the exchange.
In May 1998, the Company issued a warrant to a consultant with an estimated fair
value of $55,000 to purchase 50,000 shares of Common Stock at an exercise price
of $7.00 per share in exchange for certain investor relations services to be
provided through May 2001. In October 1999, the Company issued replacement
warrants with an estimated fair value of $29,000 (equal to the fair value of
warrants replaced) to purchase 35,000 shares of Common Stock at an exercise
price of $3.50 per share in exchange for certain investor relations services to
be provided through September 2001. As of December 31, 1999, these warrants had
not been exercised.
NOTE 7. Commitments and Contingencies
Operating Leases
The Company has entered into a lease for its corporate headquarters facility in
Fairfax, Virginia. This lease originally expired on July 31, 1998 ("Base Lease")
but was renewed in November 1997 and now expires on July 31, 2003. Under the
terms of the Base Lease, the landlord provided various incentives, which have
been deferred and classified as deferred rent in the accompanying consolidated
balance sheets. These amounts have been amortized over the life of the Base
Lease.
Upon completion of the AMBIA acquisition in July 1997, the Company assumed
responsibility for the lease of its office in Mountain View, California. The
lease originally expired on May 31, 1998, but was renewed in March 1998 and now
expires on May 31, 2001. The Company currently subleases 70% of this office
space to a third party whose sublease payments are expected to cover the
Company's costs for that portion of space up to May 31, 2001. The Company
subleases the remaining 30% of the office space to a third party whose sublease
payments are expected to cover the Company's costs for that portion of space up
to February 28, 2001.
Future minimum lease payments under non-cancelable leases as of December 31,
1999 are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ----------
<S> <C>
2000 764,000
2001 674,000
2002 613,000
2003 363,000
----------
$2,414,000
==========
</TABLE>
-35-
<PAGE> 36
INFODATA SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Rent expense charged to operations for the years ended December 31, 1999 and
1998 amounted to $699,000 and $590,000, respectively.
Contingencies
Costs charged to cost-type U.S. government contracts are subject to annual audit
by the Defense Contract Audit Agency or other duly authorized representatives of
the Federal government. No audits have been completed for any periods commencing
after 1994. Audits for years 1995 through 1998 will commence during the second
quarter of 2000, and in the opinion of management, adjustments resulting from
the completion of such audits and future audits are not expected to have a
material impact on the Company's financial position or results of future
operations.
From time to time, the Company is subject to claims arising in the ordinary
course of business. In the opinion of management, no such matter, individually
or in the aggregate, exists which is expected to have a material effect on the
results of operations, cash flows or financial position of the Company.
NOTE 8. Employee Benefit Plan
In 1988, the Company established an employee benefit plan (the "Benefit Plan")
which qualifies under Section 401(k) of the Internal Revenue Code. The Benefit
Plan allows salaried employees to contribute a part of their compensation toward
their retirement on a tax-deferred basis. Required Company contributions equate
to 50% of the first 6% of the employee's semi-monthly deferral to the Benefit
Plan and totaled approximately $150,000 in 1999 and $51,000 in 1998. 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 1999 or 1998.
As adopted by the Company and approved by its shareholders in May 1997, the
Company established an employee stock purchase plan for all eligible employees
to purchase shares of its Common Stock at 85% of the lower of the fair market
value on the first or the last day of each three-month offering period.
Employees may authorize the Company to withhold up to 15% of their compensation
during any offering period, subject to certain limitations. The 1997 Employee
Stock Purchase Plan authorizes up to 200,000 shares to be issued. During fiscal
1999 and 1998, shares totaling 38,370 and 31,269 respectively, were issued under
the plan at a weighted average price of $1.68 and $3.23 per share, respectively.
At December 31, 1999, 120,509 shares were reserved for future issuance.
NOTE 9. Related-Party Transactions
The Company incurred management consulting fees of approximately $105,500 and
$220,000 in 1999 and 1998, respectively, for services rendered by certain
directors of the Company. Amounts payable for these services to companies
employing these directors were $0 and $15,000 at December 31, 1999 and 1998,
respectively.
In 1998 the Company issued 5,988 shares of Common Stock valued at $55,000 (based
on the market value on date of issuance) to members of the Board of Directors in
consideration for their services in 1998. In 1998 the Company repurchased 5,000
common shares from the departing Chief Executive Officer for $25,000. These
shares were recorded at $17,000 (quoted market price on date of repurchase).
In December 1999, the Company received 15,000 common shares from a departing
officer valued at $30,000 and additional consideration of $40,000 cash to
extinguish a $70,000 notes receivable to the Company. In addition, the accrued
interest through 1999 was $20,259.
-36-
<PAGE> 37
INFODATA SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 1999 the Company issued 17,556 shares of Common Stock valued at $60,000
(based on the market value on date of issuance) to members of the Board of
Directors in consideration for their services in 1999.
NOTE 10. Segment Reporting
In 1998, Infodata adopted SFAS 131, "Disclosures about Segments of an Enterprise
and Related Information." Under SFAS 131 the Company has determined that it
operates in three segments: (1) Solutions, (2) Proprietary Products, and (3)
Third Party Products.
The accounting policies of the segments are the same as those described in the
"Summary of Significant Accounting Policies." Infodata evaluates its Solutions
segment on the basis of revenues less direct costs. The Proprietary and Third
Party Products segments are evaluated on the basis of revenues less direct costs
and indirect costs are not allocated to these segments to evaluate performance.
The Company does not internally report assets on a segment basis. For
Corporation purpose, the Company has prepared separate information for the years
ended December 31, 1999 and 1998.
The table below presents information about reported segments for the years
ending December 31, 1999 and 1998, as well as reconciliation to reported loss
before income taxes.
<TABLE>
<CAPTION>
1999
----------------------------------------------------------------
THIRD PARTY PROPRIETARY
SOLUTIONS PRODUCTS PRODUCTS TOTAL
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 6,119,000 $ 1,455,000 $ 2,697,000 $ 10,271,000
Direct costs 3,092,000 1,394,000 192,000 4,678,000
Indirect costs 2,621,000 - - 2,621,000
------------ ------------ ------------ ------------
Segmental profit $ 406,000 $ 61,000 $ 2,505,000 2,972,000
============ ============ ============ ------------
Research and development (684,000)
Other costs not
allocated to segments,
primarily selling,
general and administrative (5,386,000)
Goodwill Impairment (2,122,000)
Interest net 186,000
------------
Loss before income taxes $ (5,034,000)
============
<CAPTION>
1998
---------------------------------------------------------------
THIRD PARTY PROPRIETARY
SOLUTIONS PRODUCTS PRODUCTS TOTAL
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 6,322,000 $ 3,677,000 $ 4,243,000 $ 14,242,000
Direct costs 2,991,000 3,240,000 171,000 6,402,000
Indirect costs 2,251,000 - - 2,251,000
------------ ------------ ------------ ------------
Segmental profit $ 1,080,000 $ 437,000 $ 4,072,000 5,589,000
============ ============ ============ ------------
Research and development (1,765,000)
Other costs not
allocated to segments,
primarily selling,
general and administrative (5,812,000)
Goodwill Impairment -
Interest net 190,000
------------
Loss before income taxes $ (1,798,000)
============
</TABLE>
#77710
-37-
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-56351 and 033-60197) of Infodata Systems, Inc.
of our report dated March 10, 2000 relating to the consolidated financial
statements, which appears in this Annual Report on Form 10-KSB.
PriceWaterhouseCoopers LLP
McLean, Virginia
March 30, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000050420
<NAME> INFODATA SYSTEMS INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 929
<SECURITIES> 1,700
<RECEIVABLES> 1,451
<ALLOWANCES> 56
<INVENTORY> 0
<CURRENT-ASSETS> 4,080
<PP&E> 3,329
<DEPRECIATION> 2,773
<TOTAL-ASSETS> 4,636
<CURRENT-LIABILITIES> 1,771
<BONDS> 0
0
0
<COMMON> 136
<OTHER-SE> 2,729
<TOTAL-LIABILITY-AND-EQUITY> 4,636
<SALES> 10,271
<TOTAL-REVENUES> 10,271
<CGS> 7,436
<TOTAL-COSTS> 5,249
<OTHER-EXPENSES> 2,806
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2
<INCOME-PRETAX> (5,034)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,034)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,034)
<EPS-BASIC> (1.11)
<EPS-DILUTED> (1.11)
</TABLE>
