<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-10416
INFODATA SYSTEMS INC.
----------------------------------------------------
(Exact Name of Small Business Issuer in its Charter)
<TABLE>
<S> <C>
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)
</TABLE>
(703) 934-5205 (Issuer's Telephone Number)
--------------------------------------------------
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- -------------------
None Not applicable
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK-$.03 PAR VALUE
---------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
------- -------
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of Common Stock on November 3,
2000 as reported on the Nasdaq Small Cap market, was approximately $5,700,000.
Shares of Common Stock held by each director and officer and by each person who
owns 5% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
The number of outstanding shares of the Company's Common Stock, par value $0.03
per share, was 4,693,913 on November 3, 2000.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
<PAGE> 2
INFODATA SYSTEMS INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page (s)
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Operations 3
Three Months Ended September 30, 2000 and 1999
Consolidated Statements of Operations 4
Nine Months Ended September 30, 2000 and 1999
Condensed Consolidated Balance Sheets 5
September 30, 2000 and December 31, 1999
Consolidated Statements of Cash Flows 6
Nine Months Ended September 30, 2000 and 1999
Notes to Consolidated Financial Statements 7-11
Item 2. Management's Discussion and Analysis 11-18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 19
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1.
INFODATA SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------------
2000 1999
----------- ------------
<S> <C> <C>
Revenues $ 3,585 $ 2,444
Cost of revenues 2,949 1,940
----------- ------------
Gross profit 636 504
----------- ------------
Operating expenses:
Research and development 110 29
Selling, general and administrative 1,211 1,353
----------- ------------
1,321 1,382
----------- ------------
Operating loss (685) (878)
Interest income 20 44
Interest expense (8) --
----------- ------------
Net loss $ (673) $ (834)
=========== ============
Net loss per share, basic and diluted $ (0.14) $ (0.18)
=========== ============
Weighted average shares outstanding 4,682 4,541
=========== ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
3
<PAGE> 4
INFODATA SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
2000 1999
----------- ------------
<S> <C> <C>
Revenues $ 9,973 $ 8,118
Cost of revenues 7,395 6,065
----------- ------------
Gross profit 2,578 2,053
----------- ------------
Operating expenses:
Research and development 254 620
Selling, general and administrative 3,416 4,129
Goodwill impairment -- 1,941
----------- ------------
3,670 6,690
----------- ------------
Operating loss (1,092) (4,637)
Interest income 83 152
Interest expense (10) --
----------- ------------
Net loss $ (1,019) $ (4,485)
=========== ============
Net loss per share, basic and diluted $ (0.22) $ (0.99)
=========== ============
Weighted average shares outstanding 4,656 4,537
=========== ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
4
<PAGE> 5
INFODATA SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
----------------- -----------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 587 $ 929
Short-term investments 700 1,700
Accounts receivable, net of allowance of $56 2,708 1,358
Related party receivable 124 --
Other current assets 96 93
----------------- -----------------
Total current assets 4,215 4,080
----------------- -----------------
Property and equipment, at cost:
Furniture and equipment 3,291 3,006
Less accumulated depreciation and amortization (2,941) (2,773)
----------------- -----------------
350 233
Intangibles, net of accumulated amortization of $3,679 and $3,450 178 247
Related party receivable 190 --
Other assets 64 76
----------------- -----------------
Total assets $ 4,997 $ 4,636
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Line of credit $ 436 $ --
Accounts payable 771 317
Accrued expenses 1,154 833
Deferred revenue 391 621
----------------- -----------------
Total current liabilities 2,752 1,771
Shareholders' equity
Common stock 138 136
Additional paid-in capital 20,090 19,693
Accumulated deficit (17,983) (16,964)
----------------- -----------------
Total shareholders' equity 2,245 2,865
----------------- -----------------
Total liabilities and shareholders' equity $ 4,997 $ 4,636
================= =================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
5
<PAGE> 6
INFODATA SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
2000 1999
------------- -------------
<S> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss $ (1,019) $ (4,485)
Adjustments to reconcile net loss to net cash used in
operating activities:
Equity stock compensation -- 43
Depreciation and amortization 168 291
Goodwill impairment -- 1,941
Goodwill and other intangible amortization 229 359
Provision for doubtful accounts -- (29)
Changes in operating assets and liabilities:
Related party receivable (314) --
Accounts receivable (1,350) 963
Other assets 9 54
Accounts payable 454 (172)
Accrued expenses 380 42
Deferred revenue (230) (534)
------------- -------------
Net cash used in operating activities (1,673) (1,527)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (285) (175)
Purchases of short-term investments (1,200) (4,330)
Proceeds from maturity of short-term investments 2,200 4,359
Business acquisition costs (19) --
------------- ------------
Net cash provided by (used in) operating activities 696 (146)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations -- (6)
Net borrowings (repayments) from short-term debt 436 --
Issuance of common stock 199 118
------------- ------------
Net cash provided by financing activities 635 112
------------- ------------
Net decrease in cash and cash equivalents (342) (1,561)
Cash and cash equivalents at beginning of period 929 2,200
------------- ------------
Cash and cash equivalents at end of period $ 587 $ 639
============= ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
6
<PAGE> 7
INFODATA SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-QSB and
Item 310(b) of Regulation S-B. Accordingly, the accompanying unaudited financial
statements do not include all of the information and footnotes required by
accounting principles generally accepted in the United States for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the three-month and nine-month periods
ended September 30, 2000, are not necessarily indicative of the results for the
year ending December 31, 2000. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1999.
NOTE B - SIGNIFICANT ACCOUNTING POLICIES
1) Revenue Recognition - The Company recognizes revenue from the sale of
software licenses in accordance with Statement of Position 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 collection 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 recognized when the services are performed
and collection is determined to be 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.
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 customers have accepted
the products.
2) Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
3) New Accounting Pronouncements - 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
7
<PAGE> 8
recognition in financial statements. On June 26, 2000, the SEC issued SAB
No. 101B, which deferred the effective date of SAB 101 to October 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 C - RISK AND UNCERTAINTIES
Net cash flow from operating activities for the nine months ended September 30,
2000 was not sufficient to fund the operations of the business. However,
management believes that available working capital combined with borrowings
against the Company's line of credit will be sufficient to meet its requirements
for the next twelve months. The Company's actual cash requirements may vary
materially from those now planned and will depend upon numerous factors,
including the general market acceptance of the Company's products and services,
the growth of the Company's marketing channels, the technological advances and
activities of competitors, and other factors.
The Company is currently negotiating the sale of certain non-marketable
investment assets and exploring other alternatives to generate cash to fund
operations and working capital needs. However, there can be no assurance that
such capital will be available on a timely basis or at all.
NOTE D - LINE OF CREDIT
The Company maintains a line of credit with Merrill Lynch Business Financial
Services, Inc. for up to $1,000,000 based upon eligible receivables at a per
annum rate equal to the sum of 2.9% plus the 30 day commercial paper rate.
Currently, this per annum rate approximates the prime rate (9.5% at September
30, 2000). Advances on the facility are based on eligible accounts receivable
less than 90 days old. The facility expires on November 30, 2000. The Company is
currently negotiating a renewal on the line of credit. As of September 30, 2000
the Company had $432,000 of borrowings and $4,000 of accrued interest under the
line of credit. As of that date, the Company had $568,000 available under its
line. The line of credit is contingent upon the Company continuing to meet
certain general funding requirements, including the absence of any material
adverse change in the Company's business or financial condition, the continued
accuracy of the Company's representations and warranties and the provision of
quarterly and monthly financial information. The Company is currently in
compliance with these funding requirements.
NOTE E - SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid was $6,000 and $0 for the periods ended September 30, 2000 and
1999, respectively.
Supplemental disclosure of Cash Flows information:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
2000 1999
---- ----
<S> <C> <C>
Non-cash investing and financing activities:
Business acquisition in exchange for common stock $142 $ -
</TABLE>
NOTE F - BUSINESS AQUISITIONS
On March 30, 2000, the Company acquired a business unit from Earth Satellite
Corporation specializing in providing software development services to the U.S.
intelligence community. The Company issued 40,000 shares of Common Stock with a
per share fair value of $3.563, equal to the trading price of the Company's
Common Stock on that date. The adjusted acquisition cost was
8
<PAGE> 9
approximately $161,190, including $18,670 of direct cost attributed to the
acquisition. The purchase price was attributed to the business unit's sole
contract. The final acquisition value of the contract is being amortized over
its life of 18 months.
NOTE G - SEGMENT REPORTING
The table below presents information about reported segments for the three and
nine months ended September 30, 2000 and 1999, as well as a reconciliation to
the reported loss before income taxes.
INFODATA SYSTEMS INC.
THREE MONTHS ENDED
SEPTEMBER 30, 2000
SEGMENT INFORMATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 2000
--------------------------------------------------------------------
SOLUTIONS THIRD PARTY PROPRIETARY TOTAL
PRODUCTS PRODUCTS
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 3,047 $ 150 $ 388 $ 3,585
Direct costs 1,635 135 63 1,833
--------------------------------------------------------------------
Segmental profit $ 1,412 $ 15 $ 325 1,752
=========== =========== =========
Research and development (110)
Other costs not allocated to (2,327)
segments, primarily selling,
general and administrative
Interest income - net 12
---------
Loss before income taxes $ (673)
=========
</TABLE>
INFODATA SYSTEMS INC.
THREE MONTHS ENDED
SEPTEMBER 30, 1999
SEGMENT INFORMATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1999
--------------------------------------------------------------------
SOLUTIONS THIRD PARTY PROPRIETARY TOTAL
PRODUCTS PRODUCTS
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 1,472 $ 484 $ 488 $ 2,444
Direct costs 810 451 35 1,296
--------------------------------------------------------------------
Segmental profit $ 662 $ 33 $ 453 1,148
======== =========== ==========
Research and development (29)
Other costs not allocated to (1,997)
segments, primarily selling,
general and administrative
Goodwill impairment
Interest income - net 44
---------
Loss before income taxes $ (834)
=========
</TABLE>
9
<PAGE> 10
INFODATA SYSTEMS INC.
NINE MONTHS ENDED
SEPTEMBER 30, 2000
SEGMENT INFORMATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 2000
--------------------------------------------------------------------
SOLUTIONS THIRD PARTY PROPRIETARY TOTAL
PRODUCTS PRODUCTS
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 8,007 $ 646 $ 1,320 $ 9,973
Direct costs 4,131 597 163 4,891
--------------------------------------------------------------------
Segmental profit $ 3,876 $ 49 $ 1,157 $ 5,082
========= ========= ==========
Research and development (254)
Other costs not allocated to (5,920)
segments, primarily selling,
general and administrative
Interest income - net 73
----------
Loss before income taxes $ (1,019)
==========
</TABLE>
INFODATA SYSTEMS INC.
NINE MONTHS ENDED
SEPTEMBER 30, 1999
SEGMENT INFORMATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999
--------------------------------------------------------------------
SOLUTIONS THIRD PARTY PROPRIETARY TOTAL
PRODUCTS PRODUCTS
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 4,619 $ 1,345 $ 2,154 $ 8,118
Direct costs 2,306 1,285 116 3,707
--------------------------------------------------------------------
Segmental profit $ 2,313 $ 60 $ 2,038 4,411
========= ========== ==========
Research and development (620)
Other costs not allocated to (6,487)
segments, primarily selling,
general and administrative
Goodwill impairment (1,941)
Interest income - net 152
---------
Loss before income taxes $ (4,485)
=========
</TABLE>
Note H - Related Party Transaction
In March 2000, the Company was engaged by Claria Corporation (Claria) to provide
web-based design and development services. Through September 30, 2000 the
Company recognized approximately $400,000 in revenue and related receivables
under its contract with Claria. Claria, an on-line recruiting firm, informed the
Company in September that it would be unable to continue to make timely payments
pursuant to the terms of the contract. Alan S. Fisher, the vice-chairman of the
Company, is the chairman of the board of directors of Claria. On November 13,
Claria executed a twenty-four (24) month promissory note in the principal amount
of $314,396, the net sum due to the Company.
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This note bears 9.63% interest and is personally guaranteed by Alan S. Fisher
and Razi Mohiuddin, a director of Claria and a former officer of Infodata
Systems Inc. Consequently, management believes the amounts associated with these
services to be fully collectible.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS RELATING TO PRODUCT 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.
Company Overview
The Company provides its customers with complex information technology solutions
and design and implementation of complex e-business systems for emerging B2B
companies with short time-to-market requirements and the design and development
of web-based knowledge management (KM) systems, and electronic document
management (EDM) systems. These products and services are provided in three
market segments. The segments consist of (i) business-to-business (B2B) web-site
design solutions, knowledge management consulting, or "e-Content" solutions
("Solutions"), (ii) sales of proprietary products such as Compose, INQUIRE/text
("Proprietary Products"), and (iii) the sale of third party software and
hardware ("Third Party Products") on a limited basis. Solutions includes
web-based knowledge management systems integration, document management analysis
and implementation, web-site design, system architecture, application
development, and turnkey implementation of complex B2B web infrastructures and
consulting services surrounding the implementation of proprietary products, and
Third Party Products coupled with 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 quarter ended September 30, 2000, Solutions accounted
for 85% of total revenue, Proprietary Products accounted for 11% and Third Party
accounted for the remaining 4%.
At September 30, 2000, the Company had a net operating loss ("NOL") aggregating
approximately $12,874,000 available to affect future taxable income. Under
Section 382 of the Internal Revenue Code of 1986, as amended ("Code"),
utilization of prior NOLs is subject to certain limitations following a change
in ownership. As a result of the AMBIA acquisition in July 1997, the Company is
subject to limitations on the use of its NOL. Accordingly, there can be no
assurance the Company will be able to utilize a significant amount of NOLs. Due
to uncertainty of taxable income to utilize the NOL, a full valuation allowance
has been established with respect to the deferred tax asset.
Revenues from consulting services are recognized as services are performed. Any
amounts paid by customers prior to the actual performance of services are
recorded as deferred revenue until earned, at which time they are recognized in
accordance with the type of contract. Revenues from software licenses are
recorded in accordance with the provisions of the AICPA Statement of Position
97-2, "Software Revenue Recognition", as amended. Revenues from customer support
and maintenance
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<PAGE> 12
agreements are recognized over the period that support is provided. Deferred
revenue is recognized with respect to pre-payments of maintenance agreements.
On March 30, 2000, the Company acquired a business unit from Earth Satellite
Corporation specializing in providing software development services to the U.S.
intelligence community. The acquisition of the business unit brings additional
customer and teaming contracts which expand the Company's presence in the
Intelligence community including a discipline known as Information Warfare. In
conjunction with this acquisition the Company issued 40,000 shares of Common
Stock with a fair value of $142,520. During the second and third quarter the
Company incurred additional direct costs of $18,670 associated with the
acquisition. The final acquisition cost was $161,190.
Deferred revenue at September 30, 2000 was $391,000. 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 are dependent on the product or
service. For consulting, the most significant item is the direct labor cost of
the consultants. Other cost components include subcontractor costs, non-labor
direct costs such as travel and associated indirect costs (e.g., office rent,
administration, etc.) allocated to the consulting engagement. Indirect costs are
allocated based on head count and utilized 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,
customization work done by the Company, and any special packaging costs
incurred. The cost of maintenance revenue includes the customer service and
software engineering personnel supporting the product and an allocation of
associated indirect costs. 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 or 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.
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1999
Revenues
The Company derives revenues from three segments, Solutions, Proprietary
Products and Third Party Products. Solutions revenue includes consulting
services for both commercial and government customers. Proprietary Product
revenue includes the sale of INQUIRE/Text products and services and related
maintenance, and sales of the Company's plug-in based software products. Third
Party Products include software and hardware sold to both government and
commercial customers. Total revenue increased by $1,141,000, or 47%, for the
three months ended September
12
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30, 2000 as compared to the corresponding period of the prior year. Revenues for
each period consisted of the following:
(Dollar Amounts in Thousands)
THREE MONTHS ENDED
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999 INCREASE (DECREASE) %
------------------ ------------------ ---------------------
<S> <C> <C> <C>
SOLUTIONS
---------
Business Solutions $ 1,817 $ 484 275%
Intelligence 1,141 861 33%
Inquire 89 127 (30%)
------------------------------------------------------------------------------
Total Solutions Revenue $ 3,047 $ 1,472 107%
==============================================================================
PROPRIETARY PRODUCTS
--------------------
Compose and Others $ 141 193 (27%)
INQUIRE/Text 247 295 (16%)
------------------------------------------------------------------------------
Total Proprietary Products
Revenue $ 388 $ 488 (20%)
==============================================================================
TOTAL THIRD PARTY PRODUCTS
--------------------------
Revenue $ 150 $ 484 (69%)
==============================================================================
Total Revenue $ 3,585 $ 2,444 47%
==============================================================================
</TABLE>
Revenues from Solutions increased overall by $1,575,000, or 107%, from
$1,472,000 for the three months ended September 30, 1999 to $3,047,000 for the
three month period ended September 30, 2000. The Business Solutions unit within
the Solutions segment increased by $1,333,000, or 275%, from $484,000 for the
three months ended September 30, 1999 to $1,817,000 for the three months ended
September 30, 2000 due to increases in consulting services. In the third quarter
ended September 30, 2000 loss of revenue of $32,000 for training and Mountain
View consulting due to the de-emphasis of those operations was more than offset
by $805,000 of e-commerce B2B revenue. Excluding training and Mountain View
revenues the Business Solutions revenue increased by $1,365,00 or 314%, from
$435,000 for the three months ended September 30, 1999 to $1,800,000 for the
third quarter ended September 30, 2000. The Intelligence Solutions unit within
the Solutions segment increased by $280,000, or 33%, from $861,000 for the three
months ended September 30, 1999 to $1,141,000 for the three months ended
September 30, 2000, due to an increase in classified government work. The
Inquire Solutions unit within the Solutions segment decreased by $38,000, or
30%, from $127,000 for the three months ended September 30, 1999 to $89,000 for
the third quarter ended September 30, 2000 due to a decline in INQUIRE/Text
maintenance and Inquire consulting services.
Proprietary Product revenue decreased by $100,000, or 20%, from $488,000 for the
three months ended September 30, 1999 to $388,000 for the three months ended
September 30, 2000. There were declines in Aerial, Re:mark and other related
products partially offset by an increase in Compose and related maintenance. The
Company expects that INQUIRE/Text related revenue should continue to decline
over time as customers move applications off mainframes.
13
<PAGE> 14
Third Party Product sales decreased by $334,000, or 69%, from $484,000 for three
months ended September 30,1999 to $150,000 for the three months ended September
30, 2000. Revenues decreased as the Company's decision to refocus a majority of
its business away from sales of lower gross margin products.
Gross Profit
Gross profit increased by $132,000, or 26%, from $504,000 for the three months
ended September 30, 1999 to $636,000 for the three months ended September 30,
2000. The increase in gross profit is attributed to increases in consulting
services offset in part by the decline in high margin INQUIRE/Text maintenance
revenues.
Gross profit as a percent of revenues decreased from 21% for the three months
ended September 30, 1999 to 18% for the three months ended September 30, 2000.
The decrease in gross profit is attributed to lower profit margins on various
consulting service fixed price contracts and increased hiring in consulting
personnel.
Research and Development Expenses
Research and development expenses increased $81,000, or 279%, from $29,000 for
the three months ended September 30, 1999 to $110,000 for the three months ended
September 30, 2000. The increase was attributed to the Company's decision to
enhance an existing product for which the Company is a reseller.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $142,000, or 10%, from
$1,353,000 for the three months ended September 30, 1999 to $1,211,000 for the
three months ended September 30, 2000. The decrease was due to a reduction in
selling costs.
Interest Income and Expense
Net interest income decreased $32,000, or 73%, from $44,000 for the three months
ended September 30, 1999 to $12,000 for the three months ended September 30,
2000. The reduction in net interest income is due to lower cash balances and
short-term investments in the third quarter ended September 30, 2000 compared to
the same quarter ended September 30, 1999. The Company incurred nominal interest
expense in the third quarter due to borrowings on the line of credit. As of
September 30, 2000, the Company had $432,000 of borrowings under the line of
credit and $ 4,000 of accrued interest. The Company has invested in short-term
money market instruments.
Net Loss
As a result of the above, the net loss decreased by $161,000, or 19%, from
$834,000 for the three months ended September 30, 1999 to $673,000 for the three
months ended September 30, 2000.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1999
Revenues
Total revenue increased by $1,855,000, or 23%, for the nine months ended
September 30, 2000 as compared to the corresponding period of the prior year.
Revenues for each period consisted of the following:
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<PAGE> 15
(Dollar Amounts in Thousands)
NINE MONTHS ENDED
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999 INCREASE (DECREASE) %
------------------ ------------------ ---------------------
<S> <C> <C> <C>
SOLUTIONS
---------
Business Solutions $ 5,028 $ 2,014 150%
Intelligence 2,708 2,208 23%
Inquire 271 397 (32%)
-----------------------------------------------------------------------------
Total Solutions Revenue $ 8,007 $ 4,619 73%
=============================================================================
PROPRIETARY PRODUCTS
--------------------
Compose and Others $ 507 $ 1,136 (55%)
INQUIRE/Text 813 1,018 (20%)
-----------------------------------------------------------------------------
Total Proprietary Products
Revenue $ 1,320 $ 2,154 (39%)
=============================================================================
TOTAL THIRD PARTY PRODUCTS
--------------------------
Revenue $ 646 $ 1,345 (52%)
=============================================================================
Total Revenue $ 9,973 $ 8,118 23%
=============================================================================
</TABLE>
Revenues from Solutions increased overall by $3,388,000, or 73%, from $4,619,000
for the nine months ended September 30, 1999 to $8,007,000 for the nine month
period ended September 30, 2000. The Business Solutions unit within the
Solutions segment increased by $3,014,000, or 150%, from $2,014,000 for the nine
months ended September 30, 1999 to $5,028,000 for the nine months ended
September 30, 2000 due to increases in consulting services. For the nine months
ended September 30, 2000, loss of revenue of $364,000 for training and Mountain
View consulting due to the de-emphasis of those operations was more than offset
by $2,055,000 of e-commerce B2B revenue. Excluding training and Mountain view
revenues the Business Solutions revenue increased by $3,378,000, or 213%, from
$1,589,000 for the nine months ended September 30, 1999 to $4,967,000 for the
third quarter ended September 30, 2000. The Intelligence Solutions unit within
the Solutions segment increased by $500,000, or 23%, from $2,208,000 for the
nine months ended September 30, 1999 to $2,708,000 for the nine months ended
September 30, 2000 due to an increase in classified government work. The Inquire
Solutions unit within the Solutions segment decreased by $126,000, or 32%, from
$397,000 for the nine months ended September 30, 1999 to $271,000 for the third
quarter ended September 30, 2000 due to a decline in INQUIRE/Text maintenance
and Inquire consulting services.
Proprietary Product revenue decreased by $834,000, or 39%, from $2,154,000 for
the nine months ended September 30, 1999 to $1,320,000 for the nine months ended
September 30, 2000. In the first quarter of 1999, revenue from the Adobe license
of $500,000 was earned and there was no equivalent revenue in the first nine
months of 2000. There were declines in Aerial, Re:mark and other related
products partially offset by an increase in Compose. The Company expects that
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<PAGE> 16
INQUIRE/Text related revenue should continue to decline over time as customers
move applications off mainframes.
Third Party Product sales decreased by $699,000, or 52%, from $1,345,000 for the
nine months ended September 30,1999 to $646,000 for the nine months ended
September 30, 2000. Revenues decreased as the Company's decision to refocus a
majority of its business away from sales of lower gross margin products.
Gross Profit
Gross profit increased by $525,000, or 26%, from $2,053,000 for the nine months
ended September 30, 1999 to $2,578,000 for the nine months ended September 30,
2000. The overall increase in gross profit for the nine months ended September
30, 2000 compared to nine months ended September 30, 1999 is attributed to
increases in consulting revenues offset in part by the decline in high margin
INQUIRE/Text maintenance revenues.
Gross profit as a percent of revenues increased from 25% for the nine months
ended September 30, 1999 to 26% for the nine months ended September 30, 2000.
The nominal increase in gross margin is attributed to higher profit margins on
various consulting service fixed price contracts for the nine months ended
September compared to the same period in 1999.
Research and Development Expenses
Research and development expenses decreased $366,000, or 59% from $620,000 for
the nine months ended September 30, 1999 to $254,000 for the nine months ended
September 30, 2000. The overall decrease was attributed to the Company's
decision to reduce development of its proprietary products even though there was
increased spending for Research and Development in the third quarter ended
September 30, 2000 for the enhancement of an existing product for which the
Company is a reseller.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $713,000, or 17%, from
$4,129,000 for the nine months ended September 30, 1999 to $3,416,000 for the
nine months ended September 30, 2000. The decrease was due to a reduction in
selling costs.
Interest Income and Expense
Net interest income decreased $79,000, or 52%, from $152,000 for the nine months
ended September 30, 1999 to $73,000 for the nine months ended September 30,
2000. The reduction in net interest income is due to lower cash balances and
short-term investments for the first nine months ended September 30, 2000
compared to the same period in 1999. The Company incurred interest expense in
the first nine months ended September 30, 2000 due to borrowings on the line of
credit. As of September 30, 2000 the Company had $432,000 of borrowings and
$4,000 of accrued interest under its line of credit. The Company has invested in
short-term money market instruments and commercial paper.
Goodwill Impairment
During the quarter ended June 30, 1999, the Company incurred a non-cash
writedown of $1,941,000 in goodwill as a result of its July 1997 purchase of
AMBIA Corporation (Mountain View). No such write-downs occurred during the nine
months ended September 30, 2000.
Net Loss
As a result of the above, the net loss decreased by $3,466,000, or 77%, from
$4,485,000 for the nine months ended September 30, 1999 to $1,019,000 for the
nine months ended September 30, 2000.
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<PAGE> 17
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, the Company had cash, cash equivalents and short-term
investments of $1,287,000. Net working capital at September 30, 2000 amounted to
$1,653,000 as compared to $2,309,000 at September 30, 1999. The Company had $
432,000 of borrowings and accrued interest of $4,000, under its line of credit
at September 30, 2000. The reason for the increase in borrowings is due to
working capital needs. The Company maintains a line of credit with Merrill Lynch
Business Financial Services, Inc. ("MLBFS") for up to $1,000,000 based upon
eligible receivables. Interest on any outstanding debt under this line is
calculated at a per annum rate equal to the sum of 2.9% plus the 30-day
commercial paper rate. Currently, this per annum rate approximates prime. This
facility expires on November 30, 2000. The Company is currently negotiating a
renewal of its line of credit. The line of credit is contingent upon the Company
continuing to meet certain general funding requirements, including the absence
of any material adverse change in the Company's business or financial condition,
the continued accuracy of the Company's representations and warranties and the
provision of quarterly and monthly financial information. The Company is
currently in compliance with these funding requirements.
Net cash used in operating activities for the nine months ended September 30,
2000 of $1,673,000 was due to the Company's net loss for the period of
$1,019,000, and an increase in accounts receivable of $1,664,000. The increase
in accounts receivable was due to increases in revenue. In addition, as
discussed in Note F to the Consolidated Financial Statements, related party
customer was unable to make payments as due under a contract and subsequent to
September 30, 2000 converted its accounts receivable into a promissory note
personally guaranteed by the Vice-Chairman of Infodata. This was partially
offset by an increase in accounts payable and accrued expenses of $834,000,
depreciation and amortization expenses of $397,000, and a decrease in deferred
revenue of $230,000.
Net cash provided by investing activities for the nine months ended September
30, 2000 of $696,000 was due to a net decrease in short-term investments of
$1,000,000, the purchase of fixed assets of $285,000, and business acquisition
costs of $19,000 including $10,000 of accrued registration costs attributed to
the purchase of a business unit from Earth Satellite Corporation.
Net cash provided by financing activities for the nine months ended September
30, 2000 of $635,000 was due to the issuance of common stock to employees
exercising stock options and participating in the employee stock purchase plan
and $436,000 of borrowings under the line of credit which includes $4,000 of
accrued interest.
Net cash flow from operating activities for the nine months ended September 30,
2000 was not sufficient to fund the operations of the business. However,
management believes that available working capital combined with borrowings
against the Company's line of credit will be sufficient to meet its requirements
for the next twelve months. The Company's actual cash requirements may vary
materially from those now planned and will depend upon numerous factors,
including the general market acceptance of the Company's products and services,
the growth of the Company's marketing channels, the technological advances and
activities of competitors, and other factors.
The Company is currently negotiating the sale of certain non-marketable
investment assets and exploring other alternatives to generate cash to fund
operations and working capital needs. However, there can be no assurance that
such capital will be available on a timely basis or at all.
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. On April 5, 2000, audits began for years 1995 through 1998, and in
the opinion of management, adjustments resulting from
17
<PAGE> 18
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. As of September 30, 2000, the audit has not been completed. The
Company anticipates the completion of the audit by December 31, 2000.
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.
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<PAGE> 19
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8 - K
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT
<S> <C>
27 Financial Data Schedule
</TABLE>
(b) REPORTS ON FORM 8 - K. The Company filed a Form 8 - K on July 5, 2000
reporting an agreement entered into on June 14, 2000.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
INFODATA SYSTEMS INC.
BY: STEVEN M. SAMOWICH
------------------
Steven M. Samowich
President and CEO
Date: November 14, 2000
BY: GARY I. GORDON
--------------
Gary I. Gordon
Chief Accounting Officer
#84035
19
