U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2001
[ ] 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)
--------------------------------------------------
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 March 10, 2001
as reported on the Nasdaq Small Cap market, was approximately $4,572,257. 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 4,723,387 on March 10, 2001.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
INFODATA SYSTEMS INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION Page(s)
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Statements of Operations 3
Three Months Ended March 31, 2001 and 2000
Condensed Consolidated Balance Sheets 4
March 31, 2001 and December 31, 2000
Consolidated Statements of Cash Flows 5
Three Months Ended March 31, 2001 and 2000
Notes to Consolidated Financial Statements 6 - 9
Item 2. Management's Discussion and Analysis 9 - 14
PART II. OTHER INFORMATION
Item 6. Reports on Form 8-K 14
SIGNATURES 15
2
Item 1.
INFODATA SYSTEMS INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Amounts In Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended
March 31,
---------------------------
2001 2000
----------- ------------
Revenues........................................... $ 3,616 $ 2,728
Cost of revenues................................... 2,987 1,685
----------- ------------
Gross profit....................................... 629 1,043
----------- ------------
Operating expenses:
Research and development.................. 165 82
Selling, general and administrative....... 1,065 1,176
----------- ------------
1,230 1,258
----------- ------------
Operating loss..................................... (601) (215)
Gain on sale of investment......................... 1,068 -
Interest income.................................... 22 33
Interest expense................................... (19) -
----------- ------------
Net income (loss).................................. $470 $(182)
=========== ============
Basic net income (loss) per share......... $ .10 $ (0.04)
=========== ============
Weighted average basic shares outstanding.......... 4,723 4,614
=========== ============
Diluted net income (loss) per share....... $ .10 $ (0.04)
=========== ============
Weighted average diluted shares outstanding........ 4,733 4,614
=========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
3
INFODATA SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollar Amounts in Thousands)
(Unaudited)
March 31, December 31,
2001 2000
----------------- -----------------
Assets
- ------
Current assets:
Cash and cash equivalents................................. $ 894 $ 321
Short-term investments.................................... 200 500
Accounts receivable, net of allowance of $46.............. 2,911 2,583
Related party receivable, current......................... 154 151
Other current assets...................................... 104 90
----------------- -----------------
Total current assets.............................
4,263 3,645
----------------- -----------------
Property and equipment, at cost:
Furniture and equipment................................... 3,313 3,303
Less accumulated depreciation and amortization............ (3,028) (2,999)
----------------- -----------------
285 304
Goodwill and other intangibles, net of accumulated amortization of
$3,805 and $3,778......................................... 95 102
Related party receivable........................................... 112 151
Other assets....................................................... 22 56
----------------- -----------------
Total assets....................................................... $ 4,777 $ 4,258
================= =================
Liabilities and Shareholders' Equity
- ------------------------------------
Current Liabilities:
Line of Credit............................................ $ 933 $ 722
Accounts payable.......................................... 752 588
Accrued expenses.......................................... 933 1,323
Deferred revenue.......................................... 617 590
----------------- -----------------
Total current liabilities........................
3,235 3,223
----------------- -----------------
Shareholders' equity:
Common stock.............................................. 142 141
Additional paid-in capital................................ 20,197 20,161
Accumulated deficit....................................... (18,797) (19,267)
----------------- -----------------
Total shareholders' equity......................................... 1,542 1,035
----------------- -----------------
Total liabilities and shareholders' equity......................... $ 4,777 $ 4,258
================= =================
The accompanying notes are an integral part of these consolidated financial
statements.
4
INFODATA SYSTEMS INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollar Amounts in Thousands)
(Unaudited)
Three Months Ended
March 31,
2001 2000
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................... $ 470 $ (182)
Adjustments to reconcile net loss to cash used in operating activities:
Gain on sale of investment........................................ (1,068) -
Depreciation and amortization..................................... 29 60
Goodwill and other intangible amortization........................ 27 62
Accrued interest on line of credit................................ 19 -
Payments received on related party receivable..................... 36 -
Changes in operating assets and liabilities:
Accounts receivable............................................... (328) (215)
Other assets...................................................... (4) (2)
Accounts payable.................................................. 164 49
Accrued expenses.................................................. (390) 139
Deferred revenue.................................................. 27 72
------------ -------------
Net cash used in operating activities................... (1,018) (17)
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................................... (10) (91)
Purchases of short-term investments....................................... (200) (1,100)
Proceeds from maturity of short-term investments.......................... 500 1,000
Proceeds from sale of investment.......................................... 1,092 -
------------ -------------
Net cash provided by (used in) investing activities....................... 1,382 (191)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on line of credit.............................................. 192 -
Issuance of common stock.................................................. 17 155
------------ -------------
Net cash provided by financing activities............... 209 155
------------ -------------
Net increase (decrease) in cash and cash equivalents...................... 573 (53)
Cash and cash equivalents at beginning of period.......................... 321 929
------------ -------------
Cash and cash equivalents at end of period................................ $ 894 $ 876
============ =============
The accompanying notes are an integral part of these consolidated financial
statements.
5
INFODATA SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310(b)
of Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the three month period ended March 31,
2001, are not necessarily indicative of the results for the year ending December
31, 2001. 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, 2000.
The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. However, as reflected in the
accompanying consolidated financial statements, the Company continues to suffer
recurring losses from operations resulting in a negative cash flow from
operations. In addition, the Company was not in compliance with certain
covenants of its credit facility which expired on April 30, 2001. The Company is
attempting to refinance this debt facility and amounts due have not been repaid.
These factors, including the uncertainty surrounding whether and when additional
financing will be secured and whether the Company will meet its budget
expectations indicate that the Company may be unable to continue as a going
concern for a reasonable period of time. The financial statements do not include
any adjustments relating to the recoverability of assets and classification of
liabilities that might be necessary should the Company be unable to continue as
a going concern. The Company's continuation as a going concern is dependent on
its ability to obtain additional financing, meet its 2001 budgeted cash flow
objectives, and refinance its expired credit facility.
NOTE B - SIGNIFICANT ACCOUNTING POLICIES
1) 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 recognized when the services are performed
and collectibility 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
6
revenue is recognized when products are shipped or when customers have
accepted the products, depending on contractual terms.
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) Adoption of Accounting Pronouncements - On January 1, 2001, the Company
adopted Financial Accounting Standard No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities." SFAS 133 established new
accounting and reporting standards for derivative financial instruments and
hedging activities. SFAS 133 requires that all derivative instruments be
recorded on the balance sheet at fair value. Changes in fair value of
derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and if it is, depending on the type of hedge
transaction. Adoption of this standard did not have a material impact on
the Company.
New Accounting Pronouncement
SFAS 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS 140") was issued in September 2000 and
establishes accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. SFAS 140 is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2001. The Company anticipates that SFAS 140 will not
have a material impact on the Company's financial position, results of
operations or cash flows.
NOTE C - LINE OF CREDIT
The Company maintained a working capital line of credit with Merrill Lynch
Business Financial Services Inc. (MLBFS) that expired on April 30, 2001 and all
amounts became due under the line. The credit facility provided the Company with
up to a $1,000,000 line of credit at a per annum rate equal to 2.9 % over the
30-day commercial paper rate. The per annum rate approximated the prime rate
(7.9%) at March 31, 2001. Advances on the facility were based on eligible billed
accounts receivable less than 90 days old. As of March 31, 2001, the Company had
outstanding borrowings of $933,000 (which included $40,000 of accrued interest)
against this line of credit.
The amount due under the line of credit remains unpaid and the Company is
currently seeking other financing alternatives. There can be no assurances that
obtaining such financing arrangements will be successful.
NOTE D - SUPPLEMENTAL CASH FLOW INFORMATION
During the quarter ended March 31, 2001, the Company paid $2,600 of interest and
$0 for income tax. During the quarter ended March 31, 2000, no cash was paid for
income tax or interest expense.
Supplemental disclosure of Cash Flows information:
(in Thousands) Three Months Ended
March 31,
2001 2000
---- ----
Non-cash investing and financing activities:
Business acquisition in exchange for common stock $20 $142
=== ====
7
NOTE E - BUSINESS ACQUISITIONS
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 such a date. The fair value of the acquisition price was
$184,000, including $42,000 of direct cost, which was attributed to the business
unit sole contract. The value of the contract is being amortized over its life
of 18 months.
On February 9, 2001, the Company issued an additional 13,334 shares with a per
share value of $1.50, to Earth Satellite Corporation pursuant to a working
capital adjustment provision included in the Asset Purchase Agreement resulting
in a purchase price adjustment of approximately $20,000 which was attributed to
goodwill.
NOTE F - SEGMENT REPORTING
The table below presents information about reported segments for the three month
periods ended March 31, 2001 and 2000, as well as a reconciliation to reported
income (loss) before income taxes. Management does not assign identifiable
assets to its segments.
Infodata Systems Inc.
Three Months Ended
March 31, 2001
Segment Information
(In Thousands)
Solutions Proprietary Third Party Total
Products Products
-----------------------------------------------------------
Revenues $ 2,940 $ 406 $ 270 $3,616
Direct costs 2,461 34 241 2,736
-----------------------------------------------------------
Segmental profit $ 479 $ 372 $ 29 880
======= ===== ======
Research and development (165)
Other costs not allocated to
segments, primarily selling,
general and administrative (1,336)
Gain on sale of asset 1,068
Interest income - net 23
-----
Income before income taxes $ 470
=====
8
Infodata Systems Inc.
Three Months Ended
March 31, 2000
Segment Information
(In Thousands)
Solutions Proprietary Third Party Total
Products Products
----------------------------------------------------------------
Revenues $ 2,149 $ 504 $ 75 $2,728
Direct costs 1,044 45 74 1,163
----------------------------------------------------------------
Segmental profit $ 1,105 $ 459 $ 1 1,565
======= ====== ====
Research and development (82)
Other costs not allocated to segments,
primarily selling, general and
administrative (1,698)
Interest income - net 33
------
Loss before income taxes $ (182)
======
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FORWARD-LOOKING STATEMENTS RELATING TO PRODUCT AND SERVICE DEVELOPMENT, FUTURE
CONTRACTS, REVENUE, NET INCOME 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.
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(R) software sales, Compose(R), Aerial(R) and their associated
maintenance. Third Party Products include software and hardware with some
related services. For the quarter ended March 31, 2001, Solutions accounted for
81% of total revenue; Proprietary Products accounted for 11%, and Third Party
Products accounted for the remaining 8%.
9
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 conveyed to the
Company a contractual agreement which expands the Company's presence in the
intelligence community including a discipline known as Information Warfare. In
conjunction with this acquisition, 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 acquisition cost approximated
$184,000, including $42,000 of direct cost attributed to the business unit's
sole contract. The acquisition value of the contract is being amortized over its
life of 18 months.
On February 9, 2001, the Company issued an additional 13,334 shares with a per
share value of $1.50, to Earth Satellite Corporation pursuant to a working
capital adjustment provision included in the Asset Purchase Agreement resulting
in a purchase price adjustment of approximately $20,000 which was attributed to
goodwill.
On February 9, 2001, the Company completed the sale of its entire equity
position in Buckaroo.com, Inc., to six private investors for a gain of
$1,068,165. The gross proceeds from the sale were $1,092,740 and the original
cost was $24,575.
At March 31, 2001, the Company had net operating loss carryforwards ("NOLs")
aggregating approximately $15,323,000 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 NOLs. 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 NOLs, 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
accordance with the type of contract. Revenue from software licenses are
recognized in accordance with the provisions of the Statement of Position 97-2,
"Software Revenue Recognition"; as amended. Revenue 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 March 31, 2001 was $617,000. This related primarily to
amounts from maintenance revenue 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 revenue
from consulting services carry lower gross margins than deferred revenue 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 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.
10
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 in
revenue 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 or 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.
During the latter half of 2000, the Company commenced the refocusing of its
efforts on the design, development and marketing of web-based knowledge
management and e-commerce solutions services to established government and
commercial customers. The gross profit margins associated with such contractual
activity, which now constitutes and will continue to constitute an increasing
source of the Company's revenues, are higher than the gross margins associated
with the third-party software sales that are expected to decline as a percent of
revenue in the future. As a result of the Company's efforts, commenced during
mid-2000 and substantially completed in January 2001, to curtail expenses,
particularly through a reduction in force and decreased lease and marketing
expenses, and the above-referenced increase in web-based knowledge management
contractual activities, the Company expects that it will achieve income from
operations and net income during the current quarter ending June 30, 2001.
Three Months Ended March 31, 2001 Compared to the Three Months Ended March 31,
2000
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 $888,000, or 33% the three
months ended March 31, 2001 as compared to the corresponding period of the prior
year. Revenues for each period consisted of the following:
11
(Dollar Amounts in Thousands)
March 31, 2001 March 31, 2000 Increase (Decrease) %
-------------- -------------- ---------------------
Solutions
---------
Business Solutions $ 896 1,282
Intelligence 1,954 763 156%
Inquire 90 104 (13%)
-------------------------------------------------------------------------
Total Solutions Revenue $ 2,940 $ 2,149 37%
=========================================================================
Proprietary Products
--------------------
Compose and Others 193 198 (3%)
Inquire/text 213 306 (30%)
-------------------------------------------------------------------------
Total Proprietary Products
Revenue $ 406 $ 504 (19%)
=========================================================================
Total Third Party Products
--------------------------
Revenue 270 $ 75 260%
=========================================================================
Total Revenue $ 3,616 $ 2,728 33%
=========================================================================
Revenues from Solutions increased overall by $791,000, or 37%, from $2,149,000
for the three months ended March 31, 2000 to $2,940,000 for the three month
period ended March 31, 2001. The Business Solutions unit within the Solutions
segment decreased by $386,000, or 30%, from $1,282,000 for the three months
ended March 31, 2000 to $896,000 for the three months ended March 31, 2001 due
to the Company not recognizing revenues for services rendered during the
quarter, as collectibility was not considered probable. The Intelligence
Solutions unit within the Solutions segment increased by $1,191,000, or 156%,
from $763,000 for the three months ended March 31, 2000 to $1,954,000 for the
three months ended March 31, 2001 due to significant increases in classified
government work. The Inquire Solutions unit within the Solutions segment
decreased by $14,000, or 13%, from $104,000 for the three months ended March 31,
2000 to $90,000 for the first quarter ended March 31, 2001 due to a decline in
INQUIRE/Text maintenance and Inquire consulting services.
Proprietary Product revenue decreased by $98,000, or 19%, from $504,000 for the
three months ended March 31, 2000 to $406,000 for the three months ended March
31, 2001. The overall decline in proprietary revenue is attributed to reductions
in INQUIRE/Text sales that will continue to decline over time as customers move
applications off mainframes.
Third Party Product sales increased by $195,000, or 260%, from $75,000 for the
three months ended March 31, 2000 to $270,000 for the three months ended March
31, 2001. The basis for the increase is that certain engagements require
hardware and software components tied with consulting labor services.
Gross Profit
Gross profit decreased by $414,000, or 40%, from $1,043,000 for the three months
ended March 31, 2000 to $629,000 for the three months ended March 31, 2001.
Gross margin as a percent of revenues decreased from 38% for the three months
ended March 31, 2000 to 17% for the three months ended March 31, 2001. The
primary reason for the decline in gross margin and profit resulted from not
recognizing revenue for services rendered during the quarter, as collectibility
was not considered probable.
12
Research and Development Expenses
Research and development expenses increased $83,000, or 101%, from $82,000 for
the three months ended March 31, 2000 to $165,000 for the three months ended
March 31, 2001. The increase was accredited to the Company's decision to
increase spending for the enhancement of an existing product.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $111,000, or 9%, from
$1,176,000 for the three months ended March 31, 2000 to $1,065,000 for the three
months ended March 31, 2001. The decrease was a result of a reduction in selling
costs and in administrative personnel.
Interest Income and Expense
Interest income decreased $11,000, or 33%, from $33,000 for the three months
ended March 31, 2000 to $22,000 for the three months ended March 31, 2001. The
reduction in interest income is due to lower cash balances and short-term
investments in the first quarter ended March 31, 2001 compared to the quarter
ended March 31, 2000. Conversely, the Company incurred approximately $19,000 in
interest expense for the quarter ended March 31, 2001 resulting from outstanding
borrowings under our credit facility as compared to $0 interest expense for the
quarter ended March 31, 2000.
Net Income (Loss)
As a result of the completed sale of the Company's entire equity stake in
Buckaroo.com., the company recognized a gain of $1,068,165 in the first quarter
of 2001 resulting in net income for the quarter of $470,000 as compared to a
loss of $182,000 for the quarter ended March 31, 2000.
Liquidity and Capital Resources
The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. However, as reflected in the
accompanying consolidated financial statements, the Company continues to suffer
recurring losses from operations resulting in a negative cash flow from
operations. In addition, the Company was not in compliance with certain
covenants of its credit facility which expired on April 30, 2001. The Company is
attempting to refinance this debt facility and amounts due have not been repaid.
These factors, including the uncertainty surrounding whether and when additional
financing will be secured and whether the Company will meet its budget
expectations indicate that the Company may be unable to continue as a going
concern for a reasonable period of time. The financial statements do not include
any adjustments relating to the recoverability of assets and classification of
liabilities that might be necessary should the Company be unable to continue as
a going concern. The Company's continuation as a going concern is dependent on
its ability to obtain additional financing, meet its 2001 budgeted cash flow
objectives, and refinance its expired credit facility. The Company is
considering efforts to raise up to $400,000 of private convertible preferred
stock capital in mid-2001.
At March 31, 2001, the Company had cash, cash equivalents and short-term
investments of $1,094,000. Net working capital at March 31, 2001 amounted to
$1,028,000 as compared to $2,376,000 at March 31, 2000. The Company had $933,000
of borrowing which included $40,000 of accrued interest as of March 31, 2001. At
March 31, 2001, the Company maintained 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 was
calculated at a per annum rate equal to the sum of 2.9% plus the 30-day
commercial paper rate. At March 31, 2001,
13
this per annum rate approximated prime. The facility expired on April 30, 2001
accelerating all amounts due under the line.
The amount due under the line of credit remains unpaid and the Company is
currently seeking other financing alternatives. There can be no assurances that
obtaining such financing arrangements will be successful.
Net cash used in operating activities for the three months ended March 31, 2001
was $1,018,000, which was due to the Company's net loss for the quarter before
gain on the sale of an investment asset, resulting in net income of $470,000.
The primary adjustments to the net income to arrive at net cash used in
operating activities included (i) increases in accounts payable ($164,000),
goodwill and other intangible amortization ($27,000), depreciation and
amortization ($29,000), payments received on a related party receivable
($36,000), accrued interest on the line of credit ($19,000) and deferred revenue
($27,000); and (ii) decreases primarily attributable to the gain on the sale of
the Company's equity interest in Buckaroo.com ($1,068,000) and increases in
accounts receivable ($328,000) and accrued expenses ($390,000).
Net cash used in investing activities for the three months ended March 31, 2001
of $1,382,000 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 and the sale of the Company's equity interest
in Buckaroo.com.
Net cash provided by financing activities for the three months ended March 31,
2001 of $209,000 arose from purchases under the employee stock purchase plan
which amounted to $17,000 and the net borrowings under the line of credit of
$192,000.
Net cash flow from operating activities for the three months ended March 31,
2001 was not sufficient to fund the operations of the business. However,
management believes that it will be able to restructure its existing credit
facility or find alternative financing and that available working capital will
then 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.
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 1998. Audits for years 1999 and 2000 have not begun, 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.
PART II. OTHER INFORMATION
Item 6. Reports On Form 8 - K
REPORTS ON FORM 8 - K. No reports on Form 8-K were filed during the three-month
period ended March 31, 2001.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
INFODATA SYSTEMS INC.
BY: /s/ Steven M. Samowich
-------------------------------
Steven M. Samowich
President and CEO
Date: May 14, 2001
BY: /s/ Gary I. Gordon
-------------------------------
Gary I. Gordon
Chief Accounting Officer
(Principal Financial and Accounting
Officer)
#579940
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