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, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-10416
INFODATA SYSTEMS INC.
- --------------------------------------------------------------------------------
(Exact Name of Small Business Issuer in its Charter)
Virginia 16-0954695
(State of Incorporation) (I.R.S. Employer Identification No.)
12150 Monument Drive, Fairfax, Virginia 22033
(Address of Principal Executive Office) (Zip Code)
(703) 934-5205 (Issuer's Telephone Number)
--------------------------------------------------
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on Which Registered
None Not applicable
Securities registered under Section 12(g) of the Exchange Act:
Common Stock-$.03 Par Value
---------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No ____
----
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of Common Stock on November 5,
2001 as reported on the NASD OTC Bulletin Board, was approximately $3,155,000.
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 4,769,559 on November 5, 2001.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
1
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 September 30, 2001 and 2000
Consolidated Statements of Operations 4
Nine Months Ended September 30, 2001 and 2000
Condensed Consolidated Balance Sheets 5
September 30, 2001 and December 31, 2000
Consolidated Statements of Cash Flows 6
Nine Months Ended September 30, 2001 and 2000
Notes to Consolidated Financial Statements 7 - 11
Item 2. Management's Discussion and Analysis 11 - 17
PART II. OTHER INFORMATION
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Reports on Form 8-K 18
SIGNATURES 19
2
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
INFODATA SYSTEMS INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Amounts In Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended
September 30,
--------------------------
2001 2000
----------- ------------
Revenues............................................ $ 4,061 $ 3,585
Cost of revenues.................................... 3,329 2,949
----------- ------------
Gross profit........................................ 732 636
----------- ------------
Operating expenses:
Research and development................... 159 110
Selling, general and administrative........ 966 1,211
----------- ------------
1,125 1,321
----------- ------------
Operating
loss...................................... (393) (685)
Interest income..................................... 9 20
Interest expense.................................... (11) (8)
----------- ------------
Net loss............................................ $ (395) $(673)
=========== ============
Basic and diluted net loss per share....... $(0.08) $ (0.14)
=========== ============
Weighted average basic shares outstanding........... 4,755 4,682
=========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
3
INFODATA SYSTEMS INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Amounts In Thousands, Except Per Share Data)
(Unaudited)
Nine Months Ended
September 30,
------------------------------
2001 2000
----------- ------------
Revenues...................................................... $ 11,784 $ 9,973
Cost of revenues.............................................. 9,484 7,395
----------- ------------
Gross profit.................................................. 2,300 2,578
----------- ------------
Operating expenses:
Research and development............................. 430 254
Selling, general and administrative.................. 3,100 3,416
----------- ------------
3,530 3,670
----------- ------------
Operating
loss................................................ (1,230) (1,092)
Gain on sale of
investment.................................... 1,068 -
Interest income............................................... 47 83
Interest expense.............................................. (45) (10)
----------- ------------
Net loss...................................................... $ (160) $(1,019)
=========== ============
Basic and diluted net loss per share................. $(0.03) $ (0.22)
=========== ============
Weighted average basic and diluted shares outstanding......... 4,740 4,656
=========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
4
INFODATA SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollar Amounts in Thousands)
(Unaudited)
September 30, December 31,
2001 2000
----------------- -----------------
Assets
Current assets:
Cash and cash equivalents......................... $ 1,110 $ 321
Short-term investments............................ - 500
Accounts receivable, net.......................... 2,881 2,583
Related party receivable, current................. - 151
Other current assets.............................. 79 90
----------------- -----------------
Total current assets..................... 4,070 3,645
----------------- -----------------
Property and equipment, at cost:
Furniture and equipment........................... 3,323 3,303
Less accumulated depreciation and amortization.... (3,153) (2,999)
----------------- -----------------
170 304
Goodwill and other intangibles, net........................ 13 102
Related party receivable................................... - 151
Other assets............................................... 20 56
----------------- -----------------
Total assets............................................... $ 4,273 $ 4,258
================= =================
Liabilities and Shareholders' Equity
Current Liabilities:
Line of Credit.................................... $ 681 $ 722
Accounts payable.................................. 964 588
Accrued expenses.................................. 1,373 1,323
Deferred revenue.................................. 343 590
----------------- -----------------
Total current liabilities................ 3,361 3,223
----------------- -----------------
Shareholders' equity:
Common stock...................................... 142 141
Additional paid-in capital........................ 20,197 20,161
Accumulated deficit............................... (19,427) (19,267)
----------------- -----------------
Total shareholders' equity................................. 912 1,035
----------------- -----------------
Total liabilities and shareholders' equity................. $ 4,273 $ 4,258
================= =================
The accompanying notes are an integral part of these consolidated financial
statements.
5
INFODATA SYSTEMS INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollar Amounts in Thousands)
(Unaudited)
Nine Months Ended
September 30,
2001 2000
----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .............................................. $ (160) $(1,019)
Adjustments to reconcile net loss to cash used
in operating activities:
Gain on sale of investment .......................... (1,068) --
Depreciation and amortization ....................... 154 168
Goodwill and other intangible amortization .......... 104 229
Change in related party receivable .................. 302 (314)
Changes in operating assets and liabilities:
Accrued interest .................................... (11) --
Accounts receivable ................................. (298) (1,350)
Other assets ........................................ 23 9
Accounts payable .................................... 376 454
Accrued expenses .................................... 35 380
Deferred revenue .................................... (247) (230)
------- -------
Net cash used in operating activities ..... (790) (1,673)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ......................... (20) (285)
Purchases of short-term investments ......................... (200) (1,200)
Proceeds from maturity of short-term investments ............ 700 2,200
Proceeds from sale of investment ............................ 1,092 --
Business acquisition ........................................ -- (19)
------- -------
Net cash provided by investing activities.. 1,572 696
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (borrowings) repayments of line of credit .............. (30) 436
Issuance of common stock .................................... 37 199
------- -------
Net cash provided by financing activities.. 7 635
------- -------
Net increase (decrease) in cash and cash equivalents ........ 789 (342)
Cash and cash equivalents at beginning of period ............ 321 929
------- -------
Cash and cash equivalents at end of period .................. $ 1,110 $ 587
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
6
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, they 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, 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's credit facility expired on April 30, 2001
accelerating all amounts due under the line. 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 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 collectibility is reasonably
assured. 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 reasonably assured. 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.
2) 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
7
revenue is recognized when products are shipped or when customers have
accepted the products, depending on contractual terms.
3) 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.
4) New Accounting Standards
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. ("FAS") 141, "Business
Combinations" ("FAS141") and FAS 142, "Goodwill and Other Intangible
Assets" ("FAS 142"). FAS 141 addresses the initial recognition and
measurement of goodwill and other intangible assets acquired in a
business combination. FAS 142 addresses the initial recognition and
measurement of intangible assets acquired outside of a business
combination, whether acquired individually or with a group of other
assets, and the accounting and reporting for goodwill and other
intangibles subsequent to their acquisition. These standards require
all future business combinations to be accounted for using the purchase
method of accounting. Goodwill will no longer be amortized but instead
will be subject to impairment tests at least annually. The Company is
required to adopt FAS 141 and FAS 142 on a prospective basis as of
January 1, 2002.
NOTE C - LINE OF CREDIT
The Company maintained a working capital line of credit with Merrill Lynch
Business Financial Services Inc. that expired on April 30, 2001 accelerating all
amounts 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 (5.57%) at
September 30, 2001. Advances on the facility were based on eligible billed
accounts receivable less than 90 days old. As of September 30, 2001, the Company
had outstanding borrowings of $681,000 against this line of credit.
The amount due under the line of credit remains unpaid and the Company is
currently negotiating other financing alternatives. There can be no assurances
that obtaining such financing arrangements will be successful.
NOTE D - SUPPLEMENTAL CASH FLOW INFORMATION
The Company paid $34,000 interest, and accrued $11,000 interest for the nine
months ended September 30, 2001 and $0 for income tax. During the nine months
ended September 30, 2000, the Company paid $10,000 of interest expense and $0
for income tax.
Supplemental disclosure of Cash Flows information:
(in Thousands) Nine Months Ended
September 30,
2001 2000
---- ----
Non-cash investing and financing activities:
Business acquisition in exchange for common stock $20 $142
=== ====
8
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 date. The fair value of the acquisition price was $184,000,
including $42,000 of direct cost, which was attributed to the business unit's
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 between
the Company and Earth Satellite Corporation resulting in a purchase price
adjustment of approximately $20,000 which was attributed to goodwill. The
adjusted acquisition cost was approximately $200,000.
NOTE F - SEGMENT REPORTING
The table below presents information about reported segments for the three and
nine month periods ended September 30, 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
September 30, 2001
Segment Information
(In Thousands)
Solutions Proprietary Third Party Total
Products Products
---------- ----------- ----------- -----------
Revenues $ 2,921 $ 343 $ 797 $ 4,061
Direct costs 2,239 30 743 3,012
------- ------- ------- -------
Segmental profit $ 682 $ 313 $ 54 1,049
======= ======= =======
Research and development (159)
Other costs not allocated to segments,
primarily selling, general and
administrative (1,287)
Interest, net 2
-------
Loss before income taxes $ (395)
=======
9
Infodata Systems Inc.
Three Months Ended
September 30, 2000
Segment Information
(In Thousands)
Solutions Proprietary Third Party Total
Products Products
---------- ----------- ----------- -----------
Revenues $ 3,047 $ 388 $ 150 $ 3,585
Direct costs 1,635 63 135 1,833
------- ------- ------- -------
Segmental profit $ 1,412 $ 325 $ 15 1,752
======= ======= =======
Research and development (110)
Other costs not allocated to segments,
primarily selling, general and
administrative (2,327)
Interest, net 12
-------
Loss before income taxes $ (673)
=======
Infodata Systems Inc.
Nine Months Ended
September 30, 2001
Segment Information
(In Thousands)
Solutions Proprietary Third Party Total
Products Products
---------- ----------- ----------- -----------
Revenues $ 9,305 $ 1,115 $ 1,364 $ 11,784
Direct costs 7,245 91 1,263 8,599
------- ------- ------- -------
Segmental profit $ 2,060 $ 1,024 $ 101 3,185
======= ======= =======
Research and development (430)
Other costs not allocated to segments,
primarily selling, general and
administrative (3,985)
Gain on sale of asset 1,068
Interest, net 2
-------
Loss before income taxes $ (160)
=======
10
Infodata Systems Inc.
Nine Months Ended
September 30, 2000
Segment Information
(In Thousands)
Solutions Proprietary Third Party Total
Products Products
---------- ----------- ----------- -----------
Revenues $ 8,007 $ 1,320 $ 646 $ 9,973
Direct costs 4,131 163 597 4,891
------- ------- ------- -------
Segmental profit $ 3,876 $ 1,157 $ 49 5,082
======= ======= =======
Research and development (254)
Other costs not allocated to segments,
primarily selling, general and
administrative (5,920)
Interest, net 73
-------
Loss before income taxes $(1,019)
=======
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 September 30, 2001, Solutions accounted
for 72% of total revenue, Proprietary Products accounted for 8%, and Third Party
Products accounted for the remaining 20%.
11
At September 30, 2001, the Company had net operating loss carryforwards ("NOLs")
aggregating approximately $15,953,000 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 the 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 September 30, 2001 was $343,000. 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. 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
12
in the future. The Company will continue to provide third party software
where certain engagements require hardware and software components tied with
consulting labor even though the Company expects lower margins. As a result, the
Company will continue to evaluate its financial position and, when necessary, it
will continue to curtail expenses, particularly through a reduction in force and
decreased lease and marketing expenses.
Three Months Ended September 30, 2001 Compared to the Three Months Ended
September 30, 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 $ 476,000, or 13%, for the
three months ended September 30, 2001 as compared to the corresponding period of
the prior year. Revenues for each period consisted of the following:
(Dollar Amounts in Thousands)
September 30, 2001 September 30, 2000 Increase (Decrease) %
------------------ ------------------ ---------------------
Solutions
Business Solutions $ 744 $ 1,817 (59%)
Intelligence 2,135 1,141 87%
Inquire 42 89 (53%)
---------------------------------------------------------------------------
Total Solutions Revenue $ 2,921 $ 3,047 (4%)
===========================================================================
Proprietary Products
Compose and Others 122 141 (13%)
Inquire/text 221 247 (11%)
---------------------------------------------------------------------------
Total Proprietary Products
Revenue $ 343 $ 388 (12%)
===========================================================================
Total Third Party Products Revenue $ 797 $ 150 431%
===========================================================================
Total Revenue $ 4,061 $ 3,585 13%
===========================================================================
Revenues from Solutions decreased overall by $126,000, or 4%, from $3,047,000
for the three months ended September 30, 2000 to $2,921,000 for the three-month
period ended September 30, 2001. The Business Solutions unit within the
Solutions segment decreased by $ 1,073,000, or 59%, from $1,817,000 for the
three months ended September 30, 2000 to $744,000 for the three months ended
September 30, 2001 due to the Company's de-emphasis in providing services for
early-stage technology companies. In addition, the Company deferred revenue
recognition for services provided to one of its customers as collectibility was
not considered probable. The Intelligence Solutions unit within the Solutions
segment increased by $994,000, or 87%, from $1,141,000 for the three months
ended September 30, 2000 to $2,135,000 for the three months ended September 30,
2001 due to significant increases in classified government work. The Inquire
Solutions unit within the Solutions segment decreased by $47,000, or 53%, from
$89,000 for the three months
13
ended September 30, 2000 to $42,000 for the three months ended September 30,
2001 due to a decline in INQUIRE/Text maintenance and Inquire consulting
services.
Proprietary Product revenue decreased by $45,000, or 12%, from $388,000 for the
three months ended September 30, 2000 to $343,000 for the three months ended
September 30, 2001. The decline in proprietary revenue is a result of reductions
in INQUIRE/Text sales that will continue to decline over time as customers move
applications off mainframes.
Third Party Product sales increased by $647,000, or 431%, from $150,000 for the
three months ended September 30, 2000 to $797,000 for the three months ended
September 30, 2001. The increase in the third quarter ended September 30, 2001
is primarily due to the sale by the Company of third party software for certain
consulting engagements that include hardware and software components.
Gross Profit
Gross profit increased by $96,000, or 15%, from $636,000 for the three months
ended September 30, 2000 to $732,000 for the three months ended September 30,
2001. The gross margin as a percent of sales was 18% for both quarters ended
September 30. The third party sales in the third quarter offset losses on
certain fixed price contracts, which resulted in no change in gross margins when
comparing the quarters ending September 30.
Research and Development Expenses
Research and development expenses increased by $49,000 or 45%, from $110,000 for
the three months ended September 30, 2000 to $159,000 for the three months ended
September 30, 2001. The increase was due to the Company's decision to increase
spending for the enhancement of existing products.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by $245,000, or 20%, from
$1,211,000 for the three months ended September 30, 2000 to $966,000 for the
three months ended September 30, 2001. The decrease was due to the Company's
effort to reduce selling costs.
Interest Income and Expense
Interest income decreased $11,000, or 55%, from $20,000 for the three months
ended September 30, 2000 to $9,000 for the three months ended September 30,
2001. The reduction in interest income is due to lower cash balances and the
maturity of all short-term investments. The Company incurred approximately
$11,000 in interest expense for the quarter ended September 30, 2001 resulting
from outstanding borrowings under our credit facility as compared to $8,000
interest expense for the quarter ended September 30, 2000.
Net Loss
As a result of the above, the net loss decreased by $278,000, or 41%, from
$673,000 for the three months ended September 30, 2000 to $395,000 for the three
months ended September 30, 2001.
Nine Months Ended September 30, 2001 Compared to the Nine Months Ended September
30, 2000
Revenues
Total revenue increased by $1,811,000, or 18%, for the nine months ended
September 30, 2001 as compared to the corresponding period of the prior year.
Revenues for each period consisted of the following:
14
(Dollar Amounts in Thousands)
September 30, 2001 September 30, 2000 Increase (Decrease) %
------------------ ------------------ ---------------------
Solutions
Business Solutions $ 2,791 $ 5,028 (44%)
Intelligence 6,309 2,708 133%
Inquire 205 271 (24%)
---------------------------------------------------------------------------
Total Solutions Revenue $ 9,305 $ 8,007 16%
===========================================================================
Proprietary Products
Compose and Others 456 507 (10%)
Inquire/text 659 813 (19%)
---------------------------------------------------------------------------
Total Proprietary Products
Revenue $ 1,115 $ 1,320 (16%)
===========================================================================
Total Third Party Products Revenue $ 1,364 $ 646 111%
===========================================================================
Total Revenue $ 11,784 $ 9,973 18%
===========================================================================
Revenues from Solutions increased overall by $1,298,000, or 16%, from $8,007,000
for the nine months ended September 30, 2000 to $9,305,000 for the nine-month
period ended September 30, 2001. The Business Solutions unit within the
Solutions segment decreased by $2,237,000, or 44%, from $5,028,000 for the nine
months ended September 30, 2000 to $2,791,000 for the nine months ended
September 30, 2001 due to the Company's de-emphasis in providing services for
early-stage technology companies. In addition, the Company deferred revenue
recognition for services provided to one of its customers as collectibility was
not considered probable. The Intelligence Solutions unit within the Solutions
segment increased by $3,601,000, or 133%, from $2,708,000 for the nine months
ended September 30, 2000 to $6,309,000 for the nine months ended September 30,
2001 due to significant increases in classified government work. The Inquire
Solutions unit within the Solutions segment decreased by $66,000, or 24%, from
$271,000 for the nine months ended September 30, 2000 to $205,000 for the third
quarter ended September 30, 2001 due to a decline in INQUIRE/Text maintenance
and Inquire consulting services.
Proprietary Product revenue decreased by $205,000, or 16%, from $1,320,000 for
the nine months ended September 30, 2000 to $1,115,000 for the nine months ended
September 30, 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 and the de-emphasis in Compose and
related products which declined more slowly than the Company originally
forecasted.
Third Party Product sales increased by $718,000, or 111%, from $646,000 for the
nine months ended September 30, 2000 to $1,364,000 for the nine months ended
September 30, 2001. The basis for the increase is that certain engagements
during the first nine months ended September 30, 2001 required hardware and
software components which were tied with consulting labor services. The Company
will continue to move away from low margin products unless specific contractual
arrangements require the need to provide these types of services.
Gross Profit
Gross profit decreased by $278,000 or 11%, from $2,578,000 for the nine months
ended September 30, 2000 to $2,300,000 for the nine months ended September 30,
2001. Gross margin as a percent of revenues decreased from 26% for the nine
months ended September 30, 2000 to 20% for the nine months ended September 30,
2001. The primary reason for the decline in gross profit for the nine
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months ended September 30, 2001 was due to the de-emphasis in providing services
for early-stage technology companies, and cost overruns on certain fixed price
contracts. In addition, the Company deferred revenue recognition for services
provided to one of its customers as collectibility was not considered probable.
Research and Development Expenses
Research and development expenses increased $176,000, or 69%, from $254,000 for
the nine months ended September 30, 2000 to $430,000 for the nine months ended
September 30, 2001. The increase was due to the Company's decision to increase
spending for the enhancement of existing products.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $316,000, or 9%, from
$3,416,000 for the nine months ended September 30, 2000 to $3,100,000 for the
nine months ended September 30, 2001. The decrease was a result of a reduction
in selling costs and in administrative personnel.
Interest Income and Expense
Interest income decreased $36,000, or 43%, from $83,000 for the nine months
ended September 30, 2000 to $47,000 for the nine months ended September 30,
2001. The reduction in interest income is due to lower cash balances and the
maturity of all short-term investments. Cash and proceeds were used for
operations in the first nine months ended September 30, 2001. The Company
incurred approximately $45,000 in interest expense for the nine months ended
September 30, 2001 resulting from outstanding borrowings under our credit
facility as compared to $10,000 interest expense for the quarter ended September
30, 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 $1,068,000 in the first nine
months ended September 30, 2001, resulting in a loss for the period of $160,000
as compared to a loss of $1,019,000 for the prior year's corresponding period.
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's credit facility expired on April 30, 2001
accelerating all amounts due under the line. 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.
At September 30, 2001, the Company had cash, cash equivalents and short-term
investments of $1,110,000. Net working capital at September 30, 2001 amounted to
$709,000 as compared to $422,000 at December 31, 2000. The Company maintained a
working capitol line of credit with Merrill Lynch Business Financial Services,
Inc. for up to $1,000,000 based upon eligible
16
receivables. The Company had $681,000of borrowings as of September 30, 2001. The
facility expired on April 30, 2001 accelerating all amounts due under the line.
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
September 30, 2001, this per annum rate approximated prime.
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 nine months ended September 30,
2001 was $790,000 which was primarily due to the Company's net loss for the
first nine months before gain on the sale of an investment asset.
Net cash provided by investing activities for the nine months ended September
30, 2001 of $1,572,000 was derived primarily by the maturing of various
short-term investments, and the sale of the Company's equity interest in
Buckaroo.com., offset by the purchase of property and equipment and purchases of
short-term investments.
Net cash provided by financing activities for the nine months ended September
30, 2001 of $7,000 arose from purchases under the employee stock purchase plan
which amounted to $37,000 offset by net repayments under the line of credit of
$30,000.
Net cash flow from operating activities for the nine months ended September 30,
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 3. Defaults Upon Senior Securities.
The Company maintained a working capital line of credit with Merrill Lynch
Business Financial Services Inc. that expired on April 30, 2001 and all amounts
under the line then became due. The line of credit provided the Company with up
to $1,000,000 of borrowings at an annual interest rate of 2.9% over the 30-day
commercial paper rate. At September 30, 2001, the annual rate approximated the
prime rate (5.57%). Advances on the facility were based on eligible billed
accounts receivable less than 90 days old. As of September 30, 2001, the Company
had outstanding borrowings of $681,000 under this line of credit that were
unpaid and due. The Company currently is seeking other financial alternatives.
17
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Shareholders was held on October 3, 2001. A
total of 4,492,274 shares of Common Stock were outstanding and entitled to vote
at the Annual Meeting.
The proposals voted upon by stockholders were 1) the election of directors, 2)
an amendment to the Company's 1995 Stock Option Plan that would reserve 250,000
additional shares of the Company's common stock for issuance thereunder, 3) an
amendment to the Company's 1995 Stock Option Plan that would annually reserve
additional shares of the Company's Common Stock equal to 2% of the total
authorized common shares for issuance thereunder, and 4) an amendment to the
Company's 1997 Employee Stock Purchase Plan that would reserve 200,000
additional shares of the Company's Common Stock for issuance thereunder.
The following persons were nominated and elected by the votes indicated to serve
as members of the Board of Directors for one year or until their successors are
elected and qualified: Richard T. Bueschel (2,994,638 shares for and 1,497,636
withheld), Alan S. Fisher (2,995,387 shares for and 1,496,887 withheld),
Christine Hughes (3,034,658 shares for and 1,457,616 withheld), Robert M.
Leopold (2,924,566 shares for and 1,567,708 withheld), Isaac M. Pollak
(2,916,202 shares for and 1,576,072 withheld), Millard H. Pryor, Jr. (3,021,609
shares for and 1,470,665 withheld), and Steven M. Samowich (4,047,207 shares for
and 445,067 withheld).
Proposals 2, 3, and 4 were approved by the votes indicated: Proposal 2 -
(1,436,141 shares for, 1,427,895 shares against, and 32,987 abstained); Proposal
3 - (1,436,808 shares for, 1,429,002 against, and 31,213 abstained); and
Proposal 4 - (2,540,887 shares for, 317,510 shares against, and 38,626
abstained), respectively.
Item 5. Other Information.
On July 19, 2001, the Company's Common Stock commenced trading on the NASD OTC
Bulletin Board under the symbol "INFD". On that date, the common stock was
delisted from the Nasdaq SmallCap Market due to non-compliance with that
market's minimum net tangible assets requirement.
Item 6. Reports On Form 8 - K
REPORTS ON FORM 8 - K. No reports on Form 8-K were filed during the nine-month
period ended September 30, 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: November 14, 2001
BY: /s/ Gary I. Gordon
------------------------------
Gary I. Gordon
Chief Accounting Officer
(Principal Financial and
Accounting Officer)
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