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, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-10416
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INFODATA SYSTEMS INC.
(Exact Name of Small Business Issuer in its Charter)
Virginia 16-0954695
(State of Incorporation) (I.R.S. Employer Identification No.)
12150 Monument Drive, Fairfax, Virginia 22033
(Address of Principal Executive Office) (Zip Code)
(703) 934-5205 (Issuer's Telephone Number)
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Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on Which Registered
None Not applicable
Securities registered under Section 12(g) of the Exchange Act:
Common Stock-$.03 Par Value
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
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 29, 2002
as reported on the Nasdaq SmallCap Market, was approximately $1,300,000. 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 4,791,210 on March 29, 2002.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
INFODATA SYSTEMS INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION Page(s)
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of
Operations
Three Months Ended March 31, 2002 and
2001 3
Condensed Consolidated Balance Sheets
March 31, 2002 and December 31, 2001 4
Condensed Consolidated Statements of
Cash Flows
Three Months Ended March 31, 2002 and
2001 5
Notes to Condensed Consolidated
Financial Statements 6 - 10
Item 2. Management's Discussion and Analysis or
Plan of Operation 10 - 17
PART II. OTHER INFORMATION
Item 3. Defaults Upon Senior Securities 18
Item 6. Reports on Form 8-K 18
SIGNATURES 19
2
PART I
FINANCING INFORMATION
Item 1. Financial Statements.
INFODATA SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Amounts In Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended
March 31,
--------------------
2002 2001
-------- --------
Revenues ................................................. $ 2,948 $ 3,616
Cost of revenues ......................................... 2,219 2,987
------- -------
Gross profit ............................................. 729 629
------- -------
Operating expenses:
Research and development ............................... 146 165
Selling, general and administrative .................... 720 1,065
------- -------
866 1,230
------- -------
Operating loss ........................................... (137) (601)
Gain on sale of investment ............................... - 1,068
Interest income .......................................... 9 22
Interest expense ......................................... (10) (19)
------- -------
Net (loss) income ........................................ $ (138) $ 470
======= =======
Basic and diluted net (loss) income per share ............ $ (.03) $ .10
======= =======
Weighted average shares outstanding (basic
and diluted) ............................................ 4,791 4,723
======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
INFODATA SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollar Amounts in Thousands)
(Unaudited)
March 31, December 31,
2002 2001
--------- ------------
Assets
- ------
Current assets:
Cash and cash equivalents ....................... $ 1,623 $ 1,002
Accounts receivable, net of allowance of
$36 in 2002 and $35 in 2001 .................... 1,613 2,994
Prepaid expenses and other current assets ....... 402 447
--------- ---------
Total current assets ....................... 3,638 4,443
--------- ---------
Property and equipment, net ....................... 142 185
Other assets ...................................... 20 20
--------- ---------
Total assets ...................................... $ 3,800 $ 4,648
========= =========
Liabilities and Shareholders' Equity
- ------------------------------------
Current Liabilities:
Line of credit .................................. 612 616
Accounts payable ................................ 586 1,223
Accrued expenses ................................ 1,012 1,116
Deferred revenue ................................ 782 747
--------- ---------
Total current liabilities .................. 2,992 3,702
--------- ---------
Commitments and Contingencies
Shareholders' equity:
Common stock .................................... 142 142
Additional paid-in capital ...................... 20,221 20,221
Accumulated deficit ............................. (19,555) (19,417)
--------- ---------
Total shareholders' equity ........................ 808 946
--------- ---------
Total liabilities and shareholders' equity ........ $ 3,800 $ 4,648
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
INFODATA SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Dollar Amounts in Thousands)
(Unaudited)
Three Months Ended
March 31,
--------------------
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income ........................................ $ (138) $ 470
Adjustments to reconcile net loss to cash
used in operating activities:
Gain on sale of investment ............................. - (1,068)
Depreciation and amortization .......................... 43 29
Goodwill and other intangible amortization ............. - 27
Accrued interest on line of credit ..................... 3 19
Provision for doubtful accounts ........................ 1 -
Payments received on related party receivable .......... - 36
Changes in operating assets and liabilities:
Accounts receivable .................................... 1,380 (328)
Prepaid expenses and other current assets .............. 45 (4)
Accounts payable ....................................... (637) 164
Accrued expenses ....................................... (104) (390)
Deferred revenue ....................................... 35 27
------- -------
Net cash provided by (used) in
operating activities ............................ 628 (1,018)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ...................... - (10)
Purchases of short-term investments ...................... - (200)
Proceeds from maturity of short-term investments ......... - 500
Proceeds from sale of investment ......................... - 1,092
------- -------
Net cash provided by investing activities ................ - 1,382
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments) borrowings under short-term debt ........ (7) 192
Issuance of common stock ................................. - 17
------- -------
Net cash (used in) provided by financing activities ...... (7) 209
------- -------
Net increase in cash and cash equivalents ................ 621 573
Cash and cash equivalents at beginning of period ......... 1,002 321
------- -------
Cash and cash equivalents at end of period ............... $ 1,623 $ 894
======= =======
5
INFODATA SYSTEMS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2002 and 2001
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed 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,
2002, are not necessarily indicative of the results for the year ending December
31, 2002. 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, 2001.
The accompanying condensed 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 condensed consolidated financial statements, the
Company continues to suffer recurring losses from operations. In addition, the
Company's credit facility expired on April 30, 2001. 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
there is substantial doubt about the Company's ability to continue as a going
concern for a reasonable period of time. The Company's 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, among other things, its ability to obtain a new credit
facility and meet its 2002 budgeted cash flow projections.
Although the Company believes that it will be able to obtain a new credit
facility and meet its budget projections, there can be no assurance that the
Company will be able to secure financing sufficient for its needs and at terms
favorable to the Company. Additionally, there can be no assurance that the
Company will be successful in meeting budget expectations and replacing its
credit facility in 2002. Failure by the Company to obtain sufficient financing,
meet its budget expectations or replace its credit facility may have a material
adverse effect on the Company's financial position, results of operations or
cash flows.
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. Revenue from license
arrangements is 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
6
elements, all revenue is deferred until sufficient evidence exists or all
elements have been delivered. Revenue from annual maintenance and support,
including third party maintenance, is deferred and recognized ratably over
the term of the contract. Revenue from consulting and training is
recognized when the services are performed and collectibility is deemed
probable. Revenue from consulting and professional services contracts is
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. Revenue from cost reimbursement contracts is 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 provides off-the-shelf hardware and software products to the
U.S. government under the GSA Schedule Contract and to commercial
companies. The related revenue is recognized when products are shipped or
when customers have accepted the products, depending on contractual terms.
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 - Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," was
issued in June 2001. Under SFAS No. 142, goodwill and other intangible
assets with indefinite lives are no longer amortized, but are reviewed at
least annually for impairment. A two-step impairment test is used to first
identify potential goodwill impairment and then measure the amount of
goodwill impairment loss, if any. SFAS No. 142 is effective for the Company
beginning in 2002, and is required to be applied as of January 1, 2002.
Impairment losses that arise due to the initial application of SFAS No. 142
will be reported as a cumulative effect of a change in accounting
principle. The first step of the goodwill impairment test, which must be
completed in the first half of 2002, will identify potential goodwill
impairment. The second step of the goodwill impairment test, which must be
completed prior to the issuance of the financial statements for the year
ending December 31, 2002, will measure the amount of goodwill impairment
loss, if any. The Company has not completed its analysis of the effect of
adopting SFAS No. 142.
In accordance with SFAS No. 142, goodwill amortization was discontinued as
of January 1, 2002. The following adjusts reported income from continuing
operations and EPS from continuing operations to exclude goodwill
amortization:
Three Months Ended
March 31, March 31,
2002 2001
---------- ---------
(In thousands, except
per share amounts)
Reported (loss) income from continuing operations $ (138) $ 470
Goodwill amortization - 27
------- ------
Adjusted (loss) income from continuing operations $ (138) $ 497
======= ======
7
Reported basic and diluted EPS from continuing
operations $ (0.03) $ 0.10
Goodwill amortization - $ 0.01
------- ------
Adjusted basic and diluted EPS from continuing
operations $ (0.03) $ 0.11
======= ======
NOTE C - LINE OF CREDIT
The Company maintained a working capital line of credit with Merrill Lynch
Business Financial Services Inc., collateralized by accounts receivable,
equipment and other intangibles that expired on April 30, 2001, thus
accelerating all amounts due under that line of credit. The credit facility
provided the Company with up to a $1,000,000 line of credit at a per annum
interest rate equal to 2.9 % over the 30-day commercial paper rate. The per
annum interest rate approximated the prime rate, 6.7%, at March 31, 2002.
Advances under the facility were based on eligible billed accounts receivable
less than 90 days old. As of March 31, 2002, the Company had outstanding
borrowings of $612,000 (which included $3,000 of accrued interest) under 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 such financing arrangements will be successful or that the existing lender
will not pursue collection through existing collateral or other means.
NOTE D - 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.
government intelligence community. The Company issued 40,000 shares of its
Common Stock with a fair market value of $3.563 per share, which was equal to
the average of the closing bid and ask prices of the Company's Common Stock on
that date. On February 9, 2001, the Company issued an additional 13,334 shares
of its Common Stock with a fair market value of $1.50 per share to Earth
Satellite Corporation pursuant to a working capital adjustment provision
included in the acquisition agreement between the Company and Earth Satellite
Corporation in this transaction, which resulted in a purchase price adjustment
of approximately $20,000 that was attributed to goodwill. The acquisition cost
of this business unit as of March 31, 2002, was approximately $199,000,
including $37,000 of direct cost attributed to the business unit's sole
contract. The acquisition value of that contract is being amortized over its
life of 18 months and as of March 31, 2002, the Company had fully amortized that
amount.
NOTE E - AGREEMENT OF MERGER
On January 10, 2002, the Company entered into an Agreement and Plan of Merger
(the "Agreement of Merger") between the Company and Science Applications
International Corporation ("SAIC") and Info Acquisition Corp., a Delaware
corporation and wholly-owned subsidiary of SAIC ("Acquisition"). Pursuant to the
Agreement of Merger, SAIC was to acquire all of the issued and outstanding
common stock of the Company through the merger (the "Merger") of Acquisition
with and into the Company. Each outstanding share of the Company's common stock
was to be converted into the right to receive $1.00 per share (the "Merger
Price"). Under the terms of the Agreement of Merger, each outstanding stock
option of the Company with an exercise price less
8
than the Merger Price was to be converted into the right to receive the Merger
Price, less the exercise price of the stock option.
At a meeting of the Company's shareholders held on March 1, 2002, the
shareholders of the Company approved the Agreement of Merger. However,
consummation of the Merger was delayed after the Company was notified by its
major U.S. Government intelligence community customer that the scope of a large
contract (the "Customer Contract"), accounting for approximately 40% of the
Company's revenue in 2001, was going to be substantially reduced. Although the
Company believes that it had performed well under the Customer Contract, the
terms of the Customer Contract give the government customer the right to change
the scope of its services engagement, which right is typical in virtually all
government contracts.
In January 2002, pursuant to the terms of the Agreement of Merger, the Company's
Board of Directors adopted a resolution to suspend the 1997 Employee Stock
Purchase Plan during the first quarter of 2002 and to subsequently terminate it
upon the consummation of the Merger.
The Agreement of Merger was to expire pursuant to its terms on June 30, 2002,
but the proposed transaction was terminated by SAIC on April 19, 2002 (Note G).
As a result of the reduction in the scope of the Customer Contract, the Company
has taken certain steps to control its expenses, including reducing the number
of its employees, rent expense and expenditures in other areas.
NOTE F - COMMITMENTS AND 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 U.S. Government. No audits have been completed for any periods commencing
after 1998. During the year 2002, the Company anticipates that the audit for the
year 1999 will commence and in the opinion of management, adjustments resulting
from the completion of such audit and future audits are not expected to have a
material impact on the Company's financial position or results of future
operations.
As discussed in Note G, the Company is currently discussing with SAIC whether or
not it will be required to pay a $50,000 termination fee to SAIC under the terms
of the Agreement of Merger.
NOTE G -SUBSEQUENT EVENTS
On April 19, 2002, the Company received a notice from SAIC terminating its
proposed acquisition of the Company at $1.00 per share pursuant the Agreement of
Merger. The Company is currently discussing with SAIC whether or not the Company
will be required to pay a $50,000 termination fee to SAIC under the terms of the
Agreement of Merger. The Company has not accrued for this fee in the
accompanying March 31, 2002, financial statements.
On April 26, 2002, the Company submitted a proposal to a U.S. Government agency
client in an effort to recover approximately $130,000 in costs expended by the
Company related to the reduction in scope of a contract to develop and implement
a complex document production management system. Since there can be no
assurances that the Company will collect any of these costs, the Company has
expensed these costs and no revenue has been recorded.
9
NOTE H - SEGMENT REPORTING
The table below presents information about reported segments for the three month
periods ended March 31, 2002 and 2001, 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, 2002
Segment Information
(In Thousands)
Proprietary Third Party
Solutions Products Products Total
--------- ----------- ----------- -------
Revenues $ 2,397 $ 353 $ 198 $ 2,948
Direct costs 1,764 28 196 1,988
------- ----- ----- -------
Segmental profit $ 633 $ 325 $ 2 960
======= ===== =====
Research and development (146)
Other costs not allocated
to segments, primarily
selling, general and
administrative (951)
Interest income - net (1)
-------
Income before income taxes $ (138)
=======
Infodata Systems Inc.
Three Months Ended
March 31, 2001
Segment Information
(In Thousands)
Proprietary Third Party
Solutions Products Products Total
--------- ----------- ----------- -------
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 (1,316)
Gain on sale of investment 1,068
-------
Interest income - net 3
-------
Loss before income taxes $ 470
=======
Item 2. Management's Discussion and Analysis or Plan of Operation.
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
10
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, AnnoDoc(TM), 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, 2002, Solutions
accounted for 81% of total revenue, Proprietary Products accounted for 12%, and
Third Party Products accounted for the remaining 7%.
On March 30, 2000, the Company acquired a business unit from Earth Satellite
Corporation specializing in providing software development services to the U.S.
Government intelligence community. The Company issued 40,000 shares of its
Common Stock with a fair market value of $3.563 per share, which was equal to
the average of the closing bid and ask prices of the Company's Common Stock on
that date. On February 9, 2001, the Company issued an additional 13,334 shares
of its Common Stock with a fair market value of $1.50 per share to Earth
Satellite Corporation pursuant to a working capital adjustment provision
included in the acquisition agreement between the Company and Earth Satellite
Corporation in this transaction, which resulted in a purchase price adjustment
of approximately $20,000 that was attributed to goodwill. The acquisition cost
of this business unit as of March 31, 2002, was approximately $199,000,
including $37,000 of direct cost attributed to the business unit's sole
contract. The acquisition value of that contract is being amortized over its
life of 18 months and, as of March 31, 2002, the Company had fully amortized
that amount.
On February 9, 2001, the Company sold its holdings of common stock and preferred
stock of Buckaroo.com, Inc., a Silicon Valley-based on-line commodity exchange
site that serves the computer chip market, to six private investors for a total
of $1,092,740 in cash. The Company originally obtained such shares in July 1999
for $24,575. As a result of the sale of such shares, the Company recorded a gain
of $1,068,165 during the first quarter of 2001.
At March 31, 2002, the Company had net operating loss carry forwards ("NOLs")
aggregating approximately $13,692,000 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
11
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 its NOLs. Due to uncertainty of taxable income
to utilize the NOLs, a full valuation allowance has been established with
respect to this 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 the amounts are
recognized in accordance with the type of contract. Revenue from software
licenses is recognized in accordance with the provisions of the Statement of
Position 97-2, "Software Revenue Recognition;" as amended. Revenue from customer
support and maintenance agreements is 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, 2002, was $782,000. This related primarily to
amounts from maintenance revenue on the INQUIRE/Text software product and on
third party software maintenance agreements. 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 on
proprietary products pertains to INQUIRE/Text, which is a mature software
product.
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 and associated maintenance, the cost of revenue
includes the cost incurred by the Company to acquire the product/service,
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 of the product for the
purchaser.
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.
Critical Accounting Policies and Significant Estimates
The preparation of condensed consolidated financial statements requires
management to make judgments based upon estimates and assumptions that are
inherently uncertain. Such judgments affect the reported amounts of revenues on
long-term contracts. Management continuously evaluates its estimates and
assumptions related to long-term contracts and award fee provisions. Management
bases its estimates on historical experience and on various other assumptions
that
12
are believed to be reasonable under the circumstances. Actual results may differ
from these estimates under different assumptions or conditions.
The following is a summary of the Company's most critical accounting policies
used in the preparation of our condensed consolidated financial statements.
A portion of our revenue is derived primarily from long-term contracts. Revenues
on long-term fixed-price or time and material contracts with a maximum price are
generally recognized using the percentage-of-completion method of accounting.
Such revenues are recorded based on the percentage that costs incurred in the
applicable reporting period bear to the most recent estimates of total costs to
complete each contract. Estimating future costs and, therefore, revenues and
profits, is a process requiring a high degree of management judgment, including
management's assumptions regarding future operations of the Company as well as
general economic conditions. In the event of a change in total estimated
contract cost or profit, the cumulative effect of such change is recorded in the
period the change in estimate occurs. Frequently, the period of performance of a
contract extends over a long period of time and, as such, revenue recognition
and our profitability from a particular contract may be adversely affected to
the extent that estimated cost to complete or award fee estimates are revised,
delivery schedules are delayed or progress under a contract is otherwise
impeded. Accordingly, our recorded revenues and gross profits from year to year
can fluctuate significantly. In the event cost estimates indicate a loss on a
contract, the total amount of such loss is recorded in the period in which the
loss is first estimated.
Certain contracts include award fee provisions for increased or decreased
revenue and profit based on actual performance against established targets.
Award fees are included in estimated contract revenue at the time the amounts
can be reasonably determined and are reasonably assured based on historical
experience and other objective criteria. Should we fail to perform sufficiently
under such contracts, previously recognized revenues could be reversed and/or
future period revenues could be reduced.
We have recorded a full valuation allowance to reduce our deferred tax assets to
the amount that is more likely than not to be realized. In the event we were to
determine that we would be able to realize our deferred tax assets in the future
in excess of our net recorded amount, an adjustment to the deferred tax
valuation allowance would increase income in the period such determination is
made.
CONDENSED CONSOLIDATED RESULTS OF OPERATIONS FOR THE QUARTERS ENDED MARCH 31,
2002 AND MARCH 31, 2001
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 decreased by $668,000, or 18%, in the three
months ended March 31, 2002 as compared to the corresponding period of the prior
year. Revenues for each period consisted of the following:
13
(Dollar Amounts in Thousands)
Three Months Ended
March 31, March 31, Increase
2002 2001 (Decrease) %
--------- --------- ------------
Solutions
---------
Business Solutions $ 678 $ 896 (24%)
Intelligence 1,665 1,954 (15%)
INQUIRE(R)/Text 54 90 (40%)
--------------------------------------
Total Solutions Revenue $ 2,397 $ 2,940 (18%)
======================================
Proprietary Products
--------------------
Compose and Others 197 193 2%
INQUIRE(R)/Text 156 213 (27%)
--------------------------------------
Total Proprietary Products
Revenue $ 353 $ 406 (13%)
======================================
Total Third Party Products
--------------------------
Revenue 198 270 (27%)
======================================
Total Revenue $ 2,948 $ 3,616 (18%)
======================================
Revenues from Solutions decreased overall by $543,000, or 18%, from $ 2,940,000
for the three months ended March 31, 2001, to $2,397,000 for the three-month
period ended March 31, 2002. The Business Solutions unit within the Solutions
segment decreased by $218,000, or 24%, from $896,000 for the three months ended
March 31, 2001, to $678,000 for the three months ended March 31, 2002, due to
the Company's de-emphasis in providing services for early stage technology
companies. The Intelligence Solutions unit within the Solutions segment
decreased by $289,000, or 15%, from $1,954,000 for the three months ended March
31, 2001, to $1,665,000 for the three months ended March 31, 2002, largely
because the Company was notified by its major United States intelligence
community customer that the scope of the Customer Contract was going to be
substantially reduced. Although the Company believes that it had performed well
under the Customer Contract, the terms of the Customer Contract gave the U.S.
Government customer the right to change the scope of its services engagement,
which right is typical in virtually all government contracts. The Inquire
Solutions unit within the Solutions segment decreased by $36,000, or 40%, from
$90,000 for the three months ended March 31, 2001, to $54,000 for the first
quarter ended March 31, 2002, due to a continuous decline in INQUIRE/Text
maintenance and INQUIRE/Text consulting services.
Proprietary Product revenue decreased by $53,000, or 13%, from $406,000 for the
three months ended March 31, 2001, to $353,000 for the three months ended March
31, 2002. 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 decreased by $72,000, or 27%, from $270,000 for the
three months ended March 31, 2001, to $198,000 for the three months ended March
31, 2002. The basis for the decrease is that the Company had a reduction in
engagements requiring hardware and software components tied with consulting
labor services for these types of contracts.
Gross Profit
Gross profit increased by $100,000, or 16%, from $629,000 for the three months
ended March 31, 2001, to $729,000 for the three months ended March 31, 2002.
Gross margin as a percent of
14
revenues increased from 17% for the three months ended March 31, 2001, to 25%
for the three months ended March 31, 2002. The primary reason for the increase
in gross margin and gross profit is due to improved utilization in consulting
personnel.
Research and Development Expenses
Research and development expenses decreased by $19,000, or 11%, from $165,000
for the three months ended March 31, 2001, to $146,000 for the three months
ended March 31, 2002. Even though the Company incurred a reduction in expenses
in 2002, the overall spending was a higher percent of its total costs in 2002 as
compared to 2001. The Company will continue to incur these expenses in 2002 as
continuous efforts to enhancement existing products.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $345,000, or 32%, from
$1,065,000 for the three months ended March 31, 2001, to $720,000 for the three
months ended March 31, 2002. The decrease was a result of a reduction in selling
costs and administrative personnel.
Interest Income and Expense
Interest income decreased $13,000, or 60%, from $22,000 for the three months
ended March 31, 2001, to $9,000 for the three months ended March 31, 2002. The
reduction in interest income is due to the maturing of a portion of its
short-term investments in the first quarter ended March 31, 2002, as compared to
no short-term investments in the quarter ended March 31, 2002. Interest expense
decreased $ 9,000, or 47%, from $19,000 for the three months ended March 31,
2001, to $10,000 for the three months ended March 31, 2002. The reduction in
interest expense is due to lower outstanding borrowings on our line of credit in
the first quarter ended March 31, 2002.
Net Income (Loss)
As a result of the completed sale of the Company's entire equity stake in
Buckaroo.com, Inc., 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 $138,000 for the quarter ended March 31, 2002. However, by
excluding the one time recognized gain of $1,068,165, the Company would have had
a loss of $598,000 in the first quarter if 2001 as compared to a loss of
$138,000 for the current quarter ended March 31, 2002. Therefore, the primary
reason for the decrease in the loss is due to the better utilization in
consulting personnel, decreases in selling and administrative and research and
development costs.
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. In addition, the Company's credit facility
expired on April 30, 2001, thus accelerating all amounts due under that credit
facility. 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 there is substantial doubt about the
Company's ability to continue as a going concern for a reasonable period of
time. The financial statements of the Company 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, among other
things, its ability to obtain a new credit facility and meet its 2002 budgeted
cash flow projections.
15
Although the Company believes that it will be able to obtain a new credit
facility and meet its budget projections, there can be no assurance that the
Company will be able to secure financing sufficient for its needs and at terms
favorable to the Company. Additionally, there can be no assurance that the
Company will be successful in meeting budget expectations and replacing its
credit facility in 2002. Failure by the Company to obtain sufficient financing,
meet its budget expectations or replace its credit facility may have a material
adverse effect on the Company's financial position, results of operations or
cash flows. At March 31, 2002, the Company had cash and cash equivalents of
$1,623,000. Net working capital at March 31, 2002, amounted to $646,000 as
compared to $1,028,000 at March 31, 2001. The Company maintained a line of
credit with Merrill Lynch Business Financial Services, Inc., that expired on
April 30, 2001, thus accelerating all amounts due under the line of credit. As
of March 31, 2002, the Company had outstanding borrowings of $612,000 (which
included $3,000 of accrued interest) under this line of credit.
Net cash provided by operating activities for the three months ended March 31,
2002, was $628,000, which was in part the result of the Company's net loss for
the quarter of $138,000. The primary adjustments to the net loss to arrive at
net cash provided by operating activities included: (i) decreases in accounts
receivable of $1,380,000, and accounts payable and accrued expenses of $741,000;
and (ii) increases in deferred revenue of $35,000, and depreciation and
amortization of $43,000.
Net cash used by financing activities for the three months ended March 31, 2002,
of $7,000 arose from pay downs under the line of credit.
Net cash flow from operating activities for the three months ended March 31,
2002, was sufficient to fund the operations of the business. Management believes
that a new credit facility would provide the necessary available working capital
to meet its requirements for the next twelve months. However, the Company has
not yet obtained a new credit facility. 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.
Termination of Agreement of Merger
On January 10, 2002, the Company entered into the Agreement of Merger between
the Company, SAIC and Acquisition. Pursuant to the Agreement of Merger, SAIC was
to acquire all of the issued and outstanding common stock of the Company through
the Merger of Acquisition with and into the Company. Each outstanding share of
the Company's common stock was to be converted into the right to receive the
Merger Price. Under the terms of the Agreement of Merger, each currently
outstanding stock option of the Company with an exercise price less than the
Merger Price was to be converted into the right to receive the Merger Price,
less the exercise price of the stock option.
At a meeting of the Company's shareholders held on March 1, 2002, the
shareholders of the Company approved the Agreement of Merger. However,
consummation of the proposed Merger was delayed after the Company was notified
by its major U.S. Government intelligence community customer that the scope of
the Customer Contract, accounting for approximately 40% of the Company's revenue
in 2001, was going to be substantially reduced.
16
Although the Company believes that it had performed well under the Customer
Contract, the terms of the Customer Contract give the government customer the
right to change the scope of its services engagement, which right is typical in
virtually all government contracts. The Agreement of Merger was to expire
pursuant to its terms on June 30, 2002; however, on April 19, 2002, the Company
received a notice from SAIC terminating its proposed acquisition of the Company
at $1.00 per share pursuant to the Agreement of Merger. The Company is currently
discussing with SAIC whether or not the Company will be required to pay a
$50,000 termination fee to SAIC under the terms of the Agreement of Merger. The
Company has not accrued for this fee in the accompanying March 31, 2002,
financial statements.
In January 2002, pursuant to the terms of the Agreement of Merger, the Company's
Board of Directors adopted a resolution to suspend the 1997 Employee Stock
Purchase Plan during the first quarter of 2002 and to subsequently terminate it
upon the consummation of the Merger.
As a result of the reduction in the scope of the Customer Contract, the Company
has taken certain steps to control its expenses, including reducing the number
of its employees, rent expense and expenditures in other areas.
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 U.S. Government. No audits have been completed for any periods commencing
after 1998. During the year 2002, the Company anticipates that the audit for the
year 1999 will commence 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.
As discussed in Note F, the Company is currently discussing with SAIC whether or
not the Company will be required to pay a $50,000 termination fee to SAIC under
the terms of the Agreement of Merger.
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.
17
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, thus
accelerating all amounts due under that line of credit. 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 March 31, 2002, the
annual interest rate approximated the prime rate, 6.7%. Advances under the
facility were based on eligible billed accounts receivable less than 90 days
old. As of March 31, 2002, the Company had outstanding borrowings of $612,000
(which included $3,000 of accrued interest) under this line of credit that were
unpaid and due. The Company is currently seeking other financing alternatives.
Item 6. Reports On Form 8 - K
The Company filed a Form 8-K on January 11, 2002, reporting that it had entered
into the Agreement of Merger with SAIC and Acquisition pursuant to which SAIC
would acquire all of the issued and outstanding common stock of the Company
through the Merger. Each outstanding share of the Company's common stock was to
be converted into the right to receive the Merger Price. Under the terms of the
Agreement of Merger, each currently outstanding stock option of the Company with
an exercise price less than the Merger Price was to be converted into the right
to receive the Merger Price, less the exercise price of the stock option.
The Company filed a Form 8-K on March 1, 2002, reporting that it had issued two
press releases that day. The first press release stated that the Company
expected to receive a Stop-Work Order from the U.S. Government Agency overseeing
its contract to develop and implement a complex document production management
system. The second release stated that at the Special Meeting of Shareholders
held that morning, Company shareholders approved the proposed acquisition of the
Company by SAIC pursuant to the Agreement of Merger that was entered into on
January 10, 2002. It also stated that the consummation of the proposed merger
would be delayed indefinitely until the parties determined whether the contract
action by the U.S. Government made public earlier that day would operate to
prevent consummation of the merger.
18
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 15, 2002
BY: /s/ Gary I. Gordon
---------------------------------------
Gary I. Gordon
Chief Accounting Officer
(Principal Financial and Accounting
Officer)
19