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, 2003
[ ] 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.)
13454 Sunrise Valley Dr, Suite 500, Herndon, Virginia 20171-3282
(Address of Principal Executive Office) (Zip Code)
(703) 934-5205 (Issuer's Telephone Number)
12150 Monument Drive, Suite 400, Fairfax, Virginia 22033-4063
(Former Address) (Zip Code)
______________________________________________
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 No X
--- ---
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 September 30,
2003 as reported on the NASD OTC Bulletin Board, was approximately $4,244,157.
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 5,031,886 on October 31, 2003.
Transitional Small Business Disclosure Format: Yes No X
--- ---
1
INFODATA SYSTEMS INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION Page(s)
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations 3
Three Months Ended September 30, 2003 and 2002
Condensed Consolidated Statements of Operations 4
Nine Months Ended September 30, 2003 and 2002
Condensed Consolidated Balance Sheets 5
September 30, 2003 and December 31, 2002
Condensed Consolidated Statements of Cash Flows 6
Nine Months Ended September 30, 2003 and 2002
Notes to Condensed Consolidated Financial Statements 7-14
Item 2. Management's Discussion and Analysis 15-22
Item 3. Controls and Procedures 22
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits 23
(b) Reports on Form 8-K 23
SIGNATURES 24
CERTIFICATIONS 25-27
2
PART I. FINANCIAL INFORMATION
Item 1.
INFODATA SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Amounts In Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended
September 30,
2003 2002
------- -------
Revenues $ 1,981 $ 2,237
Cost of revenues 1,125 1,242
------- -------
Gross profit 856 995
Operating expenses:
Research and development 153 132
Selling, general and administrative 610 460
------- -------
763 592
------- -------
Operating income 93 403
Interest income 2 3
Interest expense (1) (7)
------- -------
Net income before income taxes $ 94 $ 399
Provision for income taxes -- --
------- -------
Net income $ 94 $ 399
======= =======
Basic net income per share $ 0.02 $ 0.08
======= =======
Weighted average basic shares outstanding 5,032 4,792
======= =======
Diluted net income per share $ 0.02 $ 0.08
======= =======
Weighted average diluted shares outstanding 5,538 4,869
======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
INFODATA SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Amounts In Thousands, Except Per Share Data)
(Unaudited)
Nine Months Ended
September 30,
2003 2002
------- -------
Revenues $ 6,205 $ 7,644
Cost of revenues 3,189 4,973
------- -------
Gross profit 3,016 2,671
Operating expenses:
Research and development 713 490
Selling, general and administrative 1,993 1,758
------- -------
2,706 2,248
------- -------
Operating income 310 423
Interest income 8 12
Interest expense (2) (31)
------- -------
Net income before income taxes $ 316 $ 404
Provision for income taxes -- --
------- -------
Net income $ 316 $ 404
======= =======
Basic net income per share $ 0.06 $ 0.08
======= =======
Weighted average basic shares outstanding 5,019 4,791
======= =======
Diluted net income per share $ 0.06 $ 0.08
======= =======
Weighted average diluted shares outstanding 5,452 4,875
======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
INFODATA SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Amounts in Thousands)
(Unaudited)
September 30, December 31,
2003 2002
------------- ------------
Assets
Current assets:
Cash and cash equivalents $ 1,170 $ 1,298
Certificates of deposit 100 100
Accounts receivable, net of allowance of $38
in 2003 and $39 in 2002 1,873 1,806
Notes Receivable 13 0
Prepaid expenses and other current assets 90 64
-------- --------
Total current assets 3,246 3,268
-------- --------
Property and equipment, net 195 79
Other assets 3 20
-------- --------
Total assets $ 3,444 $ 3,367
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Line of credit $ -- $ 55
Accounts payable 119 91
Accrued expenses 722 806
Deferred rent 21 --
Other accrued liabilities 35 --
Deferred revenue 560 753
-------- --------
Total current liabilities 1,457 1,705
Commitments and contingencies -- --
Shareholders' equity:
Common stock 149 148
Additional paid-in capital 20,252 20,243
Accumulated deficit (18,414) (18,729)
-------- --------
Total shareholders' equity 1,987 1,662
-------- --------
Total liabilities and shareholders' equity $ 3,444 $ 3,367
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
INFODATA SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Amounts in Thousands)
(Unaudited)
Nine Months Ended
September 30,
2003 2002
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 316 $ 404
Adjustments to reconcile net income to cash provided by
operating activities: -- --
Stock based compensation expense 6 --
Depreciation and amortization 58 106
Provision for doubtful accounts -- 4
Changes in operating assets and liabilities:
Accounts receivable (67) 1,219
Notes receivable (13) --
Prepaid expenses and other current assets (10) 310
Accounts payable 28 (1,088)
Accrued expenses (85) (323)
Other accrued liabilities 35 --
Deferred rent 21 --
Deferred revenue (193) (220)
------- -------
Net cash provided by operating activities 96 412
------- -------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of property and equipment (173) (11)
------- -------
Net cash used in investing activities (173) (11)
------- -------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Net repayments under short-term debt (55) (413)
Issuance of common stock 4 --
------- -------
Net cash used in financing activities (51) (413)
------- -------
Net decrease in cash and cash equivalents (128) (12)
Cash and cash equivalents at beginning of period 1,298 1,002
------- -------
Cash and cash equivalents at end of period $ 1,170 $ 990
======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2003 and 2002
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("US GAAP") 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 US GAAP 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 such interim periods are
not necessarily indicative of the results which may be expected for a full year.
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, 2002.
Prior to the quarter ended September 30, 2002, the Company had a history of
operating and cash flow losses. Management took a number of actions in 2002,
including reductions in work force and other cost-cutting measures, to restore
the Company to positive operations and cash flows.
Throughout the last nine months, a new management team with a new vision and
fresh ideas was put in place. The new management team focuses on marketing and
delivering tailored solutions to Commercial, Government and Intelligence
Community customers. The Company provides a convenient, cost effective and
centralized source of Enterprise Content Management (ECM) applications and deep
ECM domain expertise. Around the full lifecycle of content, the Company markets
and delivers pointed solutions, which include its proprietary products as well
as domain expertise in many third-party technologies. The solution offerings
focus on significantly reducing the challenges and inefficiencies that customers
face with content management, such as ECM Environment, Integrated Case
Management, Citizen Feedback, Content Addressed Storage, Forms Process
Automation and Records Management. The strategic business plan has continued to
evolve, with marketing and delivery now primarily focused on leveraging the
Company's proprietary products and deep ECM domain expertise by exploiting
partnering and fulfillment opportunities, and expanding sales and marketing as
an investment for future profitable growth. Because of these changes and
efforts, the Company has had six consecutive profitable quarters. Additionally,
management was able to renew its receivable financing agreement at improved
terms for working capital requirements. Management believes that existing cash,
short-term investments and the credit facility will be sufficient to fund
working capital requirements through 2004.
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
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
7
deferred and recognized ratably over the term of the contract. License
revenue from resellers is recognized when product is sold through to the
end user and such sell through is reported to the Company. 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.
2) Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of Infodata Systems Inc. and its wholly
owned subsidiaries (collectively referred to herein as the "Company"). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
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 Pronouncements - In April 2003, the Financial Accounting
Standards Board ("FASB") issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS 149 amends and
clarifies financial accounting and reporting for derivative instruments and
for hedging activities under SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." The Company does not believe that this
statement will have a material effect on the Company.
In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity.
The Company has not issued such financial instruments, and therefore is
currently not affected by SFAS 150.
5) Earnings Per Share - Basic earnings per share is based on the weighted
average number of common shares outstanding. Diluted earnings per share is
based on the weighted average number of common shares outstanding and all
dilutive potential common shares outstanding. Dilutive equivalent shares
consist of stock options and warrants using the treasury stock method.
The following table reconciles the basic and fully diluted shares used to
compute earnings per share data for the three and nine month periods ended
September 30, 2003 and 2002:
Three Months Ended
September 30, September 30,
2003 2002
------------- -------------
Denominator for basic earnings per
share, weighted average shares 5,031,619 4,791,707
Employee stock options 506,046 77,767
--------- ---------
Denominator for diluted earnings per
share, weighted average shares 5,537,665 4,869,474
========= =========
8
Nine Months Ended
September 30, September 30,
2003 2002
------------- -------------
Denominator for basic earnings per
share, weighted average shares 5,018,952 4,791,469
Employee stock options 433,364 83,684
--------- ---------
Denominator for diluted earnings per
share, weighted average shares 5,452,316 4,875,153
========= =========
6) Stock Compensation - Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), encourages, but
does not require, companies to record compensation cost for stock-based
employee compensation plans at fair value. The Company has chosen to
account for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", and related Interpretations. Accordingly,
compensation cost for stock options is measured as the excess, if any, of
the estimated fair value of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock. The Company has
adopted the "disclosure only" alternative described in SFAS 123 and SFAS
148, which require pro forma disclosures of net income and earnings per
share as if the fair value method of accounting had been applied.
The following table presents pro forma net income (loss) and per share
amounts for the three and nine month periods ended September 30, 2003 and
2002, as if the fair value method had been applied to employee stock
options granted. Due to the significant number of stock options forfeited
during the nine month period ended September 30, 2003, the pro forma effect
of applying the fair value method for this period results in a benefit.
Three Months Ended
September 30, September 30,
2003 2002
------------- -------------
Net income as reported $ 94,000 $ 399,000
Add: Stock compensation included in net
income, as reported 6,000 --
Less: Pro forma compensation (expense) . (12,000) (44,000)
--------- ---------
Pro forma net income $ 88,000 $ 355,000
========= =========
Nine Months Ended
September 30, September 30,
2003 2002
------------- -------------
Net income as reported $ 316,000 $ 404,000
Add: Stock compensation included in net
income, as reported 6,000 --
Less: Pro forma compensation
benefit (expense) 32,000 (53,000)
--------- ---------
Pro forma net income $ 354,000 $ 351,000
========= =========
9
Net income per share:
Three Months Ended
September 30, September 30,
2003 2002
------------- -------------
Basic, as reported $0.02 $0.08
Diluted, as reported $0.02 $0.08
Basic, pro forma $0.02 $0.07
Diluted, pro forma $0.02 $0.07
Nine Months Ended
September 30, September 30,
2003 2002
------------- -------------
Basic, as reported $0.06 $0.08
Diluted, as reported $0.06 $0.08
Basic, pro forma $0.07 $0.07
Diluted, pro forma $0.06 $0.07
NOTE C - SHORT-TERM DEBT
On July 30, 2003, the Company renewed its Assignment and Transfer of Receivables
Agreement ("Assignment Agreement") with Commerce Funding Corporation ("Commerce
Funding") for a period of twelve months. The Assignment Agreement will
automatically renew for successive one-year periods unless cancelled by the
Company thirty days prior to the last day of the existing term. The terms of the
Assignment Agreement provide for assignment of the Company's receivables to
Commerce Funding from time to time, and Commerce Funding will, at its sole
discretion, make funding available to the Company up to an amount not to exceed
$1,000,000. Interest under this Assignment Agreement is to be paid semi-monthly
at Prime +1.25 percentage points and Commerce Funding will also charge a
processing fee of 0.65% for the first thirty day period based on gross invoice
amounts. The Company is required to pay a minimum charge of approximately $1,000
per month for the interest and processing fees that is deductible from the
actual interest and processing fees due for the month.
Commerce Funding has full recourse against the Company in the event of
non-payment of any receivable assigned by the Company to Commerce Funding. The
Company has granted a security interest to Commerce Funding in all receivables
owned or hereinafter acquired, including all contract rights, proceeds and
returned goods thereof, and all accounts and cash held therein maintained by the
Company with any bank or financial institution. The Assignment Agreement can be
terminated by either party at their discretion and at any time by giving a
thirty-day written notice to the other party. In the event that the Company
terminates the Assignment Agreement before the expiration of the term, the
Company is required to pay a termination fee of $3,000. Commerce Funding may
terminate the Assignment Agreement at any time if the Company commits any event
of default. As of September 30, 2003, the Company had not assigned any of its
receivables and had no outstanding balance on the line of credit.
NOTE D - SETTLEMENT RELATED TO TERMINATION OF GOVERNMENT CONTRACT
On March 1, 2002, the Company was notified by its major U.S. Government
intelligence community customer that the scope of a large contract (the
"Customer Contract"), which accounted for approximately $47,000, or 2.1%, and
$1,868,000, or 24.4%, of the Company's total revenue in the three and nine month
periods ended September 30, 2002, was going to be substantially reduced.
Although the Company believes that it had performed well under the Customer
Contract, and in fact subsequently received a 99% award fee rating on its
performance, the terms of the Customer Contract provided the government customer
the right to change the scope of its services engagement, which is typical in
virtually all government contracts.
10
On April 26, 2002, the Company submitted a settlement proposal to a U.S.
Government agency client in an effort to recover termination costs. On August
26, 2002, the U.S. Government Agency delivered a unilateral contract
modification to the Company agreeing to an equitable adjustment of $47,105
related to the de-scope and termination of the contract. The Company has
subsequently received all balances due under the contract.
As a result of the termination of the Customer Contract, the Company took
certain steps to control its expenses, including reducing the number of its
employees and reducing rent expense and expenditures in other areas. In May
2002, another contract with the same customer commenced, and accounted for
approximately $556,000, or 28.1%, and $1,721,000, or 27.7%, of the Company's
total revenue in the three and nine month periods ended September 30, 2003,
respectively, and approximately $492,000, or 22.0%, and $872,000, or 11.4%, of
total revenues for the three and nine month periods ended September 30, 2002,
respectively.
NOTE E - COMMITMENTS AND CONTINGENCIES
Costs charged to cost-type U.S. Government contracts are subject to audit by the
Defense Contract Audit Agency or other duly authorized representatives of the
U.S. Government. Audits have been completed for all periods prior to 2002. In
March 2003, the audit for the years 1999 - 2001 was completed and settled. As
such, the Company was entitled to bill approximately $71,000 of previously
unrecognized cost and profit. The Company is continuing the process of
administratively closing-out several old contracts that date back as far as
1992. In the opinion of management, adjustments resulting from the completion of
future audits and contract close-outs are not expected to have a material impact
on the Company's financial position or results of future operations.
The Company has been notified by the Department of Labor ("DOL") that its
employee benefit plan (the "Benefit Plan") which qualifies under Section 401(k),
for plan years ended December 31, 2000 and 2001, was required to have an
independent Accountant's Opinion rendered on the Benefit Plan's financial
statements, to be issued no later than October 15, 2001 and 2002, respectively.
Failure to file these forms on time could result in government penalties up to
$1,100 per day. The likelihood or amount of penalties, if any, that might be
imposed has not been determined, and accordingly, an amount has not been accrued
for in the accompanying consolidated financial statements. The independent
Accountant's Opinions of the Benefit Plan's financial statements for the years
ended December 31, 2000 and 2001, were completed and submitted in June 2003.
Based on discussions with DOL representatives, management does not believe that
DOL will impose any penalties on the Company. The independent Accountant's
Opinion on the Benefit Plan's financial statements for plan year ended December
31, 2002, was timely filed.
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.
Operating Leases
The Company's lease for its corporate headquarters facility in Fairfax, Virginia
expired on July 31, 2003.
On April 4, 2003, the Company signed a sublease (the "Sublease") with BAAN
U.S.A., Inc. ("Baan") for the subleasing by the Company from Baan of
approximately 14,000 square feet of finished and furnished office space (the
"Premises") at One Dulles Tech Center, 13454 Sunrise Valley Drive, Herndon,
Virginia 20171 (the "Building"). The term of the Sublease commenced
11
on August 1, 2003. The term of the Sublease was scheduled to expire on July 31,
2009, and the rent under the Sublease provided for the Company to pay to Baan a
base rent for the Premises (the "Sublease Base Rental Amount") plus an
additional amount for the rental of certain furnishings and equipment located in
the Premises (the "Sublease Equipment Rental Amount") which are leased by Baan,
with the Company having the option to purchase such furnishings and equipment
(the "Furniture and Equipment") from Baan at the end of the term of the
Sublease. The Company also paid to Baan a security deposit in the amount of
$52,500 (the "Security Deposit") to be held by Baan for the Company's
performance under the Sublease, with such Security Deposit to be decreased to
$36,400 on the first anniversary of the Sublease if the Company was not in
default under the Sublease, and with such Security Deposit to be further reduced
to $18,923 on the second anniversary of the Sublease if the Company was not in
default under the Sublease. Thereafter, Baan had the right to hold the remaining
amount of the Security Deposit during the remaining term of the Sublease to
ensure the performance of the Sublease by the Company.
On September 23, 2003, the Company received a letter (the "Notice") from the new
owner of the Building (the "Master Landlord") in which the Company was informed
by the Master Landlord that (i) Baan was in default without cure under the prime
lease for the Premises with the Master Landlord, and (ii) the Company was
instructed to remit all future rent payments directly to the Master Landlord,
with which the Company has complied without objection by Baan. Pursuant to the
terms of the Sublease between Baan and the Company, this default by Baan under
the prime lease constituted a breach of the Sublease for which Baan became
liable to the Company for all damages incurred by the Company as a result of any
change to or termination of the Sublease, including the obligation by Baan to
indemnify the Company from any and all losses and/or damages, including, but not
limited to, reasonable attorneys fees claimed against and/or incurred by the
Company as a result such breach of the Master Lease by Baan.
As of November 1, 2003, the Company entered into a new direct lease with the
Master Landlord for the Company to remain in the Premises (the "New Lease"). The
New Lease contains, in addition to customary lease terms and conditions, the
following provisions: (i) the total rental amount under the New Lease equals the
Sublease Base Rental Amount plus the Sublease Equipment Rental Amount, which are
the same amounts that the Company had been paying to Baan under the Sublease,
(ii) the Security Deposit is now being held by the Master Landlord, (iii) the
Master Landlord has guaranteed that the Company will receive from the Master
Landlord, on or before November 1, 2004, the sole ownership and title to the
Furniture and Equipment in consideration for the amount of the Security Deposit
being thereafter retained by the Master Landlord as payment for the Furniture
and Equipment, and (iv) the Master Landlord will not require any new security
deposit from the Company under the New Lease for the Premises. The Company
believes that the present market value of the Furniture and Equipment is greater
than the amount of the Security Deposit, and as of September 30, 2003, has
recorded Furniture and Equipment assets of $87,500, which represents the
Company's Security Deposit of $52,500 to be retained by the Master Landlord as
payment for the Furniture and Equipment, plus the total of $35,000 in Furniture
and Equipment payments to be made by the Company to the Master Landlord as part
of the total rent over the initial twelve-month period pursuant to the terms of
the New Lease. In addition, the Company has recorded an accrued liability in the
amount of $35,000 for the balance due as payment for the Furniture and
Equipment. As a result of the foregoing and as a condition of the New Lease, the
Company has released Baan from any further liability to the Company due to the
breach by Baan of the Sublease.
The New Lease commenced on November 1, 2003, and terminates on July 31, 2009.
The cost per square foot has a fixed escalation of approximately 4% effective on
July 31, 2004, and each anniversary thereafter. Aggregate future minimum
payments, excluding the payments totaling $35,000 for the Furniture and
Equipment, are approximately $1,506,610. In accordance with US
12
GAAP, the Company will recognize rent expense on a straight-line basis over the
term of the lease.
NOTE F - CHANGES IN SHAREHOLDERS' EQUITY
During the quarter ended September 30, 2003, certain employees and former
employees exercised incentive stock options to purchase five hundred shares of
common stock at $0.12 per share, resulting in net proceeds to the Company of
approximately $60. During the quarter ended June 30, 2003, certain employees and
former employees exercised incentive stock options to purchase 8,189 shares of
common stock at a price of $0.12 per share, resulting in net proceeds to the
Company of approximately $1,000. During the quarter ended March 31, 2003,
certain employees and former employees exercised incentive stock options to
purchase 24,125 shares of common stock at a price of $0.12 per share, resulting
in net proceeds to the Company of approximately $3,000.
On January 27, 2003, the Company awarded 12,500 shares of restricted common
stock to Norman Welsch, Chief Financial Officer and Corporate Secretary, in
connection with his employment with the Company. As a result, the Company
recorded compensation expense of approximately $6,000 during the quarter ended
March 31, 2003.
NOTE G - SEGMENT REPORTING
As previously disclosed in the financial statements for the year ended December
31, 2002, contained in the Company's Annual Form 10-KSB filed on March 31, 2003,
the Company's reportable business segments were changed as a result of the
change in management, which occurred in the fourth quarter of 2002. Prior period
results have been restated to conform to the current period's presentation. The
new management team focuses on marketing and delivering tailored solutions to
Commercial, Government and Intelligence Community customers. The Company
provides a convenient, cost effective and centralized source of Enterprise
Content Management (ECM) applications and deep ECM domain expertise. Around the
full lifecycle of content, the Company markets and delivers pointed solutions,
which include its proprietary products as well as domain expertise in many
third-party technologies. As such, internal financial reporting that is provided
to the chief operating decision-maker is evaluated along these lines of
business. The solution offerings are a combination of services, proprietary
products and third party products. Services revenues are derived from
implementing specific vertical market solutions that enhance the capabilities of
content management systems. License revenues are derived from the licensing of
proprietary software products and their associated maintenance and support.
Third party revenues include software licenses and hardware with some related
services.
Infodata's management team budgets and evaluates its segment performance on the
basis of revenues less direct costs, which includes all direct labor and fringe
benefits, other direct costs and all overhead labor plus related fringe benefits
and non-labor overhead costs, that either is caused by or benefits each segment.
In prior years, direct costs used to determine segment profit included direct
labor and fringe benefits, other direct costs, and overhead labor and related
fringe benefits. The Company does not internally report assets on a segment
basis. For comparison purposes, the Company has prepared separate information
for the three and nine month periods ended September 30, 2003 and 2002, to
conform to the Commercial, Government and Intelligence Community segments.
13
The tables below present information about reported segments for the three and nine month periods ended September 30, 2003 and
2002, as well as a reconciliation to reported income before income taxes (in thousands).
Three Months Ended September 30, 2003 Three Months Ended September 30, 2002
------------------------------------------------ ------------------------------------------------
Commercial Government Intelligence Total Commercial Government Intelligence Total
------------------------------------------------ ------------------------------------------------
Revenues
Services $ 104 $ 403 $ 983 $1,490 $ 303 $ 423 $ 865 $1,591
License fees 438 36 -- 474 501 35 -- 536
Third party products -- -- 17 17 -- 110 -- 110
------ ------ ------ ------ ------ ------ ------ ------
Total revenues $ 542 $ 439 $1,000 $1,981 $ 804 $ 568 $ 865 $2,237
Direct costs 143 307 675 1,125 262 405 575 1,242
------ ------ ------ ------ ------ ------ ------ ------
Segment profit 399 132 325 856 542 163 290 995
Research and development (153) (132)
Other costs not allocated
to segments, primarily
selling, general and
administrative (610) (460)
Interest, net 1 (4)
------ ------
Income before income
taxes $ 94 $ 399
====== ======
Nine Months Ended September 30, 2003 Nine Months Ended September 30, 2002
------------------------------------------------ ------------------------------------------------
Commercial Government Intelligence Total Commercial Government Intelligence Total
------------------------------------------------ ------------------------------------------------
Revenues
Services $ 596 $1,130 $2,785 $4,511 $1,050 $ 955 $3,782 $5,787
License fees 1,571 106 -- 1,677 1,255 116 -- 1,371
Third party
products -- -- 17 17 -- 399 87 486
------ ------ ------ ------ ------ ------ ------ ------
Total revenues $2,167 $1,236 $2,802 $6,205 $2,305 $1,470 $3,869 $7,644
Direct costs 552 792 1,845 3,189 1,089 1,106 2,778 4,973
------ ------ ------ ------ ------ ------ ------ ------
Segment profit 1,615 444 957 3,016 1,216 364 1,091 2,671
Research and development (713) (490)
Other costs not allocated
to segments, primarily
selling, general and
administrative (1,993) (1,758)
Interest, net 6 (19)
------ ------
Income before income
taxes $ 316 $ 404
====== ======
14
Item 2. Management's Discussion and Analysis or Plan of Operation
FORWARD-LOOKING STATEMENTS CONTAINED IN THIS FOR 10-QSB 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 PRODUCT 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 a convenient, cost effective and centralized source of
Enterprise Content Management (ECM) applications and deep ECM domain expertise.
Around the full lifecycle of content, the Company markets and delivers pointed
solutions, which include its proprietary products as well as domain expertise in
many third-party technologies. The solution offerings focus on significantly
reducing the challenges and inefficiencies that customers face with content
management, such as ECM Environment, Integrated Case Management, Citizen
Feedback, Content Addressed Storage, Forms Process Automation and Records
Management. The strategic business plan has continued to evolve, with marketing
and delivery now primarily focused on leveraging the Company's proprietary
products and deep ECM domain expertise by exploiting partnering and fulfillment
opportunities, and expanding sales and marketing as an investment for future
profitable growth. Revenues from licensing proprietary software products include
AnnoDoc(R), Compose(R), Signet, INQUIRE(R)/Text software, WebINQUIRE(R), and
their associated maintenance and support. Revenues from third party products
include software and hardware with some related services. The Company serves
three markets with consistent product and service offerings: Commercial,
Government and the Intelligence Community.
The Company's future operating results may vary significantly and are difficult
to predict due to a number of factors, many of which are beyond its control.
These factors include the demand for the Company's services and proprietary
products, the level of product and price competition, the length of the sales
cycles, the delay or deferral of customer implementation, the success of the
direct and indirect sales force and the Company's channel partners, the mix of
products and services sold, the timing of hiring of new employees and/or
consultants, 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.
Significant Estimates and Critical Accounting Policies
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 are believed to be reasonable under the circumstances. Actual results may
differ from these estimates under different assumptions or conditions.
15
Revenue Recognition - Long-Term Contracts - A portion of the Company's revenues
are derived primarily from long-term contracts. Revenues on time and material
contracts with a maximum price per labor hour or not to exceed limit are based
on the level of effort billed to the customer up to the maximum price or not to
exceed limit. Revenues on long-term fixed-price contracts are generally
recognized using the percentage-of-completion method of accounting. Such
revenues are recorded based on the percentage which 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 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, revenues and gross profits from year to year can fluctuate
significantly. In the event that 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 the Company fail to perform
sufficiently under such contracts, previously recognized revenues could be
reversed and/or future period revenues could be reduced.
Software 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. 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 deemed probable. If an ongoing vendor obligation exists under
the license arrangement, revenue is deferred based on vendor-specific objective
evidence of the undelivered element. If vendor-specific objective evidence does
not exist for all undelivered elements, all revenue is deferred until sufficient
evidence exists or all elements have been delivered. Revenue from annual
maintenance and support, including third party software maintenance, is deferred
and recognized ratably over the term of the contract.
Deferred Tax Assets - The Company has recorded a full valuation allowance to
reduce its deferred tax assets to the amount that is more likely than not to be
realized. In the event the Company determines that the deferred tax assets may
be realized in the future in excess of the 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 SEPTEMBER
30, 2003 AND SEPTEMBER 30, 2002
Revenues
As previously disclosed in the financial statements for the year ended December
31, 2002, contained in the Company's Annual Form 10-KSB filed on March 31, 2003,
the Company's reportable business segments were changed as a result of the
change in management, which occurred in the fourth quarter of 2002. The new
management team focuses on marketing and delivering tailored solutions to
Commercial, Government and Intelligence Community customers. The Company
provides a convenient, cost effective and centralized source of Enterprise
Content
16
Management (ECM) applications and deep ECM domain expertise. Around the full
lifecycle of content, the Company markets and delivers pointed solutions, which
include its proprietary products as well as domain expertise in many third-party
technologies. As such, internal financial reporting that is provided to the
chief operating decision-maker is evaluated along these lines of business. The
solution offerings are services, proprietary products and third party products.
Services revenues are derived from specific vertical market solutions by
delivering a software services layer that enhances the capabilities of content
management systems. License revenues are derived from the licensing of
proprietary software products and their associated maintenance and support.
Third party revenues include software licenses and hardware with some related
services.
For the quarter ended September 30, 2003, total revenues decreased by
approximately $256,000, or 11.4%, to approximately $1,981,000, down from
approximately $2,237,000 for the quarter ended September 30, 2002. Revenues for
each period consisted of the following:
Three Months Ended
(Dollar Amounts in Thousands)
September 30, 2003 September 30, 2002 Increase (Decrease) %
------------------ ------------------ ---------------------
Commercial
----------
Services $ 104 $ 303 (65.7%)
License fees 438 501 (12.6%)
Third party products -- -- --
---------------------------------------------------------------
Total Commercial Revenue $ 542 $ 804 (32.6%)
===============================================================
Government
----------
Services $ 403 $ 423 (4.7%)
License fees 36 35 2.9%
Third party products -- 110 (100.0%)
---------------------------------------------------------------
Total Government Revenue $ 439 $ 568 (22.7%)
===============================================================
Intelligence
------------
Services $ 983 $ 865 13.6%
License fees -- -- --
Third party products 17 -- 100.0%
---------------------------------------------------------------
Total Intelligence Revenue $ 1,000 $ 865 15.6%
===============================================================
Total Revenues $ 1,981 $ 2,237 (11.4%)
===============================================================
For the quarter ended September 30, 2003, total revenues for the Commercial
segment were approximately $542,000, a decrease of approximately $262,000, or
32.6%, from total revenues of approximately $804,000 for the quarter ended
September 30, 2002. The decrease was primarily the result of a decline in
services revenues resulting from the completion of several projects, and lower
license fee revenues from various commercial customers.
In the Government segment, total revenues were approximately $439,000 for the
quarter ended September 30, 2003, a decrease of approximately $129,000, or
22.7%, from total revenues of approximately $568,000 for the quarter ended
September 30, 2002. The decrease was primarily the result of the decline in
sales of third party products as the Company focused primarily on the sales of
its higher-margin proprietary products.
17
For the quarter ended September 30, 2003, total revenues for the Intelligence
segment were approximately $1,000,000, an increase of approximately $135,000, or
15.6%, from total revenues of approximately $865,000 for the quarter ended
September 30, 2002. The increase was primarily the result of higher services
revenues from its intelligence customers.
Gross Profit
Gross profit decreased by approximately $139,000, or 14.0%, from approximately
$995,000 for the three months ended September 30, 2002, to approximately
$856,000 for the three months ended September 30, 2003. Gross margin as a
percent of revenues decreased from approximately 44.5% for the three months
ended September 30, 2002 to approximately 43.2% for the three months ended
September 30, 2003. The decrease in gross margin was primarily the result of the
mix of the overall lower revenue in the current quarter.
Research and Development Expenses
Research and development expenses increased approximately $21,000, or 15.9%, to
approximately $153,000 for the three months ended September 30, 2003, up from
approximately $132,000 for the three months ended September 30, 2002. The
increase was the result of increased spending for the development and
enhancement of the Company's proprietary products.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased approximately $150,000,
or 32.6%, to approximately $610,000 for the three months ended September 30,
2003, up from approximately $460,000 for the three months ended September 30,
2002. The increase was primarily the result of an increase in costs associated
with sales, marketing and management personnel.
Interest Income and Expense
Interest income decreased by approximately $1,000, to approximately $2,000 for
the three months ended September 30, 2003, from $3,000 for the three months
ended September 30, 2002. The decrease in interest income was due to lower
interest rates than in the comparable period. The Company incurred $1,000 of
interest expense for the quarter ended September 30, 2003, compared to
approximately $7,000 of interest expense for the quarter ended September 30,
2002, a decrease of approximately $6,000. The reduction in interest expense was
the net result of having no outstanding balances on the line of credit during
the current quarter.
CONDENSED CONSOLIDATED RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER
30, 2003 AND 2002
Revenues
For the nine months ended September 30, 2003, total revenues decreased by
approximately $1,439,000, or 18.8%, to approximately $6,205,000. Revenues for
each period consisted of the following:
18
Nine Months Ended
(Dollar Amounts in Thousands)
September 30, 2003 September 30, 2002 Increase (Decrease) %
------------------ ------------------ ---------------------
Commercial
----------
Services $ 596 $ 1,050 (43.2%)
License fees 1,571 1,255 25.2%
Third party products -- -- --
-----------------------------------------------------------------------
Total Commercial Revenue $ 2,167 $ 2,305 (6.0%)
=======================================================================
Government
Services $ 1,130 $ 955 18.3%
License fees 106 116 (8.6%)
Third party products -- 399 (100.0%)
-----------------------------------------------------------------------
Total Government Revenue $ 1,236 $ 1,470 (15.9%)
=======================================================================
Intelligence
Services $ 2,785 $ 3,782 (26.4%)
License fees -- -- --
Third party products 17 87 (80.5%)
-----------------------------------------------------------------------
Total Intelligence Revenue $ 2,802 $ 3,869 (27.6%)
=======================================================================
Total Revenues $ 6,205 $ 7,644 (18.8%)
=======================================================================
For the nine months ended September 30, 2003, total revenues for the Commercial
segment were approximately $2,167,000, a decrease of approximately $138,000, or
6.0%, from total revenues of approximately $2,305,000 for the nine months ended
September 30, 2002. The decrease was primarily the combined result of a decrease
in services revenues from various projects that were completed in prior periods,
which was partially offset by an increase in license fees from a single large
sale of AnnoDocTM software to a pharmaceutical company in the quarter ended
March 31, 2003.
In the Government segment, total revenues were approximately $1,236,000 for the
nine months ended September 30, 2003, a decrease of approximately $234,000, or
15.9%, from total revenues of approximately $1,470,000 for the nine months ended
September 30, 2002. The decrease was primarily the result of the decline in
sales of third party products as the Company focused primarily on the sales of
its higher-margin proprietary products, which was partially offset by an
increase in services revenues.
For the nine months ended September 30, 2003, total revenues for the
Intelligence segment were approximately $2,802,000, a decrease of approximately
$1,067,000, or 27.6%, from total revenues of approximately $3,869,000 for the
nine months ended September 30, 2002. The decrease was primarily related to the
termination of the Company's largest contract by a U.S. Government Agency. The
U.S. Government intelligence customer accounted for approximately $2,741,000, or
70.8%, of the segment's total revenues for the nine months ended September 30,
2002. On March 1, 2002, the major U.S. Government intelligence customer notified
the Company that the scope of its largest contract was going to be substantially
reduced. On August 26, 2002, the U.S. Government Agency delivered a unilateral
contract modification to the Company agreeing to an equitable adjustment of
$47,105 related to the de-scope and termination of the contract. In May of 2002,
another contract with the same customer commenced, and for the nine months ended
September 30, 2003, accounted for approximately $1,721,000, or 61.4%, of the
segment's total revenues. For the nine months ended September 30, 2002, this
contract accounted for approximately $872,000, or 22.5%, of the segment's total
revenues.
19
Gross Profit
Gross profit increased by approximately $345,000, or 12.9%, to approximately
$3,016,000 for the nine months ended September 30, 2003, up from approximately
$2,671,000 for the nine months ended September 30, 2002. Gross margin as a
percent of revenues increased to 48.6% for the nine months ended September 30,
2003, up from 34.9% for the nine months ended September 30, 2002. The increase
in gross margin was primarily the net result of an increase in revenues from
high-margin direct sales of proprietary software products, and decreases in
comparatively lower-margin services revenues, low-margin sales through channel
partners, and low-margin third party products.
Research and Development Expenses
Research and development expenses increased approximately $223,000, or 45.5%, to
approximately $713,000 for the nine months ended September 30, 2003, up from
approximately $490,000 for the nine months ended September 30, 2002. The
increase was attributable to increased spending for the development and
enhancement of the Company's proprietary products.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased approximately $235,000,
or 13.4%, to approximately $1,993,000 for the nine months ended September 30,
2003, up from approximately $1,758,000 for the nine months ended September 30,
2002. The increase was primarily the result of an increase in costs associated
with sales, marketing and management personnel.
Interest Income and Expense
Interest income decreased approximately $4,000, or 33.3%, to approximately
$8,000 for the nine months ended September 30, 2003, from approximately $12,000
for the nine months ended September 30, 2002. The reduction in interest income
was due to lower invested balances and interest rates compared to the same
period in 2002. The Company incurred approximately $2,000 in interest expense
for the nine months ended September 30, 2003, a decrease of approximately
$29,000 compared to $31,000 of interest expense for the nine months ended
September 30, 2002. The decrease in interest expense was the combined result of
higher interest rates and higher line of credit balances in the year earlier
period.
Liquidity and Capital Resources
At September 30, 2003, the Company had cash and cash equivalents of
approximately $1,170,000 and net working capital of approximately $1,789,000. At
September 30, 2002, the Company had cash and cash equivalents of approximately
$990,000 and net working capital of approximately $1,240,000. As of December 31,
2002, the Company had cash and cash equivalents of approximately $1,298,000 and
working capital of approximately $1,563,000. When compared to December 31, 2002,
cash and cash equivalents for the nine months ended September 30, 2003 decreased
by approximately $128,000, which was primarily the net result of purchases of
property and equipment and net repayments of short-term debt, which was
partially offset by net cash provided by operating activities. The increase in
working capital of approximately $226,000 was primarily the result of the
Company's net income for the nine months ended September 30, 2003.
On July 30, 2003, the Company renewed its Assignment and Transfer of Receivables
Agreement ("Assignment Agreement") with Commerce Funding Corporation ("Commerce
Funding") for a period of twelve months. The Assignment Agreement will
automatically renew for successive one-year periods unless cancelled by the
Company thirty days prior to the last day of the existing term. The terms of the
Assignment Agreement provide for assignment of the Company's
20
receivables to Commerce Funding from time to time, and Commerce Funding will, at
its sole discretion, make funding available to the Company up to an amount not
to exceed $1,000,000. Interest under this Assignment Agreement is to be paid
semi-monthly at Prime +1.25 percentage points and Commerce Funding will also
charge a processing fee of 0.65% for the first thirty day period based on gross
invoice amounts. The Company is required to pay a minimum charge of
approximately $1,000 per month for the interest and processing fees that is
deductible from the actual interest and processing fees due for the month.
Commerce Funding has full recourse against the Company in the event of
non-payment of any receivable assigned by the Company to Commerce Funding. The
Company has granted a security interest to Commerce Funding in all receivables
owned or hereinafter acquired, including all contract rights, proceeds and
returned goods thereof, and all accounts and cash held therein maintained by the
Company with any bank or financial institution. The Assignment Agreement can be
terminated by either party at their discretion and at any time by giving a
thirty-day written notice to the other party. In the event that the Company
terminates the Assignment Agreement before the expiration of the term, the
Company is required to pay a termination fee of $3,000. Commerce Funding may
terminate the Assignment Agreement at any time if the Company commits any event
of default. As of September 30, 2003, the Company had not assigned any of its
receivables and had no outstanding balance on the line of credit.
Prior to the quarter ended September 30, 2002, the Company had a history of
operating and cash flow losses. Management took a number of actions in 2002,
including reductions in force and other cost-cutting measures, to restore the
Company to positive operations and cash flows. As a result of these efforts, the
Company has had six consecutive profitable quarters. Additionally, management
was able to obtain receivable financing for working capital requirements.
Management believes that existing cash, short-term investments, and the credit
facility will be sufficient to fund working capital requirements through 2004.
The Company plans to continue to use working capital to invest in R&D and sales
and marketing in an effort to increase sales of proprietary software products,
and expects that profitability during 2003 may be lower as a result of these
investments.
Contingencies
Costs charged to cost-type U.S. Government contracts are subject to audit by the
Defense Contract Audit Agency or other duly authorized representatives of the
U.S. Government. Audits have been completed for all periods prior to 2002. In
March 2003, the audit for the years 1999 - 2001 was completed and settled. As
such, the Company was entitled to bill approximately $71,000 of previously
unrecognized cost and profit. The Company is continuing the process of
administratively closing-out several old contracts that date back as far as
1992. In the opinion of management, adjustments resulting from the completion of
future audits and contract close-outs are not expected to have a material impact
on the Company's financial position or results of future operations.
The Company has been notified by the Department of Labor that its employee
benefit plan (the "Benefit Plan") which qualifies under Section 401(k), for plan
years ended December 31, 2000 and 2001, was required to have an independent
Accountant's Opinion rendered on the Benefit Plan's financial statements to be
issued no later than October 15, 2001 and 2002, respectively. Failure to file
these forms on time could result in government penalties up to $1,100 per day.
The likelihood or amount of penalties, if any, that might be imposed has not
been determined, and accordingly, an amount has not been accrued for in the
accompanying consolidated financial statements. The independent Accountant's
Opinions of the Benefit Plan's financial statements for the years ended December
31, 2000 and 2001 were completed and submitted in June 2003. Based on
discussions with DOL representatives, management does not believe that DOL will
impose any penalties on the Company. The independent Accountant's Opinion on the
Benefit Plan's financial statements for plan year ended December 31, 2002, was
timely filed.
21
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.
Item 3. Controls and Procedures
An evaluation was carried out under the supervision and with the participation
of the Company's management, including our Chief Executive Officer and Chief
Financial Officer, regarding the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of
1934) as of September 30, 2003. As a result of their evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that the Company's
disclosure controls and procedures are effective to ensure that information
required to be disclosed by the Company in reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission rules and
forms. There were no changes in the Company's internal controls over financial
reporting that occurred during the quarter ended September 30, 2003, that has
materially affected or is reasonably likely to materially affect, the Company's
internal controls over financial reporting.
22
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
On October 27, 2003, the Company issued a press release announcing the
formation of a Board of Advisors (the "Advisory Board") and that four
highly regarded executive leaders had accepted immediate positions.
Each Advisory Board member has agreed to serve a two-year term. As an
incentive to join the Advisory Board, each member was granted a
non-qualified stock option to purchase 15,000 shares of the Company's
common stock with an exercise price equivalent to the fair market
value at date of grant, and which vests ratably each quarter during
the two-year term. In addition, as compensation for their services
over the two-year term, each member is to receive a quarterly grant of
non-qualified stock options to purchase 2,000 shares of the Company's
common stock, with an exercise price equivalent to the fair market
value at date of grant and which are fully vested at date of grant.
Item 6. Exhibits and Reports On Form 8-K
(a) Exhibits
The following Exhibits are filed herewith:
31.1 Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K.
On August 13, 2003, the Company filed a Form 8-K reporting that it
had issued a press release on August 12, 2003, which announced its
second quarter 2003 financial results, and provided notice that the
Company had scheduled a conference call for August 12, 2003, to
discuss the Company's financial results.
23
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.
Date: November 14, 2003
BY: /s/ Edwin A. Miller
---------------------------------------
Edwin A. Miller
President and CEO
(Principal Executive Officer)
BY: /s/ Norman F. Welsch
---------------------------------------
Norman F. Welsch
Chief Financial Officer and Corporate
Secretary
(Principal Financial Officer)
BY: /s/ Laura L. Sullivan
---------------------------------------
Laura L. Sullivan
Controller
(Principal Accounting Officer)
24