SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-QSB/A No. 1
QUARTERLY REPORT
Pursuant to Section 13 or 15 (d) of the
Securities and Exchange Act of 1934
Amendment No. 1 to Quarterly Report on Form 10-QSB for the quarter ended
September 30, 1997.
INFODATA SYSTEMS INC.
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(Exact name of Registrant as specified in its charter)
Virginia 0-10416 16-0954695
---------------------------- ------------ --------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification
Number)
12150 Monument Drive
Suite 400
Fairfax, Virginia 22033
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(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (703) 934-5205
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The undersigned registrant hereby amends the following items, financial
statements, exhibits or other portions of its Quarterly Report on Form 10-QSB
for the quarter ended September 30, 1997, as set forth in the pages attached
hereto:
PART I. Item 1 - Financial Statements
Item 2 - Management's Discussion and Analysis
PART II. Item 6 - Exhibits and Reports on Form 8-K
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorized.
INFODATA SYSTEMS INC.
February 13, 1998
By:/s/JAMES A. UNGERLEIDER
------------------------
James A. Ungerleider
President
By:/s/CHRISTOPHER P. DETTMAR
--------------------------
Christopher P. Dettmar
Chief Financial Officer
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INFODATA SYSTEMS INC. AND SUBSIDIARIES Amounts in
Condensed Consolidated Statements of Operations
(Amounts In Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ---------------------
1997 1996 1997** 1996
-------- -------- -------- --------
Revenues $ 3,037 $ 2,502 $ 7,033 $ 7,355
Cost of revenues 1,622 1,334 4,037 4,412
-------- -------- -------- --------
Gross profit 1,415 1,168 2,996 2,943
-------- -------- -------- --------
Operating expenses:
Research and development 751 281 1,696 537
Selling, general and administrative 1,440 739 3,942 2,007
-------- -------- -------- --------
2,191 1,020 5,638 2,544
-------- -------- -------- --------
Operating income (loss) (776) 148 (2,642) 399
Interest income 14 23 54 70
Interest expense (11) (2) (18) (9)
-------- -------- -------- --------
Income before income taxes (773) 169 (2,606) 460
Provision for income taxes - - (5) 7
Net income (loss) $ (773) $ 169 $(2,601) $ 453
======== ======== ======== ========
Preferred dividends - - - 58
Net income (loss) available to common
shareholders $ (773) $ 169 $(2,601) $ 395
======== ======== ======== ========
Per share:
Net income (loss) per common
and equivalent share $ (0.26) $ 0.08 $ (1.08) $ 0.19
======== ======== ======== ========
Weighted average shares(*) 3,031 2,149 2,407 2,085
<FN>
(*) All share and per share amounts retroactively reflect a 1-for-6 common
stock dividend in May 1996 and a 2-for-1 common stock split in the form
of a 100% stock distribution made on August 26, 1996 to shareholders of
record as of August 12, 1996.
(**) Amounts for the nine months ended September 30, 1997 have been restated.
</FN>
The accompanying notes are an integral part of theses consolidated statements.
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INFODATA SYSTEMS INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollar Amounts in Thousands)
(Unaudited)
ASSETS
September 30, December 31,
1997* 1996
------------- ------------
Current assets
Cash and cash equivalents $ 278 $ 1,266
Short term investments 425 947
Accounts receivable, net of allowance of
$80 and $80 2,219 1,522
Other current assets 234 185
--------- ---------
Total current assets 3,156 3,920
Property and equipment, at cost:
Furniture and equipment 2,713 2,373
Less accumulated depreciation and
amortization (2,136) (1,897)
--------- ---------
577 476
Goodwill, net of accumulated amortization
of $98 and $36 3,681 274
Other assets 105 137
Software development costs, net of accumulated
amortization of $2.084 and $2.052 136 84
Total assets $ 7,655 $4,891
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
September 30, December 31,
1997 1996
------------- ------------
Current Liabilities
Current portion of capital lease obligations $ 30 $ 46
Current portion of note payable 958 -
Accounts payable 1,135 327
Accrued expenses 822 823
Deferred revenue 1,070 1,079
Current portion of deferred rent 33 33
--------- ---------
Total current liabilities 4,048 2,308
--------- ---------
Capital lease obligations 12 33
Deferred revenue 75 75
Deferred rent - 19
--------- ---------
Total liabilities 4,135 2,435
Shareholders' equity
Common stock 82 68
Additional paid-in capital 12,706 9,055
Accumulated deficit (9,268) (6,667)
--------- ---------
Total shareholders' equity 3,520 2,456
--------- ---------
Total liabilities and shareholders' equity $ 7,655 $ 4,891
========= =========
<FN>
(*) Amounts as of September 30, 1997 have been restated.
</FN>
The accompanying notes are an integral part of these consolidated statements.
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INFODATA SYSTEMS INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollar Amounts in Thousands)
(Unaudited)
Nine Months Ended
September 30,
1997* 1996
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(2,601) $ 453
Adjustments to reconcile net income (loss) to
cash provided by operating activities:
Depreciation and amortization 261 195
Software amortization 31 32
Goodwill and other intangible amortization (44) 34
Other - (6)
Changes in operating assets and liabilities:
Accounts receivable (696) (185)
Prepaid royalties and other current assets (49) (20)
Other Assets 32
Accounts payable 808 (122)
Accrued expenses (8) 196
Deferred revenue (8) (285)
Deferred rent (19) (31)
-------- --------
Net cash provided by (used in)
operating activities (2,293) 261
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (340) (200)
Business acquisition - (12)
Proceeds from maturity of short term investments 522 29
-------- --------
Net cash (used in) provided by investing activities 182 (183)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations (37) (84)
Proceeds from short-term borrowing 1,280
Payments of notes payable (324) (2)
Preferred stock dividends - (87)
Issuance of common stock 204 155
-------- --------
Net cash (used in) provided by financing activities 1,123 (18)
-------- --------
Net (decrease) increase in cash and cash equivalents (988) 60
Cash and cash equivalents at beginning of period 1,266 1,476
-------- --------
Cash and cash equivalents at end of period $ 278 $ 1,536
======== ========
<FN>
(*) Amounts for the nine months ended September 30, 1997 have been restated.
</FN>
The accompanying notes are an integral part of these consolidated statements.
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INFODATA SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the Nine Months Ended
September 30, 1997 has been restated)
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 accruals) considered necessary for
a fair presentation have been included. Operating results for the three and
nine month periods ended September 30, 1997, are not necessarily indicative of
the results for the year ended December 31, 1997. 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,
1996.
NOTE B - RECENT AUTHORITATIVE PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 128, "Earnings per Share,"
changes the reporting requirements for earnings per share (EPS) for publicly
traded companies by replacing primary EPS with basic EPS and changing the
disclosures associated with this change. The Company is required to adopt this
standard for its December 31, 1997 year-end. Under SFAS No. 128, the Company's
basic and diluted loss per share would have been $(1.08) at September 30, 1997
on a pro forma basis. Common equivalent shares were not included in the
calculation of diluted loss per share as their effect would have been
antidilutive. As a result, the basic and diluted loss per share amounts are
identical.
SFAS No. 129, "Disclosure of Information about Capital Structure," establishes
standards for disclosing information about an entity's capital structure. The
Company is required to adopt this standard for its December 31, 1997 year-end.
The Company does not expect that this pronouncement will have a material
impact on its financial statements.
Statement of Accounting Standards No. 130, "Reporting Comprehensive Income,"
establishes standards for the reporting and display of comprehensive income in
a full set of general purpose financial statements. The Company is required to
adopt this standard for its December 31, 1998 year-end and is currently
evaluating the impact of this standard.
Statement of Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information," requires that public business enterprises
report
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certain information about operating segments. The Company is required to adopt
this standard for its December 31, 1998 year-end and is currently evaluating
the impact of this standard.
NOTE C - LINE OF CREDIT
In November 1996, the Company entered into a working capital line of credit
with Merrill Lynch Business Financial Services Inc. This loan facility
provides the Company with up to a $1,000,000 line of credit at a per annum
rate equal to the sum of 2.9 percent plus the 30-day commercial paper rate.
This per annum rate was 8.4% as of September 30, 1997. The weighted average
interest rate for the nine months ended September 30, 1997 was 8.4%. The
advances on the facility are based on eligible billed accounts receivable
fewer than 90 days old, which constitute collateral for the line of credit.
The facility expires in July 1998. As of December 31, 1996, the Company had no
borrowings under this line of credit. As of September 30, 1997, the Company
had borrowed $958,000 under this line of credit.
NOTE D - SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest totaled $18,000 and $9,000 for the nine-month
periods ended September 30, 1997 and 1996, respectively. No cash was paid for
income taxes in either period.
NOTE E - BUSINESS ACQUISITION
On July 22, 1997, the Company acquired all of the common stock of AMBIA
Corporation ("AMBIA") in consideration for 400,000 shares of the Company's
Common Stock (restricted as to sale) with a fair value of $7.75 per share,
which was equivalent to the trading price of the Company's Common Stock on
such date. As a result of the acquisition, outstanding options to purchase
390,000 shares of AMBIA common stock were converted into options to acquire
approximately 35,000 shares of the Company's Common Stock at an exercise price
of $1.69 per share. The fair value of the options is recorded as part of the
acquisition cost. The total acquisition cost was approximately $3,461,000
including the direct costs of the acquisition. Approximately $25,000 was
allocated to acquired tangible assets, $144,000 to acquired intangible assets,
and $3,292,000 to goodwill. The acquired intangible assets and goodwill are
being amortized over two years and seven years, respectively. The acquisition
was treated as a purchase and was accomplished by means of a merger of a
wholly owned subsidiary of the Company into AMBIA. AMBIA develops, markets and
sells software products and consulting services, which are complimentary to
those being developed, marketed and sold by the Company. In the Company's
previously issued financial statements for the period ended September 30,
1997, the fair value of the options was not recorded as part of
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the acquisition costs. Additionally, the Company had determined the
acquisition cost using a 30% discount from the trading price of the Company's
Common Stock on the date of acquisition. Since then, the Company has
determined that no discount was warranted. Also, the Company allocated an
additional $84,000 of the acquisition cost to acquired intangible assets. As a
net result of these changes, goodwill and intangible acquired assets were
increased by $1,079,000 and $84,000, respectively, as of September 30, 1997,
and amortization expense was increased by approximately $28,000 for the nine
months ended September 30, 1997. The impact on net income and earnings per
share was approximately $28,000 and $.01 per share, respectively, for the nine
months ended September 30, 1997.
The unaudited proforma financial information presented below reflects the
acquisition of AMBIA as if the acquisition had occurred on January 1, 1996.
These results are not necessarily indicative of future operating results or of
what would have occurred had the acquisition been consummated at that time.
(Unaudited)
September 30, December 31,
1997 1996
------------- ------------
Revenue $ 7,958,000 $10,395,000
Net loss available to
common shareholders (3,015,000) (743,000)
Net loss per share $ (1.11) $ (0.29)
NOTE F - SUBSEQUENT EVENTS
On October 24, 1997, the Company signed a non-binding letter of intent (LOI)
with Adobe Systems Inc. to cross-license and market certain technologies. The
LOI contemplates that the Company will perform certain development functions
in connection with the licensing of these technologies. Management expects to
collect approximately $1.5 million in license and service fees during the next
six months from this transaction.
On November 5, 1997, the Company named James Ungerleider, former American
Management Systems, Inc. Vice President, as President and Chief Executive
Officer to be effective November 24, 1997. At that time, Harry Kaplowitz, the
current President will become Executive Vice President.
As of September 30, 1997, the Company had incurred a net loss and accumulated
and working capital deficits. Management has developed a plan to obtain
additional financing to mitigate the Company's liquidity risk through a public
offering and sale of 1,600,000 shares of Common Stock pursuant to a
registration statement filed in December 1997 with the Securities and Exchange
Commission. However, there can be no assurance that such funds will be
secured. The lack of such funds could have a material adverse impact on the
Company's financial condition.
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NOTE G - RISKS AND UNCERTAINTIES
The Company is developing the Virtual File Cabinet (TM) (VFC(TM)), a family of
new proprietary software products. The Company has incurred significant costs
related to these products and will continue to incur these costs in the
future. Revenue for VFC products commenced during July 1997. There can be no
assurance as to the amount of VFC revenues in the future. Management has
identified potential contingency plans to mitigate the Company's future
liquidity risk and believes that such plans will be effective. Furthermore,
the Company is in negotiations regarding additional financing to support the
VFC business.
In 1996, a customer asserted that the Company did not perform on a contract
and sought a $90,000 refund. The Company vigorously denies the assertion and
management believes that based upon the current facts it is not probable that
a loss will occur. Accordingly, no accrual has been made for this claim at
September 30, 1997.
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Three Months Ended September 30, 1997 Compared to Three Months Ended September
30, 1996.
Revenues increased by $535,000, or 21%, from $2,502,000 for the three
months ended September 30, 1996 to $3,037,000 for the three months ended
September 30, 1997. The Company derived revenues from consulting services,
sales of third party products, sales of INQUIRE/Text-related products and
services and maintenance related thereto, and sales of the Company's software
products. During the quarter, VFC sales were minimal. Revenues from consulting
services and third party products, as well as training, increased by $261,000,
or 28%, from $933,000 for the three months ended September 30, 1996, to
$1,194,000 for the three months ended September 30, 1997, due to an increase
in product sales, and, to a lesser extent, related consulting services. AMBIA
contributed $253,000 to the Company's revenues for the quarter ended September
30, 1997.
Gross profit increased by $247,000, or 21%, from $1,168,000 for the
three months ended September 30, 1996, to $1,415,000 for the three months
ended September 30, 1997. The increase was due to the increase in revenue for
the quarter and the acquisition of AMBIA. Gross profit as a percentage of
sales was consistent for the three months ended September 30, 1997 compared to
the same period in 1996.
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Gross margin as a percentage of revenues approximated 47% for both the
three month period ended September 30, 1996 and the three month period ended
September 30, 1997. In general, revenue related to INQUIRE product and
maintenance sales has the highest profit margin. Company software sales have
the next highest margins, followed by consulting and the, third party products
sales. Prior to 1997, the Company did not quantify gross margins with respect
to specific revenue streams. Furthermore, in 1995, the Company changed its
methodology for overhead allocation to more accurately reflect certain
indirect cost of revenue, and in 1996, the Company changed accounting systems.
Thus, an accurate comparison of historical gross margins by revenue stream is
not possible. For the nine months ended September 30, 1997, gross margin was
approximately 82% for sales of INQUIRE/Text products and maintenance,
approximately 79% for sales of VFC, approximately 90% for sales of AMBIA
products, which consist solely of software, approximately 24% for consulting
services and approximately 15% for third party product sales. The Company
expects to maintain substantially the same margin through 1998, although there
can be no assurance that it will do so. For the three months ended September
30, 1997, the Company's margin as a percentage of sale remained consistent.
Third party product and Company software sales both increased as a percentage
of sales. Consulting services and revenues from INQUIRE/Text-related products
and services both decreased as a percent of total revenue, and consulting
services decreased approximately 9% compared to the three months ended
September 30, 1996. The net effect was that there was little change in the
Company's margin.
The Company continues to invest heavily in the development of VFC. This
resulted in an increase of $470,000, or 167%, in research and development
expenditures from $281,000 for the three months ended September 30, 1996, to
$751,000 for the three months ended September 30, 1997. The Company expects
this investment to increase throughout 1998 and for the foreseeable future as
VFC product enhancements and capabilities are added.
Selling, general and administrative expenses increased by $701,000, or
95%, from $739,000 for the three months ended September 30, 1996, to
$1,440,000 for the three months ended September 30, 1997. The increase was due
primarily to the expansion of the sales and marketing staff and an increase in
marketing expenses associated with VFC. The Company expects these expenses to
increase throughout 1998 as new versions of VFC are released, new sales
channels are established and potential markets are explored.
Interest income decreased by $9,000, or 39%, from $23,000 for the three
months ended September 30, 1996 to $14,000 for the three months ended
September 30, 1997. The decrease was due to lower balances of cash, cash
equivalents, and short term investments during the three months ended
September 30, 1997, compared to the three months ended September 30, 1996.
Interest expense increased by $9,000, or 450%, from $2,000 for the three
months ended September 30, 1996 to $11,000 for the three months
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ended September 30, 1997. This was due to the increased utilization of a line
of credit during the third quarter.
As a result of the foregoing, the Company reported a net loss of
$773,000 for the three months ended September 30, 1997, compared to net income
of $169,000 for the same period in 1996.
Cash and short term investments decreased by $836,000, or 54%, from
$1,539,000 as of September 30, 1996 to $703,000 as of September 30, 1997. This
reflects losses incurred during the year offset by an increase in borrowings.
Accounts receivable increased $1,143,000 or 106% from $1,076,000 as of
June 30, 1997 to $2,219,000 as of September 30, 1997. Revenues increased
$1,081,000 or 55% from $1,956,000 for the three months ended June 30, 1997 to
$3,037,000 for the three months ended September 30, 1997. This growth in
revenue was the primary reason for the growth in receivables. Receivables grew
at a faster rate than revenues due to the acquisition of AMBIA. The company
acquired the outstanding receivables of AMBIA totaling $93,000 on July 22,
1997. Approximately $69,000 of these receivables were still uncollected as of
September 30, 1997.
At September 30, 1997, the Company maintained an adequate allowance for
doubtful accounts. Revenues for the three months ended September 30, 1997 were
$3,037,000 and receivables were $2,219,000. This represents a 66 day
collection cycle, as compared to a 62 collection cycle at December 31, 1996,
based on revenues of $2,205,000 for the three months then ended and
receivables of $1,522,000 at such date, and a 79 day collection cycle at
December 31, 1995, based on revenues of $2,156,000 for the three months then
ended and receivables of $1,901,000 at such date. The Company reviews its
receivables monthly and contacts all accounts that are outstanding for more
than 30 days. Based on its direct contact with customers and the Company's
aggressive collection efforts, the Company believes its allowance for doubtful
accounts is reasonable.
Nine Months Ended September 30, 1997 Compared to Nine Months Ended
September 30, 1996
Revenues decreased by $322,000, or 4%, from $7,355,000 for the nine
months ended September 30, 1996 to $7,033,000 for the nine months ended
September 30, 1997. The primary cause of this decrease was a decline in
revenues from consulting services and third party product sales of $735,000,
or 26%, from $2,867,000 for the nine months ended September 30, 1996 to
$2,132,000 for the nine months ended September 30, 1997, resulting from the
shift of certain of the Company's engineering personnel to research and
development to accelerate the development of VFC. In addition, INQUIRE/Text-
related revenue decreased by $118,000, or 5%, from $2,362,000 for the nine
months ended September 30, 1996 to $2,244,000 for the nine months ended
September 30, 1997. Due to the maturity of the product and the market, the
Company expects INQUIRE/Text-related revenue to continue to decline. The
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decrease in revenues was partially offset by AMBIA revenues of $253,000 from
July 22, 1997, the date of its acquisition, to September 30, 1997 and by an
increase in intelligence-related revenues of $278,000, or 13%, from $2,127,000
for the nine months ended September 30, 1996, to $2,405,000 for the nine
months ended September 30, 1997.
Gross profit increased by $53,000, or 2%, from $2,943,000 for the nine
months ended September 30, 1996, to $2,996,000 for the nine months ended
September 30, 1997. The slight increase was due to the acquisition of AMBIA.
The gross profit of $2,996,000 for the nine months ended September 30, 1997
represented an increase of $53,000, or 2%, over the gross profit of $2,943,000
for the nine months ended September 30, 1996. AMBIA product sales contributed
approximately $230,000 to gross profits for the quarter ended September 30,
1997. Revenues from the sale of AMBIA products for the three months ended
September 30, 1997 were approximately $207,000. The costs associated with
these sales, including direct costs and directly attributable allocated costs,
were approximately $189,000. These costs consisted primarily of direct
salaries and benefits, costs of sales, related software development, allocated
rent, indirect salaries, commissions, packaging, advertising and shipping.
AMBIA product sales contributed approximately $18,000 to the Company's
operating revenues.
Gross margin as a percentage of revenues increased by 2% from 40% for
the nine months ended September 30, 1996 to 42% for the nine months ended
September 30, 1997. The increase was due to a decline in revenues from
consulting services and third party product sales combined with the addition
of sales of higher margin AMBIA products.
For the nine months ended September 30, 1997, the Company's margin as a
percentage of sales increased 2%. The primary reason was the increase in sales
of INQUIRE/Text-related products and services and maintenance related thereto
and in revenues from Company software as a percentage of total sales. These
two lines of business have higher margins than both the consulting and third
party software lines of business.
Research and development expenditures increased by $1,159,000, or 216%,
from $537,000 for the nine months ended September 30, 1996, to $1,696,000 for
the nine months ended September 30, 1997. The Company continues to spend
heavily on the development of its VFC products.
Selling, general and administrative expenses increased by $1,935,000, or
96%, from $2,007,000 for the nine months ended September 30, 1996, to
$3,942,000 for the nine months ended September 30, 1997. The increase was due
primarily to the expansion of the sales and marketing staff and an increase in
marketing expenses associated with VFC.
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As a result of the foregoing, the Company reported a net loss of
$2,601,000 for the nine months ended September 30, 1997, compared to net
income of $453,000 for the same period in 1996.
Accounts payable increased by $885,000, or 354%, from $250,000 as of
September 30, 1996 to $1,135,000 as of September 30, 1997. This is due
primarily to an increase in expenses of $2,719,000 for the nine months ended
September 30, 1997 compared to the nine months ended September 30, 1996. It is
also due to the increased aging of payables.
Accounts receivable increased $697,000 or 46% from $1,522,000 as of
December 31, 1996 to $2,219,000 as of September 30, 1997. Revenues decreased
$322,000 or 4% from $7,355,000 for the nine months ended September 30, 1996 to
$7,033,000 for the nine months ended September 30, 1997. Receivables increased
because of an increase in revenues during the third quarter of 1997 and
because of the acquisition of AMBIA. Revenues were down significantly during
the first two quarters of 1997 compared to the first two quarters of 1996.
However, third quarter revenues increased 21% over third quarter revenue for
1996. In addition, the acquisition of AMBIA accounted for $69,000 of
receivables at September 30, 1997. For these reasons, the growth in
receivables exceeded the growth in revenues.
Liquidity and Capital Resources
At September 30, 1997, the Company had cash, cash equivalents and short
term investments of $703,000 and a working capital deficit of $892,000. The
Company maintains a line of credit with Merrill Lynch Business Financial
Services, Inc. for up to $1,000,000 based upon eligible receivables. Interest
on this debt is calculated at a per annum rate equal to the sum of 2.9% plus
the 30-day commercial paper rate. Currently, this per annum rate approximates
prime. The facility expires in July 1998. The line of credit is contingent
upon the Company continuing to meet certain general funding requirements,
including the absence of any material adverse change in the Company's business
or financial condition, the continued accuracy of the Company's
representations and warranties and the provision of annual and quarterly
financial information. The Company currently is in compliance with these
funding requirements. At November 28, 1997, the Company had outstanding
borrowings of approximately $986,000, including accrued interest, under this
line of credit. The Company is not involved in negotiations with any lenders
to obtain additional working capital financing.
Net cash used in operating activities for the nine months ended
September 30, 1997 of $2,293,000 was due to the Company's net loss for the
period of $2,601,000, and an increase in accounts receivable, offset by
non-cash expenses such as depreciation and amortization, and a significant
increase in accounts payable. Accounts receivable are derived from sales made
to customers on 30-day (or less) terms. Net cash provided by investing
activities of $182,000 for the nine months ended September 30, 1997 was
derived primarily from the maturity of short term investments, offset by
purchases of
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property and equipment. Net cash provided by financing of $1,123,000 came from
proceeds of short-term borrowing for the nine months ended September 30, 1997.
Accounts payable increased by $808,000, or 247%, between December 31,
1996 and September 30, 1997. This increase was caused in part by the
acquisition of AMBIA and in part by increased expenditures in research and
development and sales and marketing. These two factors resulted in an increase
in the number of vendors and the amount of orders to vendors. In addition, the
Company began paying its vendors more slowly in the third quarter of 1997. As
of September 30, 1997, approximately 57% of the Company's payables were past
due, as compared to approximately 28% at December 31, 1996.
The Company incurred net losses of $2,601,000 for the nine months ended
September 30, 1997 and was in a negative working capital position of $892,000
at September 30, 1997. Since September, the Company has continued to incur
losses and management's projections indicate that the Company will continue to
generate operating losses and negative cash flow, although at a declining
rate. The Company anticipates, based on currently proposed plans and
assumptions relating to its operations (including the costs associated with
its growth strategy), that the proceeds of the Offering, together with and
operating cash flows and anticipated growth in revenue from sales of VFC will
be sufficient to meet anticipated cash requirements through the end of the
year 2000. However, there can be no assurance that this will be the case.
Although sales of VFC accounted for less than $50,000 for the nine months
ended September 30, 1997, the first sale of VFC was not recorded until the
third quarter of 1997. The Company believes VFC sales will increase through
the end of the year 2000. There can be no assurance, however, that VFC sales
will increase, or if they increase, that they will continue to do so through
the year 2000 or that revenues from such sales will grow. 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 new and existing products and services, the growth of the Company's
distribution channels, the technological advances and activities of
competitors, and other factors. If the Company is not successful in developing
and marketing VFC, the Company's cash flow will be materially and adversely
affected, and the Company may require additional financing. There can be no
assurance such financing will be available on reasonable terms or at all. If
such financing is not available, the Company will be materially and adversely
affected. Even if such financing is available, in may involve significant
dilution to the holders of the Company's Common Stock.
At September 30, 1997, the Company had a net deferred tax asset of
$3,128,000 related primarily to net operating loss carryforwards. The net
deferred tax asset is fully reserved in the Company's financial statements due
to the operating losses incurred in 1997 and the uncertainty of future
operating results. Additionally, the acquisition of AMBIA during 1997 could
limit the extent to which the Company may utilize the carryforwards in any one
year.
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The Company's Common Stock is listed on Nasdaq. In August 1997, the
Company received a notice from Nasdaq that it was not in compliance with
Nasdaq's requirement that listed issuers maintain a minimum of $1,000,000 in
capital and surplus. In November 1997, the Company appeared at a hearing
before a Nasdaq Listing Qualifications Panel to demonstrate compliance with
the minimum capital and surplus requirement and to request continued listing
on Nasdaq. The panel agreed to allow the Company to continue to be listed if
(i) on or before February 16, 1998, the Company makes a public filing with the
Commission and Nasdaq evidencing the closing of this Offering and a minimum of
$5,500,000 in net tangible assets and (ii) the Company is able to evidence
compliance with Nasdaq's new standards for continued listing, which go into
effect in February 1998. Such public filing is a condition to the closing of
this Offering. Thereafter, the Company must continue to meet Nasdaq's
standards for continued listing. The standards for continued listing include
(i) maintenance of net tangible assets of at least $2,000,000, or a market
capitalization of $35,000,000, or net income in the latest fiscal year (or in
two of the last three fiscal years) of at least $500,000; (ii) at least
500,000 shares must be publicly held; (iii) the market value of the publicly
held shares must be at least $4,000,000; (iv) there must be at least 300
shareholders; and (v) there must be at least two market-makers for the
publicly traded shares. The failure to meet these standards may result in the
delisting of the Company's securities from Nasdaq and trading, if any, in the
Company's securities would thereafter be conducted on the OTC Bulletin Board.
If such delisting occurs, an investor may find it more difficult to dispose
of, or to obtain accurate quotations as to the market value of, the Company's
securities. In addition, if the Common Stock were to become delisted from
trading on Nasdaq and the trading price of the Common Stock were to fall below
$5.00 per share, trading in the Common Stock also would be subject to the
requirements of certain rules promulgated under the Exchange Act that require
additional disclosure by broker-dealers in connection with any trades
involving a stock defined as a penny stock (generally, any non-Nasdaq equity
security that has a market price of less than $5.00 pr share, subject to
certain exceptions). Such rules require the delivery, prior to any penny stock
transaction, of a disclosure schedule explaining the penny stock market and
the risks associated therewith, and impose various sales practice requirements
on broker-dealers who sell penny stocks to persons other than established
customers and accredited investors (generally institutions). For these types
of transactions, the broker-dealer must make a special suitability
determination for the purchaser and have received the purchaser's written
consent to the transaction prior to sale. The additional burdens imposed upon
broker-dealers by such requirements may discourage them from effecting
transactions in the Company's securities, which could severely limit the
liquidity of the Company's securities and the ability of purchasers in this
Offering to sell such securities in the secondary market. The foregoing
factors would adversely impact the Company's ability to raise additional funds
publicly.
FORWARD-LOOKING STATEMENTS CONTAINED IN THIS FORM 10-QSB RELATING TO PRODUCT
DEVELOPMENT AND REVENUE AND THE ADEQUACY OF WORKING CAPITAL ARE BASED ON
CURRENT
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EXPECTATIONS THAT INVOLVE UNCERTAINTIES AND RISKS ASSOCIATED WITH NEW PRODUCTS
INCLUDING, BUT NOT LIMITED TO, MARKET CONDITIONS, SUCCESSFUL PRODUCT
DEVELOPMENT AND ACCEPTANCE, THE INTRODUCTION OF COMPETITIVE PRODUCTS, ECONOMIC
CONDITIONS, AND THE TIMING OF ORDERS FOR PRODUCTS. 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.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibit 27 - Financial Data Schedule
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