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, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-10416
------------------------
INFODATA SYSTEMS INC.
(Exact name of Small Business Issuer in its charter)
VIRGINIA 16-0954695
(State of Incorporation) (I.R.S. Employer Identification No.)
12150 MONUMENT DRIVE, FAIRFAX, VIRGINIA 22033
(Address of Principal Executive Office) (Zip Code)
(703) 934-5205 (Issuer's Telephone Number)
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SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- ---------------------
None Not applicable
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT:
COMMON STOCK-$.03 PAR VALUE
---------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of Common Stock on November 9,
1998 as reported on the Nasdaq National market, was approximately $9,446,459.
Shares of Common Stock held by each director and officer and by each person
who owns 5% or more of the outstanding Common Stock have been excluded in that
such persons may be deemed to be affiliates. This determination of affiliate
status is not necessarily a conclusive determination for other purposes.
The number of outstanding shares of the Company's Common Stock, par value
$0.03 per share, was 4,500,310 on November 9, 1998.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
INFODATA SYSTEMS INC. AND SUBSIDIARIES
INDEX
Page(s)
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statement of Operations 3
Three Months Ended September 30, 1998 and 1997
Condensed Consolidated Statements of Operations 4
Six Months Ended September 30, 1998 and 1997
Condensed Consolidated Balance Sheet 5
September 30, 1998 and December 31, 1997
Condensed Consolidated Statements of Cash Flows 6
Six Months Ended September 30, 1998 and 1997
Notes to Condensed Consolidated Financial Statements 7 - 8
Item 2. Management's Discussion and Analysis 8 - 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 15
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,
--------------------------
1998 1997
--------- --------
Revenues $ 3,842 $ 3,037
Cost of revenues 2,659 1,622
-------- --------
Gross profit 1,183 1,415
-------- --------
Operating expenses:
Research and development 264 751
Selling, general and administrative 1,463 1,440
-------- --------
1,727 2,191
-------- --------
Operating income (loss) (544) (776)
Interest income 71 14
Interest expense - (11)
Loss on disposal of fixed asset (6) -
-------- --------
Loss before income taxes (479) (773)
Provision for income taxes - -
-------- --------
Net loss $ (479) $ (773)
======== ========
Net loss available to common shareholders $ (479) $ (773)
======== ========
Per share:
Net loss per common and equivalent share:
Basic $ (0.11) $ (0.26)
======== ========
Diluted $ (0.11) $ (0.26)
======== ========
Weighted average shares 4,490 3,031
======== ========
The accompanying notes are an integral part of these condensed consolidated
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,
--------------------------
1998 1997
--------- --------
Revenues $ 10,418 $ 7,033
Cost of revenues 6,892 4,037
--------- ---------
Gross profit 3,526 2,996
--------- ---------
Operating expenses:
Research and development 1,387 1,696
Selling, general and administrative 4,142 3,942
--------- ---------
5,529 5,638
--------- ---------
Operating income (loss) (2,003) (2,642)
Interest income 185 54
Interest expense (14) (18)
Loss on disposal of fixed asset (6) -
--------- ---------
Loss before income taxes (1,838) (2,606)
Provision for income taxes - (5)
--------- ---------
Net loss $ (1,838) $ (2,601)
========= =========
Net loss available to common shareholders $ (1,838) $ (2,601)
========= =========
Per share:
Net loss per common and equivalent share:
Basic $ (0.44) $ (1.08)
========= =========
Diluted $ (0.44) $ (1.08)
========= =========
Weighted average shares 4,137 2,407
========= =========
The accompanying notes are an integral part of these condensed consolidated
statements.
4
INFODATA SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS)
September 30, December 31,
1998 1997
(Unaudited)
--------- ---------
ASSETS
Current assets
Cash and cash equivalents $ 1,975 $ 284
Short term investments 2,520 4
Accounts receivable, net of allowance of $94 and $80 2,304 2,772
Prepaid royalties 57 -
Other current assets 638 174
--------- ---------
Total current assets 7,494 3,234
--------- ---------
Property and equipment, at cost:
Furniture and equipment 2,891 2,817
Less accumulated depreciation and amortization (2,411) (2,220)
--------- ---------
480 597
Goodwill, net of accumulated amortization of $722 and $296 2,897 3,371
Other assets 127 309
Software development costs, net of accumulated amortization of
$2,125 and $ 2,094 11 42
--------- ---------
Total assets $ 11,009 $ 7,553
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current portion of capital lease obligations $ 13 26
Current portion of note payable - 880
Accounts payable 565 1,482
Accrued expenses 1,001 928
Deferred revenue 1,716 1,592
Current portion of deferred rent - 19
--------- ---------
Total current liabilities 3,295 4,927
--------- ---------
Capital lease obligations - 6
--------- ---------
Total liabilities 3,295 4,933
Shareholders' equity
Common stock 135 82
Additional paid-in capital 19,549 12,670
Accumulated deficit (11,970) (10,132)
--------- ---------
Total shareholders' equity 7,714 2,620
--------- ---------
Total liabilities and shareholders' equity $ 11,009 $ 7,553
========= =========
The accompanying notes are an integral part of these condensed consolidated
statements.
5
INFODATA SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
Nine Months Ended
June 30,
--------------------------
1998 1997
--------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,838) $ (2,601)
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization 234 261
Software amortization 31 31
Goodwill and other intangible amortization 426 (44)
Changes in operating assets and liabilities:
Accounts receivable 467 (696)
Prepaid royalties and other current assets (521) (49)
Other assets 181 32
Accounts payable (917) 808
Accrued expenses 83 (8)
Deferred revenue 124 (8)
Deferred rent (19) (19)
--------- ---------
Net cash (used in) operating activities (1,749) (2,293)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (124) (340)
Purchases of short term investments (10,970) -
Proceeds from maturity of short term investments 8,500 522
--------- ---------
Net cash provided by (used in) investing
activities (2,594) 182
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations (20) (37)
Proceeds from short-term borrowing 103 1,280
Payments of notes payable (984) (324)
Issuance of common stock 6,935 204
--------- ---------
Net cash provided by financing activities 6,034 1,123
--------- ---------
Net increase (decrease) in cash and cash equivalents 1,691 (988)
Cash and cash equivalents at beginning of period 284 1,266
--------- ---------
Cash and cash equivalents at end of period $ 1,975 $ 278
========= =========
The accompanying notes are an integral part of these condensed consolidated
statements.
6
INFODATA SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310(b)
of Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the three and nine
month periods ended September 30, 1998, are not necessarily indicative of the
results for the year ending December 31, 1998. 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, 1997.
NOTE B - SIGNIFICANT ACCOUNTING POLICIES
1) REVENUE RECOGNITION - The Company recognizes revenue from software
licenses upon delivery of the software product to the customer or upon
customer acceptance, if a trial period exists. Revenues from post
contract support, including revenue bundled with the initial license
fee, are recognized ratably over the period that customer support
services are provided. Software service revenue is recognized as
performed if there is no contract in place.
Revenues from consulting and professional services contracts are
recognized on the percentage-of-completion method for fixed price
contracts and on the basis of hours incurred at contract rates for time
and materials contracts. Revenues from cost reimbursement contracts are
recognized as costs are incurred. Any amounts paid by customers prior to
the actual performance of services are recorded as deferred revenue
until earned, at which time they are recognized in accordance with the
type of contract
The American Institute of Certified Public Accountants has issued
Statements of Position ("SOP") 97-2, "Software Revenue Recognition" and
SOP 98-4, "Deferral of the Effective Date of a Provision of SOP 97-2".
SOP 97-2 and SOP 98-4 together provide guidance with respect to multiple
elements, returns, exchanges, and platform transfer rights; resellers;
services; funded software-development arrangements; and contract
accounting. SOP 97-2, as amended by SOP 98-4, was implemented during the
Company's quarter ended March 31, 1998. It did not have a significant
impact on the Company's financial statements.
2) USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
3) NEW ACCOUNTING PRONOUNCEMENTS - In June 1997, the Financial Accounting
Standards Board issued SFAS No. 130, "Reporting Comprehensive Income"
and SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information." SFAS No. 130 requires that an enterprise report
items of other comprehensive income separately from retained earnings
and additional paid-in-capital in the equity section of a statement of
financial position. The Company adopted SFAS No. 130 starting in the
first quarter of 1998, however, the Company did not have other
comprehensive income for any of the first three quarters of 1998 ended
September 30, 1998. The Company does not expect SFAS No. 130 to have a
significant impact on its financial statements. SFAS No. 131 requires
7
the Company to report financial and descriptive information about its
reportable operating segments. The Company will adopt SFAS No. 131 in
its year-end reporting as of December 31, 1998. The Company is currently
evaluating the impact of SFAS No. 131 on its financial statements.
NOTE C - LINE OF CREDIT
The Company maintains a line of credit with Merrill Lynch Business Financial
Services, Inc. for up to $1,000,000 based upon eligible receivables 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
April 1999, and management expects that the line will be renewed at that time.
The Company did not have any borrowings under the line of credit as of
September 30, 1998.
NOTE D - SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest expense was $0 and $11,000 for the three-month periods
ended September 30, 1998 and September 30, 1997, respectively. No cash was
paid for income tax in either period.
NOTE E - RISKS AND UNCERTAINTIES
In 1997, the Company introduced VFC(R), the virtual file cabinet family of new
proprietary software products. The Company has incurred significant
development and marketing costs related to these products. Revenue for VFC
products commenced during July 1997. There can be no assurance as to the
amount of VFC revenues in the future. The Company began to implement certain
cost control measures during the second quarter of 1998 related to VFC. During
the third quarter of 1998, the Company shifted a number of its technical
personnel from software development to the solutions group as the demand for
the Company's solution services increased. The Company's operations are
subject to certain other risks and uncertainties. This includes the
uncertainty of future operating results, fluctuations in quarterly results, a
change in the mix of products, a decline in INQUIRE/Text sales, lengthy sales
and implementation cycles, rapid technological changes and product
obsolescence, both technical hiring and market competition, risks associated
with sales channels, and a dependence on government contracts and security
clearances.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMPANY OVERVIEW
The Company provides electronic document management software, systems and
solutions to corporate and government workgroups, departments and enterprises.
Prior to 1994, the strength of the Company was in the sales, support, and
maintenance of INQUIRE(R)/Text, one of the most respected full-text retrieval
products used for storing, indexing, retrieving and managing large collections
of documents on IBM and IBM-compatible mainframes. In 1994, the Company began
to broaden its focus to provide a wider range of document and information
management solutions deliverable through client/server, internet and intranet
technology, in addition to INQUIRE/Text-based solutions. As part of this
effort, the Company acquired Merex, Inc., a systems integrator and software
company, in 1995 and AMBIA(R) Corporation ("AMBIA"), a software products
company, in 1997. In addition, the Company made a significant investment in
new software products. As a result, the Company believes it is well-positioned
to address the requirements of the electronic document market. In 1997, the
Company's revenue derived from consulting, client/server software, and
internet and intranet technologies increased by $1,242,000 or 18% from
$6,778,000 in 1996 to $8,020,000 in 1997. In the nine months ended September
30, 1998, revenue from these sources increased $3,896,000 or 78% compared to
the first nine months of 1997. As a percentage of total revenue, these sources
8
have increased from 46% in 1994, to 71% in 1996, to 75% in 1997 and to 85%
during the first three quarters of 1998.
The Company offers document systems solution services, training, and customer
support for its own products, and those of other vendors, including Adobe,
Verity, and Documentum, Inc., for each of whom the Company is a value-added
reseller. The Company's current mix of products includes VFC, the virtual file
cabinet family of intranet-based software products that, together, enables
users to easily retrieve, organize and share desktop files across
organizations; Compose(R), a suite of plug-in tools for Adobe Acrobat Exchange
that automate and streamline a variety of document production tasks;
Re:mark(R), a plug-in product for Adobe Acrobat software that enables users to
mark up and review documents electronically in a workgroup setting;
Aerial(TM), a plug-in that enables Adobe Acrobat to print any document that
needs to be formatted for printing on multiple pages which are then pieced
together to form one page, such as a large spreadsheet or a CAD drawing;
Signet(TM), a security solution for Web or CD-ROM publishers who want to
permit only authorized users to read their documents; INQUIRE/Text, a
full-text retrieval product used for storing, indexing, retrieving and
managing large collections of documents on IBM and IBM-compatible mainframes;
and WebINQUIRE(R), an extension product that provides Web browser access to
INQUIRE/Text collections.
Given the mix of products and services that the Company offers and the demands
of the market, the Company has concluded that its best path is to provide a
total document solution to our customers. Most of these solutions will be
based on corporate intranets or the Web. As a total document solutions
company, the Company will provide customers with both consulting services and
products such as Compose, and products from third party vendors. The Company
believes this positioning will enable it to better control the entire customer
relationship and lead to more opportunities.
In December 1997, the Company entered into an agreement with Adobe Systems
Incorporated to cross license and co-market certain technologies (the
"Cross-license Agreement"). Through September 30, 1998, the Company recognized
approximately $873,000 of the total expected contract amount in revenue under
a consulting agreement (the "Consulting Agreement") entered into in connection
with the Cross-license Agreement. The Company expects to receive another
$67,000 in consulting fees under the Consulting Agreement after September 30,
1998. The Company recognizes revenue from these services in both 1997 and 1998
on a percentage of completion basis. The Consulting Agreement may be
terminated by Adobe upon 30 days' written notice and payment of 10% of the
next unpaid installment of the consulting fee. Upon acceptance of the
modifications by Adobe, the Company will earn a license fee of $1,000,000.
Although the Company has received approximately 50% of the license fee under
the Cross-license Agreement, any license fees received by the Company are
subject to refund if the Company fails to deliver an acceptable final product
to Adobe. The Company has not recognized any revenue with respect to these
license fees
At September 30, 1998, the Company had a net operating loss ("NOL")
aggregating approximately $10,285,000 available to affect future taxable
income. Under Section 382 of the Internal Revenue Code of 1986, as amended
("Code"), utilization of prior NOLs is limited after an ownership change, as
defined in Section 382, to an amount equal to the value of the loss
corporation's outstanding stock immediately before the date of the ownership
change multiplied by the federal long-term tax-exempt rate in effect during
the month that the ownership change occurred. As a result of the AMBIA
acquisition, the Company is subject to limitations on the use of its NOL as
provided under Section 382. Accordingly, there can be no assurance the Company
will be able to utilize a significant amount of NOLs.
9
Any amounts paid by customers prior to the actual performance of services are
recorded as deferred revenue until earned, at which time they are recognized
in accordance with the type of contract. The margins realized on transactions
involving deferred revenue depend on the type of service rendered by the
Company. In general, most deferred revenue is generated by software
maintenance contracts or software licenses that traditionally have high
margins. Most of the Company's maintenance revenue pertains to INQUIRE/Text or
the Adobe Cross-license Agreement. The balance of deferred revenue generally
relates to consulting services, which carry lower margins than maintenance
contracts.
The components of the Company's cost of revenue depend on the product or
service. For consulting, the most significant item is the direct labor cost of
the consultants. Other components include any subcontractor costs, any
non-labor direct costs such as travel and any associated indirect costs (e.g.,
office rent, administration, etc.) allocated to the consulting engagement.
Indirect costs are allocated based on head count and square footage of office
space. For third-party product sales, the cost of revenue includes the cost
incurred by the Company to acquire the product, shipping and delivery charges,
associated taxes, any customization work done by the Company, and any special
packaging costs incurred prior to shipment. The cost of maintenance revenue
includes the customer service and software engineering personnel supporting
the product and an allocation of associated indirect costs based on head count
and square footage of office space. For products that have been developed
internally, the Company includes shipping, delivery, packaging, production,
the direct labor of personnel involved in delivering and installing the
product and any associated expenses involved with the installation.
Future operating results will depend upon many factors, including the demand
for the Company's products and services, the effectiveness of the Company's
efforts to integrate various products it has developed or acquired and to
achieve the desired levels of sales from such product integration, the level
of product and price competition, the length of the company's sales cycle,
seasonality of individual customer buying patterns, the size and timing of
individual transactions, the delay or deferral of customer purchases and
implementations, the budget cycles of the Company's customers, the timing of
new product introductions and product enhancements by the Company and its
competitors, the mix of sales by products, services and distribution channels,
acquisitions by competitors, the ability of the Company to develop and market
new products and control costs, and general domestic economic and political
conditions.
YEAR 2000 ISSUE
The Company currently has a program underway to ensure that all significant
computer systems are substantially Year 2000 compliant by December 31, 1999.
The program is divided into three major components: (1) identification of all
information technology systems ("IT Systems") and non-information technology
systems ("Non-IT Systems") that are not Year 2000 compliant; (2) repair or
replacement of any identified non-compliant systems; and (3) testing of the
repaired or replaced systems. The Company uses commercially developed
software, the majority of which is upgraded through existing maintenance
contracts. The Company also develops software for sale and or license to
customers and uses some of these software products internally.
Part (1), identification, of the Year 2000 program has been completed. Part
(2), repair or replacement, is currently underway and scheduled to be
completed by December 31, 1998. The majority of all software and systems have
been found to be Year 2000 compliant. For those systems not currently Year
2000 compliant, most significantly the Company's accounting system, the
Company has received upgraded software, which is anticipated to make the
system Year 2000 compliant. Internal products were either developed to be Year
2000 compliant or have been upgraded and tested for compliance. Part (3),
testing, is scheduled to start in the Company's fourth quarter ending December
31, 1998 and is scheduled to be finished by March 31, 1999.
10
The Company has contacted key suppliers and business partners about the Year
2000 issue. While no assurance can be given that key suppliers and business
partners will remedy their own Year 2000 issues, the Company, to date, has not
identified any material impact on its ability to continue normal business
operations with suppliers or other third parties who fail to address the
issue.
Actual costs associated with the implementation of the Company's Year 2000
program are expected to be insignificant to the Company's operations and
financial condition.
The Company will continue to monitor and evaluate the impact of the Year 2000
issue on its operations. Until the Company is into the final testing part of
its program, the risks from potential Year 2000 failures cannot be fully
assessed. Due to this situation, the Company cannot now begin final
contingency plans. However, these plans will be developed as potential Year
2000 failures are identified in the final testing stages.
SUBSEQUENT EVENTS
On November 2, 1998, Steven M. Samowich was named President, Chief Executive
Officer (CEO), and a director of the Company. Richard T. Bueschel, who had
been serving as the Company's Acting CEO, will continue in his position as
Chairman of the Board.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1997
REVENUES
Total revenue increased by $805,000, or 26%, from $3,037,000 for the three
months ended September 30, 1997 to $3,842,000 for the three months ended
September 30, 1998. The Company derived revenues from consulting services,
licenses of software products, sales of INQUIRE/Text-related products and
maintenance related thereto, and sales of third party products. Revenues from
consulting services and third party products increased by $628,000, or 30%,
from $2,088,000 for the three months ended September 30, 1997 to $2,716,000
for the three months ended September 30, 1998. This was due to an increase in
the size and number of consulting engagements and a significant increase in
the number of third party sales. The Company's proprietary products which
includes the Company's VFC and AMBIA software products were introduced during
1997 and produced $653,000 in revenue during the third quarter of 1998. This
represents an increase of $357,000 or 121%, compared to third quarter 1997
proprietary products revenue of $295,000. Revenue generated primarily from
INQUIRE/Text-related products and maintenance decreased by $181,000, or 28%,
from $654,000 for the three months ended September 30, 1997 to $473,000 for
the three months ended September 30, 1998. The Company expects that
INQUIRE/Text-related revenues will continue to decline over time as customers
move applications off mainframes.
GROSS PROFIT
Gross profit decreased by $232,000, or 16%, from $1,415,000 for the three
months ended September 30, 1997 to $1,183,000 for the three months ended
September 30, 1998. The decrease in gross profit was due to the buildup of the
Company's solutions area, whereby technical personnel were shifted from
software development to the solutions group. These technical personnel did not
become billable immediately. This transfer increased the Company's cost of
11
revenues, but decreased operating expenses. The Company' gross profit should
increase once this transition is completed.
Gross margin as a percent of revenues decreased by 16% from 47% for the three
months ended September 30, 1997 to 31% for the three months ended September
30, 1998. The decrease was due to the shift of technical personnel from
software development to solutions and the significant growth in third party
sales, which have a smaller gross margin than consulting, product sales or
maintenance.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses decreased $486,000, or 65%, from $751,000
for the three months ended September 30, 1997 to $265,000 for the three months
ended September 30, 1998. The principal cause of the decrease was the shift of
technical personnel from software development to solutions. The Company
expects that quarterly research and development expenses during the remainder
of 1998 will also be less than research and development expenses for the
similar period in 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased $23,000, or 2%, from
$1,440,000 for the three months ended September 30, 1997, to $1,463,000 for
the three months ended September 30, 1998. The increase was due to one-time
expenses incurred in connection with the resignation of the Company's Chief
Executive Officer, partially offset by a planned reduction in sales expenses.
The Company expects selling, general and administrative expenses to increase
moderately as revenues increase.
INTEREST INCOME AND EXPENSE
Net interest income increased $68,000, from $3,000 for the three months ended
September 30, 1997 to $71,000 for the three months ended September 30, 1998.
The increase was due to higher balances of cash, cash equivalents, and
short-term investments during the three months ended September 30, 1998. The
Company's cash balances increased significantly during the second quarter of
1998 as a result of the Company's public offering. The Company invested only
in short-term, highly liquid money market instruments.
NET LOSS
Net loss decreased $294,000, from $773,000 for the three months ended
September 30, 1997 to a net loss of $479,000 for the three months ended
September 30, 1998. The decrease was due to the factors discussed above. For
the three months ended September 30, 1997, the Company's net loss was
$773,000, or $0.26 per share, on both a basic and diluted basis. For the three
months ended September 30, 1998, the net loss was $479,000, or $0.11 per
share, on both a basic and diluted basis.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1997
REVENUES
Total revenue increased by $3,385,000, or 48%, from $7,033,000 for the nine
months ended September 30, 1997 to $10,418,000 for the nine months ended
September 30, 1998. Revenues from consulting services and third party products
increased by $2,893,000, or 62%, from $4,681,000 for the nine months ended
September 30, 1997 to $7,574,000 for the nine months ended September 30, 1998.
This was due to an increase in the size and number of consulting engagements
12
and a significant increase in the number of third party sales. The Company's
proprietary products, which include the Company's VFC and AMBIA software
products produced $1,299,000 in revenue during the first three quarters of
1998. This represents a $1,004,000 increase over the first three quarters of
1997. The initial sales of these products were not recorded until the third
quarter of 1997. Revenue generated primarily from INQUIRE/Text-related
products and maintenance decreased by $511,000, or 25%, from $2,056,000 for
the nine months ended September 30, 1997 to $1,545,000 for the nine months
ended September 30, 1998. The Company expects that INQUIRE/Text-related
revenues will continue to decline over time as customers move applications off
mainframes.
GROSS PROFIT
Gross profit increased by $530,000, or 18%, from $2,996,000 for the nine
months ended September 30, 1997 to $3,526,000 for the nine months ended
September 30, 1998. The increase in gross profit was due primarily to
increased revenue.
Gross margin as a percent of revenues decreased from 43% for the nine months
ended September 30, 1997 to 34% for the nine months ended September 30, 1998.
The decrease was due to the significant growth in third party sales, which
have a much smaller gross margin than consulting, product sales or
maintenance, and the shift of technical personnel from software development to
the solutions group during the third quarter of 1998.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses decreased $309,000, or 18%, from $1,696,000
for the nine months ended September 30, 1997 to $1,387,000 for the nine months
ended September 30, 1998. The decrease was due to the reduced development
expenses required by the VFC family of products and the shift of development
personnel to the solutions area.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased $200,000, or 5%, from
$3,942,000 for the nine months ended September 30, 1997 to $4,142,000 for the
nine months ended September 30, 1998. The increase was due primarily to the
increase in goodwill amortization associated with the acquisition of AMBIA.
INTEREST INCOME AND EXPENSE
Net interest income increased $135,000, or 375%, from $36,000 for the nine
months ended September 30, 1997 to $171,000 for the nine months ended
September 30, 1998. The increase was due to higher balances of cash, cash
equivalents, and short-term investments during the nine months ended September
30, 1998. These balances increased significantly during the first three
quarters of 1998 as a result of the Company's public offering in February
1998. The Company invested only in short-term, highly liquid money market
instruments.
NET LOSS
Net loss decreased $763,000, from $2,601,000 for the nine months ended
September 30, 1997 to a net loss of $1,838,000 for the nine months ended
September 30, 1998. The decrease was due to the factors discussed above. For
the nine months ended September 30, 1997, the Company's net loss was
$2,601,000, or $1.08 per share, on both a basic and diluted basis. For the
nine months ended September 30, 1998, the net loss was $1,838,000, or $ 0.44
per share, on both a basic and diluted basis.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had cash, cash equivalents and short-term
investments of $4,495,000 and a working capital surplus of $4,199,000. The
Company had no borrowings as of September 30, 1998. The Company maintains a
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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 April 1999, and the Company expects to renew it at that
time. 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 is currently in
compliance with these funding requirements. During the first quarter of 1998,
the Company paid off the line of credit in full.
Net cash used in operating activities for the nine months ended September 30,
1998 of $1,749,000 was due to the Company's net loss for the period of
$1,838,000, a decrease in accounts payable of $917,000, and a decrease in
prepaid royalties and other current assets of $521,000, partially offset by an
increase in accounts receivable of $467,000, other assets of $181,000,
deferred revenue of $124,000 and depreciation and amortization expense of
$691,000.
Net cash used in investing activities of $2,594,000 for the nine months ended
September 30, 1998 was due to the net investment of $2,470,000 in short term
investments.
Net cash provided by financing activities of $6,034,000 was due to the
proceeds received from the public offering of $6,935,000 and proceeds from
short-term borrowing of $103,000, offset by $984,000 used to pay off the
Company's line of credit in full.
Net cash flow from operating activities for the nine months ended September
30, 1998 was not sufficient to fund the operations of the business. However,
based upon the Company's expectations of growth in future revenues from both
its solutions business, and based on the successful financing completed on
February 20, 1998, management believes that available and projected resources
will be sufficient to meet its working capital requirements for the next
twelve months and beyond.
On February 20, 1998, the Company sold 1,600,000 shares of common stock in an
underwritten public offering for a price of $5.00 per share, or a total of
$8.0 million. On April 7, 1998, an additional 50,000 shares were sold at a
price of $5.00 per share for a total of $250,000 upon the underwriters'
exercise of their over-allotment option. The Company plans to use the
approximately $5.6 million of net proceeds from the offering to expand the
Company's sales and marketing activities, for research and development, and
for working capital and general corporate purposes. Approximately $1.0 million
of the proceeds were used to pay off institutional debt.
Since December 31, 1997, the Company has continued to incur losses. By the
fourth quarter of 1998, the Company expects to operate on a positive cash flow
basis as a result of increased revenues and improved consulting margins.
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 its operations, the Company's cash flow will be materially and adversely
affected, and the Company may need to implement further cost control measures
or obtain 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, it may involve significant dilution to the then holders of
Common Stock.
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FORWARD-LOOKING STATEMENTS CONTAINED IN THIS FORM 10-QSB RELATING TO PRODUCT
DEVELOPMENT, REVENUE, GROSS PROFIT, OPERATING EXPENSES, CASH FLOW, AND THE
ADEQUACY OF WORKING CAPITAL ARE BASED ON CURRENT 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
(a) EXHIBITS
EXHIBIT NO. DOCUMENT
27 Financial Data Schedule
(b) REPORTS ON FORM 8 - K. On August 28, 1998, the Company filed a
Form 8-K, reporting a change in the Company's certifying
accountant on August 24, 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
INFODATA SYSTEMS INC.
BY: /s/STEVEN M. SAMOWICH
---------------------
Steven M. Samowich
President and CEO
Date: November 11, 1998
BY: /s/CHRISTOPHER P. DETTMAR
--------------------------
Christopher P. Dettmar
Chief Financial Officer
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