SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended Commission
June 30, 2000 File No. 0-22405
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Information Analysis Incorporated
(Exact name of Registrant as specified in its charter)
Virginia 54-1167364
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
11240 Waples Mill Road, #400
Fairfax, VA 22030
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(Address of principal executive offices) (Zip Code)
(Registrant's telephone number,
including area code) (703) 383-3000
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Indicate by check mark whether the Registrant(1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No _______
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State the number of shares outstanding of each of the issuer's classes of common
stock, as of July 30, 2000:
Common Stock, par value $.01, 9,581,473 shares
Transitional small business disclosure format.
Yes _______ No x .
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INFORMATION ANALYSIS INCORPORATED
FORM 10-QSB
Index
Page
PART I. FINANCIAL INFORMATION Number
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of
June 30, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Operations
for the three months and six months ended
June 30, 2000 and June 30, 1999 4
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 2000 and
June 30, 1999 5
Notes to Unaudited Condensed Consolidated
Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 2. Changes in Securities 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 10
2
Information Analysis Incorporated and Subsidiaries
Consolidated Balance Sheets
As of As of
June 30, 2000 December 31, 1999
(unaudited (audited)
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ASSETS
Current assets:
Cash and cash equivalents $ 96,025 $ 133,468
Accounts receivable, net 1,595,446 1,902,244
Employee advance -- 6,230
Prepaid expenses 118,504 129,995
Other receivables 95,165 97,299
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Total current assets 1,905,140 2,269,236
Fixed assets, net 169,766 279,787
Equipment under capital leases, net 9,135 11,553
Capitalized software, net 521,268 463,653
Other receivables 28,992 28,992
Other assets 58,275 58,275
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Total assets $ 2,692,576 $ 3,111,496
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LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,278,476 $ 1,491,179
Accrued payroll and related liabilities 278,865 276,871
Other accrued liabilities 133,094 727,904
Revolving line of credit 732,791 501,500
Current maturities of capital lease obligations 3,291 6,936
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Total current liabilities 2,426,517 3,004,390
-- --
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Total liabilities 2,426,517 3,004,390
Common stock, par value $0.01, 30,000,000 shares authorized;
11,086,084 and 10,723,284 shares issued, 9,581,473 and
9,218,673 outstanding at June 30,2000 and
December 31, 1999, respectively 110,861 107,233
Additional paid in capital 13,916,902 13,763,904
Retained earnings (12,907,391) (12,909,718)
Less treasury stock; 1,504,611 shares at cost (854,313) (854,313)
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Total stockholders' equity 266,059 107,106
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Total liabilities and stockholders' equity $ 2,692,576 $ 3,111,496
============ ============
See accompanying notes
3
Information Analysis Incorporated and Subsidiaries
Consolidated Statements of Operations
Three months ended June 30,
(unaudited) 2000 1999
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Net sales:
Professional services $ 1,407,926 $ 1,924,717
Software sales 139,426 280,893
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Total sales 1,547,352 2,205,610
Cost of goods sold and services provided:
Cost of professional services 999,697 1,580,373
Cost of software sales 143,646 361,245
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Total cost of goods sold and services provided 1,143,343 1,941,618
Gross margin 404,009 263,992
Operating expenses:
Selling, general and administrative 439,082 1,053,716
Research and development -- --
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Total operating expenses 439,082 1,053,716
Operating (loss) (35,073) (789,724)
Other (expense) (4,502) (37,872)
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(Loss) before income taxes (39,575) (827,596)
Provision for income taxes -- --
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Net (loss) $ (39,575) $ (827,596)
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Earnings per common share:
Basic ($ 0.00) $ (0.12)
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Diluted ($ 0.00) $ (0.12)
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Weighted average common shares outstanding:
Basic 9,581,473 6,918,673
Diluted 9,581,473 6,918,673
Six months ended June 30,
(unaudited) 2000 1999
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Net sales:
Professional services $ 2,629,731 $ 5,440,675
Software sales 605,938 600,599
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Total sales 3,235,669 6,041,274
Cost of goods sold and services provided:
Cost of professional services 1,938,851 3,675,882
Cost of software sales 288,160 736,956
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Total cost of goods sold and services provided 2,227,011 4,412,838
Gross margin 1,008,658 1,628,436
Operating expenses:
Selling, general and administrative 999,626 2,240,553
Research and development -- 72,935
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Total operating expenses 999,626 2,313,488
Operating income (loss) 9,032 (685,052)
Other (expense) (6,705) (72,361)
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Income (loss) before income taxes 2,327 (757,413)
Provision for income taxes -- --
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Net income (loss) $ 2,327 $ (757,413)
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Earnings per common share:
Basic $ 0.00 $ (0.11)
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Diluted $ 0.00 $ (0.11)
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Weighted average common shares outstanding:
Basic 9,508,508 6,906,667
Diluted 9,808,201 6,906,667
4
Information Analysis Incorporated and Subsidiaries
Consolidated Statement of Cash Flows
For the Six Months Ended June 30,
---------------------------------
Net income (loss) $ 2,327 $ (757,413)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation 110,020 158,310
Amortization 2,418 10,445
Amortization of Capitalized Software 77,274 548,348
Loss on sale of fixed assets -- 22,838
Changes in operating assets and liabilities
Accounts receivable 306,798 1,131,338
Other receivables and prepaid expenses 19,856 (21,718)
Accounts payable and accrued expenses (805,519) (1,300,266)
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Net cash used by operating activities $ (286,826) $ (208,118)
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Cash flows from investing activities
Increase in capitalized software (134,889) --
Proceeds from sale of fixed assets -- 46,845
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Net cash (used) provided in investing activities (134,889) 46,845
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Cash flows from financing activities
Net borrowing (payments) under bank revolving line of credit 231,291 (14,600)
Principal payments on capital leases (3,645) (4,373)
Net Proceeds from private placement 125,000 --
Proceeds from exercise of stock options and warrants 31,626 19,774
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Net cash provided by financing activities 384,272 801
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Net decrease in cash and cash equivalents (37,443) (160,472)
Cash and cash equivalents at beginning of the period 133,468 176,399
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Cash and cash equivalents at end of the period $ 96,025 $ 15,927
============ ===========
Supplemental cash flow Information
Interest paid $ 25,208 $ 79,426
See accompanying notes
5
PART I
Item 1. Financial Statements.
INFORMATION ANALYSIS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation
The accompanying consolidated financial statements have been prepared by
Information Analysis Incorporated ("IAI" or the "Company") pursuant to the rules
and regulations of the Securities and Exchange Commission. Financial information
included herein is unaudited, however, in the opinion of management, all
adjustments (which include normal recurring adjustments) considered necessary
for a fair presentation have been made. Certain information and footnote
disclosures normally included in annual financial statements prepared in
accordance with generally accepted accounting principles have been omitted
pursuant to such rules and regulations, but the Company believes that the
disclosures made are adequate to make the information presented not misleading.
For more complete financial information, these financial statements should be
read in conjunction with the audited financial statements and notes thereto for
the year ended December 31, 1999 included in the Company's annual report on Form
10-KSB. Results for interim periods are not necessarily indicative of the
results for any other interim period or for the full fiscal year.
Cautionary Statement Regarding Forward-Looking Statements
This Form 10-QSB contains forward-looking statements regarding the Company's
business, customer prospects, or other factors that may affect future earnings
or financial results that are subject to the safe harbor created by the Private
Securities Litigation Reform Act of 1995. Such statements involve risks and
uncertainties which could cause actual results to vary materially from those
expressed in the forward-looking statements. Investors should read and
understand the risk factors detailed in the Company's 10-KSB for the fiscal year
ended December 31, 1999 and in other filings with the Securities and Exchange
Commission.
Common Stock and Common Stock Options
In the second quarter of 2000, the Stockholders approved a vote to amend the
articles of incorporation to increase the authorized shares of the Company's
Common Stock to 30,000,000. The Stockholders also approved a vote to increase
the authorized shares in the present Stock Option Plan to 3,075,000 during the
second quarter of 2000.
Commitments and Contingencies
In March 1997, the Company entered into an agreement with Computer Associates
International, Inc. (CA). As part of the agreement, royalties are paid to CA
based upon sales of the UNCAST licensing fees collected by the Company. In the
second quarter the Company settled its outstanding royalties obligation to CA in
the amount of $232,485. The Company does not expect to incur any additional
royalty expenses from its agreement with CA.
6
Net Income Per Share
Earnings per share are presented in accordance with SFAS No. 128, "Earnings Per
Share." This statement requires dual presentation of basic and diluted earnings
per share on the face of the income statement. Basic earnings per share excludes
dilution and is computed by dividing income available to common shareholders by
the weighted-average number of shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock.
The following is a reconciliation of the amounts used in calculating basic
and diluted net income per common share.
Per Share
Income Shares Amount
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(dollars in thousand)
Basic net income per common share for the
six months ended June 30, 2000:
Income available to common stockholders $ 2 9,508,508 $ 0.0
Effect of dilutive stock options 299,693
Diluted net income per common share for
the six months ended June 30, 2000: $ 2 9,808,201 $ 0.0
Basic net income per common share for the
six months ended June 30, 1999:
Income available to common stockholders $ (757) 6,906,667 $ (0.11)
Effect of dilutive stock options
Diluted net income per common share for
the six months ended June 30, 1999: $ (757) 6,906,667 $ (0.11)
Basic net income per common share for the
three months ended June 30, 2000:
Income available to common stockholders $ (40) 9,581,473 $ 0.0
Effect of dilutive stock options
Diluted net income per common share for
the three months ended June 30, 2000: $ (40) 9,581,473 $ 0.0
Basic net income per common share for the
six months ended June 30, 1999:
Income available to common stockholders $ (827) 6,918,673 $ (0.12)
Effect of dilutive stock options
Diluted net income per common share for
the six months ended June 30, 1999: $ (827) 6,918,673 $ (0.12)
7
Item 2. Management's Discussion and Analysis of Financial Condition or Plan
of Operation.
Overview
Prior to mid 1999, the Company was primarily dedicated to solving Year 2000
problems by providing software and services. Since the latter part of 1999 the
Company's main focus has been modernizing client information systems and
developing Web-based solutions. IAI primarily applies its technology, services
and experience to legacy software migration and modernization. The arrival of
the Internet and Intranet technology has offered a different approach at
collecting and processing large volumes of user transactions, processes which
were the forte of older legacy systems. The Company has been using its
expertise in legacy systems to develop solutions that allow these legacy systems
to interface with the Web.
Three Months Ended June 30, 2000 Versus Three Months Ended June 30, 1999
Revenue
IAI's revenues in the second quarter of fiscal 2000 were $1.5 million,
compared to $2.2 million in the second quarter of fiscal 1999, a decrease of
29.8%. Professional services revenues were $1.4 million versus $1.9 million, a
decrease of 26.9%, and product revenues were $0.1 million versus $0.3 a decrease
of 50.4%. The decrease in revenue for services and product is a result of
diminished sales across the board for Year 2K related projects during the second
quarter of fiscal 2000 as compared to the same quarter in 1999.
Gross margin
Gross margins were $0.4 million or 26.1% of sales, in the second quarter of
fiscal 2000 versus $0.3 million, or 12.0% of sales, in the second quarter of
fiscal 1999. Of the $0.4 million in 2000, $0.4 million was attributable to
professional services and ($0.0 million) was due to software sales. Gross
margins as a percentage of sales were 29.0% for professional services and (3.0%)
for software sales. In the second quarter of 1999, the Company reported gross
margins of approximately 17.9% for professional services and (28.6%) for
software. The increase in percentages for gross margins in the second quarter of
fiscal 2000 is primarily attributable to Year 2K fixed price contracts in 1999
that no longer exist, which contained overall lower margins.
Selling, General & Administrative (SG&A)
SG&A was $0.4 million, or 28.4% of revenues, in the second quarter of 2000
versus $1.1 million, or 47.8% of revenues, in the second quarter of 1999, a
decrease in expenses of 58.3%. The decrease is attributable to the Company's
elimination of its marketing and support expenses associated with Year 2K
services and product.
Profit
The Company reported an operating loss of $0.04 million in the second
quarter of 2000 compared to an operating loss of $0.8 million in the second
quarter of 1999. The primary cause of the improvement was a combination of
higher gross margin percentages, lower SG&A and the discontinued amortization of
UNICAST capitalized software which was fully written-off by year-end 1999.
8
Six Months Ended June 30, 2000 Versus Six Months Ended June 30, 1999
Revenue
IAI's revenues in the first six months of fiscal 2000 were $3.2 million,
compared to $6.0 million in the first six months of fiscal 1999, a decrease of
46.4%. Professional services revenues were $2.6 million versus $5.4 million, a
decrease of 51.7%, and product revenues were $0.606 million versus $0.601
million, an increase of 0.9%. The decrease in revenues for professional services
is a result of diminshed sales for Year 2K related projects.
Gross margin
Gross margins were $1.0 million or 31.2% of sales, in the first six months
of fiscal 2000 versus $1.6 million, or 27.0% of sales, in the first six months
of fiscal 1999. Of the $1,0 million in 2000, $0.7 million was attributable to
professional services and $0.3 million was due to software sales. Gross margins
as a percentage of sales were 26.3% for professional services and 52.4% for
software sales for 2000, versus 32.4% for professional services and (22.7%) for
software sales in 1999. The increase in gross margins as a whole is attributable
to the discontinuation of Year 2K related projects which contained lower overall
margins.
Selling, General & Administrative
SG&A was $1.0 million, or 30.9% of revenues, in the first half of 2000
versus $2.2 million, or 37.1% of revenues, in the first half of 1999, a decrease
in expenses of 55.4%. The decrease is attributable to the Company's elimination
of its marketing and support expenses associated with Year 2K services and
product.
Research and Development
No R&D expenditures were incurred in the first six months of fiscal 2000
versus $72,935 R&D expenditures in the first six months of fiscal 1999.
Profit
The Company reported a profit of $0.002 million in the first half of 2000
compared to an operating loss of $0.8 million, in the first half of 1999. In
general, the Company experienced a slight profit through the second quarter of
2000. The improvement is a combination of higher gross margin percentages, lower
SG&A and the discontinued amortization of UNICAST capitalized software which was
fully written-off by year-end 1999.
Liquidity and Capital Resources
Through the first six months of 2000, the Company financed its operations from
current collections and through its bank line of credit. Cash and cash
equivalents at June 30, 2000 were $96,025 compared to $15,927 at June 30, 1999.
As of June 30, 2000 the Company had an outstanding balance on its line of credit
of $732,791.
The Company is in default with its line of credit with First Virginia Bank as a
result of the Company's failure to meet certain financial tests. However, a
forbearance agreement between the Company and First Virginia Bank is in effect
which effectively extends the line of credit of $1,000,000 to August 29, 2000.
The Company is in negotiations with various organizations to obtain a new line
of credit.
If revenue continues at curent levels the Company believes that it will
derive sufficient cash flow to continue to pay all essential expenses which are
required to operate the business. Any material reduction in revenue could have
a material adverse effect on the Company's operational capabilities. The
Company cannot be certain that there will not be a need for additional cash
resources at some point in fiscal 2000. Accordingly, the Company may from time
to time consider
9
additional equity offerings to finance business expansion. The Company is
uncertain that it will be able to raise additional capital.
The Company has no material commitments for capital expenditures.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not aware of any legal proceedings against it at this time.
Item 2. Changes in Securities
In the second quarter of 2000, the Stockholders approved a vote to amend the
articles of incorporation to increase the authorized shares of the Company's
Common Stock to 30,000,000.
Item 4. Submission of Matters to a Vote of Security Holders
IAI held its Annual Meeting of Shareholders on May 21, 2000. At that meeting,
shareholders cast votes for the Board of Directors for the coming year, for
ratification of the Board's selection of Rubino & McGeehin Chartered as outside
auditors, to increase the number of shares in the stock option plan to
3,075,000, and to amend the Articles of Incorporation to increase the authorized
shares of the company's common stock to 30,000,000. Messrs. Rosenberg, May and
Ms Wachtel each received 9,123,747 votes in favor of their serving on the Board:
with 226,375 votes withheld. Mr. Wester received 9,122,547 votes in favor of
his serving on the Board with 227,575 votes withheld. Rubino & McGeehin was
ratified with 9,300,776 votes in favor, and 28,246 votes against. The increase
in number of shares in the option plan received 5,068,846 votes in favor, and
143,179 against. The amendment to the Articles of Incorporation received
9,175,704 votes in favor, and 166,551 against.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27.1, "Financial Data Schedule" is attached.
(b) No reports on Form 8-K were filed for the quarter for which this report is
filed.
10
SIGNATURES
In accordance with the requirements of the Exchange Act of 1934, the registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
Information Analysis Incorporated
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(Registrant)
Date: August 13, 2000 By: ______________________
--------------- Sandor Rosenberg, Chairman of the
Board and President
By: ____________________
Richard S. DeRose, Executive Vice
President and Treasurer
11
INDEX TO EXHIBITS
Exhibit No. Description Location
27.1 Financial Data Schedule Filed with this Form 10-QSB
12