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 March 31, 1996 File No. 33-9390 INFORMATION ANALYSIS INCORPORATED (Exact name of Registrant as specified in its charter) Virginia 54-1167364 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 2222 Gallows Road, Suite 300 Dunn Loring, VA 22027 (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code) (703) 641-0955 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 ___________ State the number of shares outstanding of each of the issuer's classes of common stock, as of March 31, 1996: Common Stock, par value $.01, 462,053 shares Transitional small business disclosure format. Yes __________ No x INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET March 31, 1996 ASSETS Current assets Cash and cash equivalents $ 122,656 Accounts receivable 3,405,689 Employee advances 37,074 Deferred income taxes 95,887 Prepaid expenses 143,545 Other receivables 62,012 Total current assets 3,866,863 Fixed assets At cost, net of accumulated depreciation and amortization of $1,108,537 245,639 Equipment under capital leases Net of accumulated amortization of $40,180 65,641 Investments 10,000 Other receivables 157,660 Total assets $4,345,803 INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET March 31, 1996 LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities Accounts payable $1,759,422 Accrued payroll 406,104 Other accrued liabilities 31,100 Note payable - bank 0 Current maturities of capital 18,229 lease obligations Income taxes payable 36,229 Deferred rent 8,520 Total current liabilities 2,259,604 Capital lease obligations, net of 54,428 current portion Deferred income taxes 19,000 Total liabilities 2,333,032 Common stock, par value $0.01 1,000,000 shares authorized; 621,232 shares issued 6,212 Paid in capital in excess of par value 772,219 Retained earnings 2,056,153 Less treasury stock; 159,179 shares at cost (821,813) Total stockholders' equity 2,012,771 Total liabilities and stockholders' equity $4,345,803 INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS For the three months ended March 31, 1996 1995 Sales Professional fees $4,053,087 $4,229,242 Software sales 26,437 56,979 Total sales 4,079,524 4,286,221 Cost of sales Cost of professional fees 3,311,057 3,362,169 Cost of software sales 21,598 52,111 Total cost of sales 3,332,655 3,414,280 Gross profit 746,869 871,941 Selling, general and administrative expenses 581,778 828,489 Income from operations 165,091 43,452 Other income and expenses Interest income 601 2,096 Interest expense (8,103) (33,423) Income before provision for income 157,589 12,125 taxes Provision for income taxes 56,924 4,607 Net income $ 100,665 $ 7,518 Net income per common and common equivalent share $0.22 $0.02 Weighted average common and common equivalent shares outstanding 465,978 486,430 INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS For the three months ending March 31, 1996 1995 Cash flows from operating activities Cash received from customers $3,925,478 $4,061,343 Cash paid to suppliers and employees (3,258,374) (4,266,564) Interest received 601 2,096 Interest paid (8,103) (33,423) Net cash provided (used) by operating activities 659,602 (236,548) Cash flows from investing activities Loans and advances (12,450) (8,242) Acquisition of furniture and equipment (6,295) (43,412) Net cash used in investing activities (18,745) (51,654) Cash flows from financing activities Net borrowing under bank revolving line of credit (550,000) 285,000 Principal payments on debt and capital leases (4,467) (3,910) (Repurchase) of common stock (20,750) (19,125) Net cash (used) provided by financing activities (575,217) 261,965 Net increase (decrease) in cash and cash equivalents 65,640 (26,237) Cash and cash equivalents at beginning of the period 57,016 35,211 Cash and cash equivalents at end of the period $ 122,656 $ 8,974 Reconciliation of net loss to cash provided by operating activities Net income $ 100,665 $ 7,518 Adjustments to reconcile net loss to net cash provided by operating activities Depreciation and amortization 39,155 43,087 Changes in operating assets and liabilities Accounts receivable (154,046) (224,878) Other receivables and prepaid expenses 5,912 (21,361) Accounts payable and accrued expenses 613,548 (42,965) Deferred rent (2,556) (2,556) Income tax liability 56,924 4,607 Net cash provided (used) by operating activities $659,602 $(236,548) INFORMATION ANALYSIS INCORPORATED Notes to Financial Statements The interim financial statements are furnished without audit; however, they reflect all adjustments which are, in the opinion of management, necessary for the fair statement of the financial position and results of operations for the three months ended March 31, 1996 and 1995. The financial statements should be read in conjunction with the summary of significant accounting policies and notes to financial statements included in the Company's annual report for the year ended December 31, 1995. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation. Results of Operations The Company's revenues in the first quarter of 1996 from its computer and software related services and sales segment increased by $901,905 or by 28.6%, to $4,045,511, from $3,143,606 for the first quarter of 1995. This increase is primarily attributable to the Company's contract with the U.S. Customs Service ("USCS"). The USCS contract generated $3,171,109 in revenue in the first quarter of 1996 as compared to $1,692,240 in the first quarter of 1995, an increase of $1,478,869. This increase principally arose because the USCS assigned to the Company contractual responsibility for certain tasks which were previously contracted to other parties. The Company has subcontracted these additional tasks to others. It should be noted that the USCS contract is scheduled to terminate on June 30, 1996, the Company having failed to be awarded the renewal of this contract under recompetition. The Company has protested the award. No assurances can be provided that this protest will be successful. Even though revenues increased for the computer and software services related segment, profit margins for this segment decreased from 23.9% in the first quarter of 1995 to 18.5% in the first quarter of 1996. This reduction is mostly attributable to lower profit margins the Company has realized on subcontracted services under the USCS contract. Selling, general and administrative expenses, as a percentage of revenue, decreased for the first quarter of 1996 compared to the corresponding quarter of 1995, or 13.9% this year compared to 21.5% last year. This decrease is due to a $111,341 reduction in indirect expenses for the first quarter of 1996, as compared to the first quarter of 1995, coupled with the increased revenue generated from the contract with USCS. Primarily, by reducing its selling, general, and administrative expenses, the computer and software segment was able to generate a profit of $184,236 during the first quarter of 1996, as compared to a $73,322 profit during the first quarter of 1995. The Company's revenue generated from the health care segment of its business through Allied Health and Information Systems, Inc. ("AHISI") declined in the first quarter of 1996 to $34,013 from $1,142,615 during the corresponding quarter of 1995. This reduction in revenue resulted from the Company's implementation of its objective to wind-down the health care segment of its business. As of April 1, 1996, AHISI's funded backlog was reduced to $54,280 under one contract it maintains with the United States Department of Justice. This contract will terminate May 3, 1996 because the option year was not exercised. Effective May 3, 1996, the Company will generate no further revenue through AHISI. AHISI's first quarter 1996 loss was $19,145 compared to a $29,870 loss realized during the corresponding quarter of 1995. On a consolidated basis, as a result of winding-down its health care services business, the Company's overall 1996 first quarter revenues declined by $206,697, to $4,079,524 from $4,286,221 in the first quarter of 1995. Consolidated gross profit margins also declined to 18.3% in the first quarter of 1996 compared to 20.3% in the first quarter of 1995. Selling, general and administrative expenses as a percentage of revenue decreased by 5.1% in the first quarter of 1996, to 14.2% from 19.3% in the corresponding quarter of 1995. After considering the effect of interest and taxes, the Company generated a consolidated first quarter profit of $100,665 in 1996 compared to a $7,518 profit which was generated in the first quarter of 1995. Liquidity and Capital Resources In the first quarter of 1996, as with the first quarter of 1995, the Company financed its operations from current collections and through advances on its line of credit with its bank. As of March 31, 1996, the outstanding balance on its line of credit was zero, as compared to $1,667,000 as of March 31, 1995. The winding down of AHISI has reduced the Company's working capital requirements allowing it to significantly reduce its borrowings on the line of credit. Cash and cash equivalents at March 31, 1996 were $122,656, compared to $8,974 at March 31, 1995. The Company's $2,000,000 line of credit was renewed on June 5, 1995. This line of credit expires May 30, 1996 at which time it is subject to renewal. The line of credit coupled with funds generated from operations is sufficient to meet the Company's operating cash requirements. The Company has no material commitments for capital expenditures. PART II - FINANCIAL INFORMATION Item 6. Exhibits and Reports on Form 8-K (b) No reports on Form 8-K were filed by the registrant during the quarter ended March 31, 1996. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Information Analysis Incorporated (Registrant) Date: May 10, 1996 By:______________________ Sandor Rosenberg Chairman of the Board and President Date: May 10, 1996 By:______________________ Brian R. Moore Treasurer