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, 1999 FILE NO. 0-22405
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.)
11240 WAPLES MILL ROAD, #400
FAIRFAX, VA 22030
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number,
including area code) (703) 383-3000
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 July 30, 1999:
Common Stock, par value $.01, 6,918,673 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, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Operations
for the three months and nine months ended
June 30, 1999 and June 30, 1998 4
Condensed Consolidated Statements of Cash Flows
for the three months ended June 30, 1999 and
June 30, 1998 5
Notes to Unaudited Condensed Consolidated
Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART II OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 11
2
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of As of
June 30, 1999 December 31, 1998
(UNAUDITED) (AUDITED)
--------- -------
ASSETS
Current assets:
Cash and cash equivalents $ 15,927 $ 176,399
Accounts receivable, net 3,288,457 4,419,795
Employee advances 23,265 29,678
Prepaid expenses 112,359 89,629
Other receivables 101,177 56,059
------------ -----------
Total current assets 3,541,185 4,771,560
Fixed assets, net 419,557 650,474
Equipment under capital leases, net 18,222 25,743
Capitalized software, net 2,858,174 3,406,522
Other receivables 49,454 50,226
Other assets 59,330 98,275
-------------- -------------
Total assets $6,945,922 $9,002,800
============== =============
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,719,911 $2,323,394
Accrued payroll and related liabilities 467,643 692,778
Other accrued liabilities 619,926 1,091,574
Revolving line of credit 1,781,600 1,796,200
Current maturities of capital lease obligations 10,622 14,995
-------------- -------------
Total current liabilities 4,599,702 5,918,941
- -
-------------- -------------
Total liabilities 4,599,702 5,918,941
Common stock, par value $0.01, 15,000,000 shares authorized; 8,423,284 and
8,358,784 shares issued, 6,918,673 and 6,854,173 outstanding at June
30, 1999 and December 31, 1998, respectively 84,233 83,588
Additional paid in capital 12,658,794 12,639,666
Retained earnings (9,542,494) (8,785,082)
Less treasury stock; 1,504,611 shares at cost (854,313) (854,313)
------------- -----------
Total stockholders' equity 2,346,220 3,083,859
--------- ---------
Total liabilities and stockholders' equity $6,945,922 $9,002,800
========== ==========
See accompanying notes
3
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended June 30,
(IN THOUSANDS, EXCEPT PER SHARE DATA; UNAUDITED) 1999 1998
---- ----
Net sales:
Professional services $ 1,924,717 $ 3,342,911
Software sales 280,893 2,474,087
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Total sales 2,205,610 5,816,998
Cost of goods sold and services provided:
Cost of professional services 1,580,373 2,377,080
Cost of software sales 361,245 1,037,751
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Total cost of goods sold and services provided 1,941,618 3,414,831
Gross margin 263,992 2,402,167
Operating expenses:
Selling, general and administrative 1,053,716 1,730,716
Research and development -- 391,267
----- --------------
Total operating expenses 1,053,716 2,121,983
Operating (loss) income (789,724) 280,184
Other (expense) income (37,872) 50,184
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(Loss) income before income taxes (827,596) 330,368
Provision for income taxes -- --
--------- --------
Net (loss) income $ (827,596) $ 330,368
============= ==========
Earning per common share:
Basic ($ 0.12) $ 0.05
======== =======
Diluted ($ 0.12) $ 0.04
======== =======
Weighted average common shares outstanding:
Basic 6,918,673 6,654,685
Diluted 6,918,673 8,076,235
Six months ended June 30,
(IN THOUSANDS, EXCEPT PER SHARE DATA; UNAUDITED) 1999 1998
---- ----
Net sales:
Professional services $ 5,440,675 $ 5,379,951
Software sales 600,599 4,606,053
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Total sales 6,041,274 9,986,004
Cost of goods sold and services provided:
Cost of professional services 3,675,882 3,969,742
Cost of software sales 736,956 1,612,672
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Total cost of goods sold and services provided 4,412,838 5,582,414
Gross margin 1,628,436 4,403,590
Operating expenses:
Selling, general and administrative 2,240,553 3,416,923
Research and development 72,935 679,020
------ -------
Total operating expenses 2,313,488 4,095,943
Operating (loss) income (685,052) 307,647
Other (expense) income (72,361) 82,224
------------- ------------
(Loss) income before income taxes (757,413) 389,871
Provision for income taxes -- --
--------- --------
Net (loss) income $ (757,413) $ 389,871
============== ===========
Earning per common share:
Basic ($ 0.11) $ 0.06
======== =======
Diluted ($ 0.11) $ 0.05
======== =======
Weighted average common shares outstanding:
Basic 6,906,667 6,586,862
Diluted 6,906,667 8,008,412
See accompanying notes
4
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Six Months Ended June 30,
--------------------------------
(UNAUDITED) 1999 1998
Net (loss) income $(757,413) $389,871
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation 158,310 165,190
Amortization 10,445 42,279
Software Amortization of Capitalized Software 548,348 517,001
Loss on sale of fixed assets 22,838 -
Changes in operating assets and liabilities
Accounts receivable 1,131,338 (4,033,605)
Other receivables and prepaid expenses (21,718) (300,848)
Refundable income taxes - 32,681
Accounts payable and accrued expenses (1,300,266) 1,844,422
--------- -----------
Net cash (used) by operating activities $(208,118) $(1,343,009)
--------- -----------
Cash flows from investing activities
Acquisition of furniture and equipment - (332,536)
Increase in capitalized software - (2,048,519)
--- ----------
Proceeds from sale of fixed assets 46,845 -
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Net cash provided (used) in investing activities 46,845 (2,381,055)
------- ----------
Cash flows from financing activities
Net (payments) under bank revolving line of credit (14,600) (599,600)
Principal (payments) purchases on capital leases (4,373) 40,567
Net Proceeds from private placement - 5,646,685
Proceeds from exercise of stock options and warrants 19,774 397,220
-------- -----------
Net cash provided by financing activities 801 5,484,872
---- ----------
Net (decrease) increase in cash and cash equivalents (160,472) 1,760,808
Cash and cash equivalents at beginning of the period 176,399 363,753
Cash and cash equivalents at end of the period $15,927 $2,124,561
======= ==========
Supplemental cash flow Information
Interest paid $79,426 $8,520
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, 1998 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, 1998 and in other filings with the Securities and Exchange
Commission.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF
OPERATION.
OVERVIEW
Prior to 1997, IAI was primarily dedicated to providing a range of information
technology services such as software applications development, software
conversions, information systems reengineering and systems integration. In 1996,
IAI acquired the rights to a software tool which IAI initially intended to
utilize for systems conversion services as companies sought to migrate from
mainframe legacy systems to more modern day platforms and environments. After
acquiring the rights to this tool, which IAI named UNICAST, IAI recognized that
the tool's functionality was capable of being extended to address the Year 2000
problem currently confronting many computer systems. This problem basically
prevents certain software applications from recognizing dates and executing
transactions involving years subsequent to 1999.
The Company's main focus had been to license the UNICAST product to
third-parties who were either engaged in the business of correcting date impacts
in other parties' software or undertaking this remediation process for their own
software. IAI also sought to perform remediation services in its own large
volume production environment, called a solutions factory, in which it could
utilize its own automation tools. During the latter part of 1998, IAI began to
appreciate that Year 2000 market demand was not developing to the extent which
third-parties had projected. Therefore, the Company began to devote greater
resources to modernization and conversion services and web based solutions. The
downturn in Year 2K software sales, which began to occur in the first quarter
1999, and the reduction in Year 2K professional fees, which became evident in
the second quarter 1999, significantly accounts for the changes in software
sales and professional services fees to date in 1999 in comparison to the
corresponding periods in 1998.
THREE MONTHS ENDED JUNE 30, 1999 VERSUS THREE MONTHS ENDED JUNE 30, 1998
REVENUE
IAI's revenues in the second quarter of fiscal 1999 were $2,205,610,
compared to $5,816,998 in the second quarter of fiscal 1998, a decrease of 62%.
Professional services revenues were $1,924,717 versus $3,342,717, a decrease of
42%, and product revenues were $280,893 versus $2,474,087, a decrease of 87%.
GROSS MARGIN
Gross margins were $263,992, or 12% of sales, in the second quarter of
fiscal 1999 versus $2,402167, or 41% of sales, in the second quarter of fiscal
1998. Of the $263,992 in 1999, $344,344 was attributable to professional
services and ($80,352)was due to software sales. Gross margins as a percentage
of sales were 18% for professional services and (29%) for software sales.
Included in the cost of software sales are royalties the Company pays to
Computer Associates International, Inc. for certain products that the Company
sells. In the second quarter of 1998, the Company reported gross margins of
approximately 29% for professional services and 58% for software.
SELLING, GENERAL & ADMINISTRATIVE (SG&A)
SG&A was $1,053,716, or 48% of revenues, in the second quarter of 1999
versus $1,730,716, or 30% of revenues, in the second quarter of 1998, a decrease
of 39%. The dollar decrease is attributable to the scaling back of SG&A expenses
through the second quarter of
7
1999. The increase in SG&A as a percentage of revenue is primarily attributable
to the reduction of overall revenue experienced by the Company.
RESEARCH AND DEVELOPMENT (R&D)
R&D expenditures were $0 in the second quarter of fiscal 1999 versus
$391,267 in the second quarter of fiscal 1998, as the Company terminated
software maintenance expenses.
PROFITS
The Company reported an operating loss of $789,724 in the second
quarter of 1999 compared to a profit of $280,184 in the second quarter of 1998.
In general, the losses are a combination of the continuing amortization of
capitalized software and the reduction of Year 2K services and software sales.
8
SIX MONTHS ENDED JUNE 30, 1999 VERSUS SIX MONTHS ENDED JUNE 30, 1998
REVENUE
IAI's revenues in the first six months of fiscal 1999 were $6,041,274,
compared to $9,986,004 in the first six months of fiscal 1998, a decrease of
40%. Professional services revenues were $5,440,675 versus $5,379,951, an
increase of 1%, and product revenues were $600,599 versus $4,606,053, a decrease
of 87%.
GROSS MARGIN
Gross margins were $1,628,436, or 27% of sales, in the first six months
of fiscal 1999 versus $4,403,590, or 44% of sales, in the first six months of
fiscal 1998. Of the $1,628,436 in 1999, $1,764,793 was attributable to
professional services and ($136,357) was due to software sales. Gross margins as
a percentage of sales were 32% for professional services and (23)% for software
sales.
SELLING, GENERAL & ADMINISTRATIVE
SG&A was $2,240,553, or 37% of revenues, in the first half of 1999
versus $3,416,923, or 34% of revenues, in the first half of 1998.
RESEARCH AND DEVELOPMENT
R&D expenditures were $72,935 in the first six months of fiscal 1999
versus $679,020 in the first six months of fiscal 1998. The decrease is due to
lower software maintenance expenses in 1999.
PROFITS
The Company reported an operating loss of $685,052 in the first half of
1999 compared to a profit of $307,647 in the first half of 1998. In general, the
losses are due to lower software sales combined with a higher level of
amortization of capitalized software.
LIQUIDITY AND CAPITAL RESOURCES
Through the first six months of 1999, the Company financed its operations from
current collections and through its bank line of credit. Cash and cash
equivalents at June 30 ,1999 were $15,927 compared to $175,399 at June 30, 1998.
As of June 30, 1999 the Company had an outstanding balance on its line of credit
of $1,781,600.
The Company's line of credit of $2,000,000 expired on June 19,1999. The Company
signed a forbearance agreement with First Virginia Bank extending the line of
credit until September 20, 1999. The Company is in negotiations with various
organizations to obtain a new line of credit. The current line of credit,
coupled with funds generated from operations, assuming the operations are
profitable, should be sufficient to meet the Company's operating cash
requirements. The Company, however, may be required from time to time to delay
the timely payment of its accounts payable. The Company cannot be certain that
there will not be a need for additional working capital at some point in fiscal
1999. It is uncertain whether the Company will be able to obtain such additional
working capital.
The Company has no material commitments for capital expenditures.
9
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Other than the class action lawsuit referenced in the Form 10-QSB for the three
months ended March 31, 1999, the Company is not a party to any other material
legal proceeding. No developments occurred in the class action lawsuit in the
quarter ended June 30, 1999.
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
- ---------------------------------
(Registrant)
Date: August 13, 1999 By:
--------------- ---------------------------------
Sandor Rosenberg, Chairman of the
Board and President
By:
--------------------------------
Richard S. DeRose, Executive Vice
President and Treasurer
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
27.1 Financial Data Schedule