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 SEPTEMBER 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 November 1, 1999: Common Stock, par value $.01, 6,918,673 shares Transitional small business disclosure format. Yes _______ No ___x___ . INFORMATION ANALYSIS INCORPORATED FORM 10-QSB Index
Page PART I. FINANCIAL INFORMATION Number Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998 3 Condensed Consolidated Statements of Operations for the three months and nine months ended September 30, 1999 and September 30, 1998 4 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 1999 and September 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 EXHIBIT INDEX 12
2 INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
As of As of September 30, 1999 December 31, 1998 (UNAUDITED) (AUDITED) ---------------- ------------------ ASSETS Current assets: Cash and cash equivalents $ 135,757 $ 176,399 Accounts receivable, net 2,564,947 4,419,795 Employee advances 10,307 29,678 Prepaid expenses 80,217 89,629 Other receivables 112,321 56,059 ------------ ----------- Total current assets 2,903,549 4,771,560 Fixed assets, net 344,426 650,474 Equipment under capital leases, net 14,462 25,743 Capitalized software, net 2,585,267 3,406,522 Other receivables 49,454 50,226 Other assets 59,330 98,275 -------------- ------------- Total assets $5,956,488 $9,002,800 ========== ========== LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $1,858,370 $2,323,394 Accrued payroll and related liabilities 324,777 692,778 Other accrued liabilities 757,515 1,091,574 Revolving line of credit 1,126,700 1,796,200 Current maturities of capital lease obligations 8,436 14,995 ------------- ------------- Total current liabilities 4,075,798 5,918,941 - - ----------------- --------------- Total liabilities 4,075,798 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 September 30,1999 and December 31, 1998, respectively 84,233 83,588 Additional paid in capital 12,658,795 12,639,666 Retained earnings (10,008,025) (8,785,082) Less treasury stock; 1,504,611 shares at cost (854,313) (854,313) ------------- ----------- Total stockholders' equity 1,880,690 3,083,859 --------- --------- Total liabilities and stockholders' equity $5,956,488 $9,002,800 ========== ========== See accompanying notes
3 INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended September 30, (UNAUDITED) 1999 1998 ---- ---- Net sales: Professional services $ 1,548,178 $ 2,643,329 Software sales 549,767 112,791 ------- ------- Total sales 2,097,945 2,756,120 Cost of goods sold and services provided: Cost of professional services 1,037,233 3,056,744 Cost of software sales 791,447 397,473 ------- ------- Total cost of goods sold and services provided 1,828,680 3,454,217 Gross margin 269,265 (698,097) Operating expenses: Selling, general and administrative 702,495 1,879,292 Research and development - 353,282 ---------- ---------- Total operating expenses 702,495 2,232,574 Operating (loss) (433,230) (2,930,671) Other (expense) income (32,301) 15,479 ---------- ---------- (Loss) before income taxes (465,531) (2,915,192) Provision for income taxes -- -- --------- -------- Net (loss) $ (465,531) $ (2,915,192) ============= ============== Earnings per common share: Basic $(0.07) $(0.43) ======= ======= Diluted $(0.07) $(0.43) ======= ======= Weighted average common shares outstanding: Basic 6,918,673 6,724,851 Diluted 6,918,673 6,724,851 Nine months ended September 30, (UNAUDITED) 1999 1998 ---- ---- Net sales: Professional services $ 6,988,853 $ 8,023,280 Software sales 1,150,366 4,718,844 --------- ---------------- Total sales 8,139,219 12,742,124 Cost of goods sold and services provided: Cost of professional services 4,713,115 7,026,486 Cost of software sales 1,528,403 2,010,145 --------- ------------- Total cost of goods sold and services provided 6,241,518 9,036,631 Gross margin 1,897,701 3,705,493 Operating expenses: Selling, general and administrative 2,943,048 5,296,215 Research and development 72,935 1,032,302 ------ --------- Total operating expenses 3,015,983 6,328,517 Operating (loss) (1,118,282) (2,623,024) Other (expense) income (104,662) 97,703 -------------- ------------ (Loss) before income taxes (1,222,944) (2,525,321) Provision for income taxes -- -- --------- -------- Net (loss) $ (1,222,944) $ (2,525,321) ================ ============== Earnings per common share: Basic $(0.18) $(0.38) ======= ======= Diluted $(0.18) $(0.38) ======= ======= Weighted average common shares outstanding: Basic 6,910,713 6,633,364 Diluted 6,910,713 6,633,364
4 INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, --------------------------------------- (UNAUDITED) 1999 1998 Net (loss) $(1,222,944) $(2,525,321) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation 222,819 219,863 Amortization 15,547 55,296 Software Amortization of Capitalized Software 821,253 872,993 Loss on sale of fixed assets 25,361 - Changes in operating assets and liabilities Accounts receivable 1,854,848 (3,542,810) Other receivables and prepaid expenses 12,238 (313,926) Refundable income taxes - 32,681 Accounts payable and accrued expenses (1,167,084) 2,113,791 ----------- ----------- Net cash provided (used) by operating activities $562,038 ($3,087,433) -------- ----------- Cash flows from investing activities Acquisition of furniture and equipment (1,961) (257,530) Increase in capitalized software - (3,172,550) Proceeds from sale of fixed assets 55,566 - --------- ----------------- Net cash provided (used) in investing activities 53,605 (3,430,080) ------- ---------- Cash flows from financing activities Net (payments) borrowed under bank revolving line of credit (669,500) 393,600 Principal payments on capital leases (6,559) (18,199) Net Proceeds from private placement - 5,646,685 Proceeds from exercise of stock options and warrants 19,774 402,820 --------- ----------- Net cash (used) provided by financing activities (656,285) 6,424,906 ---------- ---------- Net (decrease) in cash and cash equivalents (40,642) (92,607) Cash and cash equivalents at beginning of the period 176,399 363,753 Cash and cash equivalents at end of the period $135,757 $271,146 ======== ======== Supplemental cash flow Information Interest paid $112,049 $12,204 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"). 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, 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 changes in the Company's focus between 1998 and 1999 substantially account for many of the differences in the Company's financial performance when periods in 1999 are compared to corresponding periods in 1998. THREE MONTHS ENDED SEPTEMBER 30, 1999 VERSUS THREE MONTHS ENDED SEPTEMBER 30, 1998 REVENUE IAI's revenues in the third quarter of fiscal 1999 were $2,097,945, compared to $2,756,120 in the third quarter of fiscal 1998, a decrease of 24%. Professional services revenues were $1,548,178 in 1999 versus $2,643,329 in 1998, a decrease of 41%, and product revenues were $549,767 in 1999 versus $112,791 in 1998, an increase of 387%. This increase was mostly related to JETFORM product sales. GROSS MARGIN Gross margins were $269,265, or 13% of sales, in the third quarter of fiscal 1999 versus ($698,097), or (25%) of sales, in the third quarter of fiscal 1998. Of the $269,265 in 1999, $510,945 was attributable to professional services and ($241,680) was due to software sales. Gross margins as a percentage of sales were 33% for professional services and (44%) for software sales. In the third quarter of 1998, the Company reported gross margins of approximately (16%) for professional services and (252%) for software. The gross margin for 1998 was adversely impacted by a prior period adjustment. The gross margin from software sales for 1999 was adversely impacted by software amortization costs of UNICAST. For third quarter 1999, were amortization excluded, overall gross margin would have been approximately 26%. SELLING, GENERAL & ADMINISTRATIVE (SG&A) SG&A was $702,495, or 33% of revenues, in the third quarter of 1999 versus $1,879,292, or 68% of revenues, in the third quarter of 1998, a decrease of 63%. The decrease in SG&A is attributable to the continued scaling back of SG&A expenses through the third quarter of 1999 as the Company continues its transition back to information technology services. 7 RESEARCH AND DEVELOPMENT (R&D) R&D expenditures were $0 in the third quarter of fiscal 1999 versus $353,282 in the third quarter of fiscal 1998, as the Company terminated software maintenance expenses. PROFIT/LOSS The Company reported a net loss of $465,531, or ($0.07) per share basic and diluted in the third quarter of 1999 compared to a net loss of $2,915,492, or ($0.43) per share basic and diluted in the third quarter of 1998. In general, the losses are a combination of the continuing amortization of capitalized software and expenses associated with the Company's prior Year 2K initiatives, which the Company has not yet been able to eliminate. The Company's earnings per share calculations are based upon the weighted average of shares of common stock outstanding. The dilutive effect of stock options are included for purposes of calculating diluted earnings per share, except for periods when the Company reports a net loss, in which case the inclusion of stock options would be antidilutive. 8 NINE MONTHS ENDED SEPTEMBER 30, 1999 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 1998 REVENUE IAI's revenues in the first nine months of fiscal 1999 were $8,139,219, compared to $12,742,124 in the first nine months of fiscal 1998, a decrease of 36%. Professional services revenues were $6,988,853 in 1999 versus $8,023,280 in 1998, a decrease of 13%, and product revenues were $1,150,366 in 1999 versus $4,718,844 in 1998, a decrease of 76%. GROSS MARGIN Gross margins were $1,897,701, or 23% of sales, in the first nine months of fiscal 1999 versus $3,705,493, or 29% of sales, in the first nine months of fiscal 1998. Of the $1,897,701 in 1999, $2,275,738 was attributable to professional services and ($378,037) was due to software sales. Gross margins as a percentage of sales were 33% for professional services and (33%) for software sales. The gross margin from software sales for 1999 was adversely impacted by software amortization costs of UNICAST. SELLING, GENERAL & ADMINISTRATIVE SG&A was $2,943,048, or 36% of revenues, in the first nine months of 1999 versus $5,296,215, or 42% of revenues, in the first nine months of 1998. The decrease in SG&A is attributable to the continued scaling back of SG&A expenses through the third quarter of 1999 as the Company continues its transition back to information technology services. RESEARCH AND DEVELOPMENT R&D expenditures were $72,935 in the first nine months of fiscal 1999 versus $1,032,302 in the first nine months of fiscal 1998. The decrease is due to lower software maintenance expenses in 1999. PROFIT/LOSS The Company reported a net loss of $1,222,944, or ($0.18) per share basic and diluted in the first nine months of 1999 compared to a net loss of $2,525,321, or ($0.38) per share basic and diluted in the first nine months of 1998. In general, the losses are a combination of the continuing amortization of capitalized software and expenses associated with the Company's prior Year 2K initiatives, which the Company has not yet been able to eliminate. The Company's earnings per share calculations are based upon the weighted average of shares of common stock outstanding. The dilutive effect of stock options are included for purposes of calculating diluted earnings per share, except for periods when the Company reports a net loss, in which case the inclusion of stock options would be antidilutive. LIQUIDITY AND CAPITAL RESOURCES Through the first nine months of 1999, the Company financed its operations from current collections and through its bank line of credit. Cash and cash equivalents at September 30 ,1999 were $135,757 compared to $271,146 at September 30,1998. As of September 30, 1999 the Company had an outstanding balance on its line of credit of $1,126,700. The Company's line of credit of $2,000,000 with First Virginia Bank expired on June 19,1999. First Virginia Bank has executed forbearance agreements with the Company which effectively extends the line of credit until January 5, 2000. 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 cash flow positive, 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 in the near future. 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 YEAR 2000 The Company has previously examined its internal operating systems to insure that each is year 2000 compliant. All of the Company's software systems were evaluated, and to the extent required, upgraded to be year 2000 compliant. The Company does not believe that it has any material risks as a result of year 2000 impacts on its systems. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The securities class action law suit, Goldenberg v. Information Analysis Inc., et al., Civil Action No. 99-439A, filed on March 30, 1999, against the Company and two of its officers in the United States District Court for the Eastern District of Virginia, Alexandria Division, has been dismissed by order of the court. See the Company's Form 10-QSB for the period ending March 31, 1999. In this case the plaintiffs were seeking the certification of a class to assert claims for damages under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The dismissal resulted from the failure of the plaintiffs to file a complaint which complied with requirements imposed under the Private Securities Litigation Reform Act of 1995. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit 3.1 Amended and Restated Articles of Incorporation effective March 18, 1997 3.2 Articles of Amendment to the Articles of Incorporation 3.3 Amended By-Laws of the Company 4.1 Copy of Stock Certificate 27.1 Financial Data Schedule (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: November 12, 1999 By:______________________________ ----------------- Sandor Rosenberg, Chairman of the Board and President By:______________________________ Richard S. DeRose, Executive Vice President and Treasurer 11 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION LOCATION 3.1 Amended and Restated Articles of Incorporated by reference from Incorporation effective March 18, the Registrant's Form 10-KSB/A 1997 for the fiscal year ending December 31, 1996 3.2 Articles of Amendment to the Incorporated by reference from Articles of Incorporation the Registrant's Form 10-KSB/A for the fiscal year ending December 31, 1998 3.3 Amended By-Laws of the Company Incorporated by reference from the Registrant's Form S-18 dated November 20, 1986 (Commission File No. 33-9390). 4.1 Copy of Stock Certificate Incorporated by reference from the Registrant's Form 10-KSB/A for the fiscal year ending December 31, 1998 27.1 Financial Data Schedule Filed with this Form 10-QSB 12