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, 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 June 30, 1996: Common Stock, par value $.01, 464,303 shares Transitional small business disclosure format. Yes No x ---------- ---------- INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET June 30, 1996 ASSETS Current assets Cash and cash equivalents $ 93,765 Accounts receivable 2,838,593 Employee advances 33,721 Deferred income taxes 95,887 Prepaid expenses 164,839 Other receivables 68,867 ----------------- Total current assets 3,295,672 Fixed assets At cost, net of accumulated depreciation and amortization of $1,135,694 237,254 Equipment under capital leases Net of accumulated amortization of $45,471 60,350 Investments 10,000 Goodwill 99,606 Other receivables 157,660 ----------------- Total assets $ 3,860,542 ================= INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET June 30, 1996 LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities Accounts payable $ 1,120,111 Accrued payroll 280,291 Other accrued liabilities 95,911 Note payable - bank 50,000 Current portion of note payable - other 115,413 Current maturities of capital 18,229 lease obligations Income taxes payable 7,664 Deferred rent 5,964 -------------- Total current liabilities 1,693,583 Note payable - other 123,172 Capital lease obligations, net of 49,020 current portion Deferred income taxes 19,000 -------------- Total liabilities 1,884,775 -------------- Common stock, par value $0.01 1,000,000 shares authorized; 627,482 shares issued 6,275 Paid in capital in excess of par value 797,156 Retained earnings 2,010,149 Less treasury stock; 163,179 shares at cost (837,813) -------------- Total stockholders' equity 1,975,767 -------------- Total liabilities and stockholders' equity $3,860,542 ============== INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS
For the six months ended June 30, ---------------------------------------------- 1996 1995 -------------- -------------- Sales Professional fees $ 6,999,875 $ 8,388,366 Software sales 126,893 114,831 -------------- -------------- Total sales 7,126,768 8,503,197 -------------- -------------- Cost of sales Cost of professional fees 5,633,024 6,593,315 Cost of software sales 102,088 102,554 -------------- -------------- Total cost of sales 5,735,112 6,695,869 -------------- -------------- Gross profit 1,391,656 1,807,328 Selling, general and administrative expenses 1,297,438 1,599,756 -------------- -------------- Income from operations 94,218 207,572 Other income and expenses Interest income 2,785 3,349 Interest expense (13,983) (70,640) -------------- -------------- Income before provision for income 83,020 140,281 taxes Provision for income taxes 28,359 53,306 -------------- -------------- Net income $ 54,661 $ 86,975 ============== ============== Net income per common and common equivalent share $0.12 $0.18 Weighted average common and common equivalent shares outstanding 464,499 484,800
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS
For the three months ended June 30, --------------------------------------------- 1996 1995 -------------- -------------- Sales Professional fees $ 2,946,788 $ 4,159,124 Software sales 100,456 57,852 -------------- -------------- Total sales 3,047,244 4,216,976 -------------- -------------- Cost of sales Cost of professional fees 2,321,967 3,231,146 Cost of software sales 80,490 50,443 -------------- -------------- Total cost of sales 2,402,457 3,281,589 -------------- -------------- Gross profit 644,787 935,387 Selling, general and administrative expenses 715,660 771,267 -------------- -------------- Income (loss) from operations (70,873) 164,120 Other income and expenses Interest income 2,184 1,253 Interest expense (5,880) (37,217) -------------- -------------- Income (loss) before provision for income (74,569) 128,156 taxes Provision (benefit) for income taxes (28,565) 48,699 -------------- -------------- Net income (loss) $ (46,004) $ 79,457 ============== ============== Net income per common and common equivalent share ($0.10) $0.16 Weighted average common and common equivalent shares outstanding 461,353 483,171
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
For the six months ending June 30, 1996 1995 ------------------ --------------- Cash flows from operating activities Cash received from customers $ 8,000,987 $ 8,080,219 Cash paid to suppliers and employees (7,291,638) (7,943,311) Interest received 2,785 3,349 Interest paid (13,983) (70,640) ---------------- ---------------- Net cash provided by operating activities 698,151 69,617 ---------------- ---------------- Cash flows from investing activities Loans and advances (9,097) 1,260 Acquisition of furniture and equipment (31,074) (66,108) ---------------- ---------------- Net cash used in investing activities (40,171) (64,848) ---------------- ---------------- Cash flows from financing activities Net borrowing (payments) under bank revolving (500,000) 27,000 line of credit Principal payments on debt and capital leases (9,875) (8,688) (Repurchase) of common stock (36,750) (47,350) Goodwill associated with purchase of a business (99,606) 0 Stock issued in purchase of a business 25,000 0 Proceeds from exercise of incentive stock options 0 275 ---------------- ---------------- Net cash used by financing activities (621,231) (28,763) ---------------- ---------------- Net increase (decrease) in cash and cash equivalents 36,749 (23,994) Cash and cash equivalents at beginning of the period 57,016 35,211 ---------------- ---------------- Cash and cash equivalents at end of the period $ 93,765 $ 11,217 ================ ================ Reconciliation of net income to cash provided by operating activities Net income $ 54,661 $ 86,975 Adjustments to reconcile net loss to net cash provided by operating activities Depreciation and amortization 77,610 86,599 Changes in operating assets and liabilities Accounts receivable 874,219 (422,978) Other receivables and prepaid expenses (483,406) 43,710 Accounts payable and accrued expenses 151,820 227,117 Deferred rent (5,112) (5,112) Income tax liability 28,359 53,306 ---------------- ---------------- Net cash provided by operating activities $ 698,151 $ 69,617 ================ ================
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 six months ended June 30, 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 second quarter of 1996 from its computer and software related services and sales segment decreased by $464,491 or by 13.3%, to $3,034,988 from $3,499,479 for the second quarter of 1996. The results of this segment now include International Software Services Corporation ("ISSC") which will operate as a subsidiary. ISSC's operating performance has been included from the date of acquisition, June 5, 1996. For the period June 5 through June 30, 1996, ISSC generated $63,590 in revenue and a $14,473 profit. Overall, in the second quarter of 1996, the Company incurred a $43,274 loss in its computer and software related services segment. This represented a $192,628 reduction in profit compared with the second quarter of 1995, in which the Company generated a profit of $149,354 profit from this line of business. In the second quarter of 1996, the gross profit percentage from the computer and software related services and sales segment decreased to 21.3%, from 22.6% in the second quarter of 1995. Selling, general, and administrative expenses as a percentage of revenue increased to 22.7% during the second quarter of 1996, from 18.4% in the second quarter of 1995. This increase is due to $110,000 in legal fees that the Company incurred in the second quarter of 1996 in its protest of the award to another party of the renewal of the contract that the Company has maintained with the U.S. Customs Service ("USCS"). During the second quarter of 1996, the Company completed its intention of winding down the health care segment of the business provided by Allied Health and Information Services, Inc. ("AHISI"). AHISI's last remaining contract terminated May 3, 1996. No further revenue will be generated in AHISI. AHISI had revenues of $12,256 and a loss of $27,599 during the second quarter of 1996. On a consolidated basis, as a result of winding-down its health care services business, the Company's overall 1996 second quarter revenues declined by $1,169,732 to $3,047,244 from $4,216,976 in the second quarter of 1995. Consolidated gross profit margins also declined to 21.2% in the second quarter of 1996, compared to 22.2% in the second quarter of 1995. Selling, general and administrative expenses as a percentage of revenue increased by 5.3% in the second quarter of 1996, to 23.5% from 18.2% in the corresponding quarter of 1995, primarily as a result of the reduction of its consolidated revenue. After considering the effect of interest and taxes, the Company sustained a consolidated second quarter loss of $46,004 in 1996 compared to a $79,457 profit which was generated in the second quarter of 1995. As a result of winding down AHISI's business, year-to-date revenues for the Company for the six months ended June 30, 1996 decreased $1,376,429 over the corresponding six months of 1995, a decrease of 16.2%. The Company's consolidated gross profit percentage declined by 1.8% from 21.3% during first six months of 1994, to 19.5% during the first six months of 1996. Selling, general and administrative expenses as a percentage of revenue declined slightly to 18.2% during the first six months of 1996, compared to 18.9% during the first six months of 1995. Interest expense decreased by $56,657 during the first six months of 1996, as compared to the first six months of 1995. Interest income declined slightly to $2,785 in the first six months of 1996, from $3,349 in the first six months of 1995. Net income declined to $54,661 during the first six months of 1996, compared to a net income of $86,975 during the first six months of 1995. Liquidity and Capital Resources In the second quarter of 1996, as with the second quarter of 1995, the Company financed its operations from current collections and through advances on its line of credit with its bank. As of June 30, 1996 the outstanding balance on its line of credit was $50,000, as compared to $1,419,000 as of June 30, 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 June 30, 1996 were $93,765, compared to $11,217 at June 30, 1995. The Company's renewed its line of credit for $1,500,000 on June 25, 1996. This line of credit represents a $500,000 reduction from the prior line of credit. This reduction is due to the Company's decreased working capital requirements. This line of credit expires June 19, 1997 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 5. Other Information On April 9, 1996, the Company protested the award to another bidder of the renewal of the contract the Company has maintained with USCS. This protest was not successful. The contract with USCS accounted for 58% and 34% respectively, of the Company's consolidated revenue for the years ending December 31, 1995 and 1994. Until this revenue is replaced, the Company anticipates that its selling, general and administrative expenses as a percentage of revenue will increase. Any and all direct expenses associated with the contract will be eliminated. Item 6. Exhibits and Reports on Form 8-K (b) An 8-K was filed by the registrant during the quarter ended June 30, 1996 pertaining to acquisition of International Software Services Corporation on June 5, 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: August 15, 1996 By:______________________ Sandor Rosenberg Chairman of the Board and President Date: August 15, 1996 By:______________________ Brian R. Moore Treasurer