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, 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 September 30, 1996: Common Stock, par value $.01, 460,303 shares Transitional small business disclosure format. Yes No x ---------- ---------- INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET September 30, 1996 ASSETS Current assets Cash and cash equivalents $ 35,764 Accounts receivable 2,189,059 Employee advances 134,073 Deferred income taxes 95,887 Prepaid expenses 163,411 Other receivables 60,777 ----------------- Total current assets 2,678,971 Fixed assets At cost, net of accumulated depreciation and amortization of $1,169,396 280,289 Equipment under capital leases Net of accumulated amortization of $50,762 55,059 Other assets 16,593 Investments 10,000 Goodwill 85,080 Other receivables 157,660 ----------------- Total assets $ 3,283,652 ================= INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET September 30, 1996 LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities Accounts payable $ 564,560 Accrued payroll 303,138 Other accrued liabilities 60,125 Note payable - bank 75,000 Current portion of note payable - other 120,300 Current maturities of capital 18,229 lease obligations Income taxes payable 5,317 Deferred rent 3,408 ----------------- Total current liabilities 1,150,077 Note payable - other 123,172 Capital lease obligations, net of 44,355 current portion Deferred income taxes 19,000 ----------------- Total liabilities 1,336,604 ----------------- 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 1,997,930 Less treasury stock; 167,179 shares at cost (854,313) ----------------- Total stockholders' equity 1,947,048 ----------------- Total liabilities and stockholders' equity $ 3,283,652 ================= INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS
For the nine months ended September 30, --------------------------------------------- 1996 1995 -------------- -------------- Sales Professional fees $ 9,343,616 $ 12,016,630 Software sales 339,926 210,911 ---------------- ---------------- Total sales 9,683,542 12,227,541 ---------------- ---------------- Cost of sales Cost of professional fees 7,409,611 9,526,293 Cost of software sales 292,717 183,762 ---------------- ---------------- Total cost of sales 7,702,328 9,710,055 ---------------- ---------------- Gross profit 1,981,214 2,517,486 Selling, general and administrative expenses 1,895,716 2,314,621 ---------------- ---------------- Income from operations 85,498 202,865 Other income and expenses Interest income 9,944 6,037 Interest expense (26,988) (100,055) ---------------- ---------------- Income before provision for income 68,454 108,847 taxes Provision for income taxes 26,012 41,643 ---------------- ---------------- Net income 42,442 67,204 ================ ================ Retained earnings: Beginning of period 1,955,488 2,030,121 ---------------- ---------------- End of period $ 1,997,930 $ 2,097,325 ================ ================ Net income per common and common equivalent share $0.09 $0.14 Weighted average common and common equivalent shares outstanding 463,634 483,467
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS
For the three months ended September 30, --------------------------------------------- 1996 1995 -------------- -------------- Sales Professional fees $ 2,343,741 $ 3,628,264 Software sales 213,033 96,080 ---------------- ---------------- Total sales 2,556,774 3,724,344 ---------------- ---------------- Cost of sales Cost of professional fees 1,776,587 2,932,978 Cost of software sales 190,629 81,208 ---------------- ---------------- Total cost of sales 1,967,216 3,014,186 ---------------- ---------------- Gross profit 589,558 710,158 Selling, general and administrative expenses 598,278 714,865 ---------------- ---------------- Income (loss) from operations (8,720) (4,707) Other income and expenses Interest income 7,159 2,688 Interest expense (13,005) (29,415) ---------------- ---------------- Income (loss) before provision for income (14,566) (31,434) taxes Provision (benefit) for income taxes (2,347) (11,663) ---------------- ---------------- Net income (loss) (12,219) (19,771) ================ ================ Retained Earnings: Beginning of period 2,010,149 2,117,096 ---------------- ---------------- End of period $ 1,997,930 $ 2,097,325 ================ ================ Net income per common and common equivalent share ($0.03) ($0.04) Weighted average common and common equivalent shares outstanding 463,561 481,800
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
For the nine months ending September 30, 1996 1995 ------------------ --------------- Cash flows from operating activities Cash received from customers $ 10,746,126 $ 12,016,657 Cash paid to suppliers and employees (9,927,705) (11,099,471) Interest received 9,944 6,037 Interest paid (26,988) (100,055) ------------------ ------------------ Net cash provided by operating activities 801,377 823,168 ------------------ ------------------ Cash flows from investing activities Loans and advances (109,449) 5,537 Acquisition of furniture and equipment (110,310) (71,941) ------------------ ------------------ Net cash used in investing activities (219,759) (66,404) ------------------ ------------------ Cash flows from financing activities Net borrowing (payments) under bank revolving (475,000) (688,000) line of credit Principal payments on debt and capital leases (14,540) (12,866) (Repurchase) of common stock (53,250) (61,788) Goodwill associated with purchase of a business (85,080) 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 (602,870) (762,379) ------------------ ------------------ Net increase (decrease) in cash and cash equivalents (21,252) (5,615) Cash and cash equivalents at beginning of the period 57,016 35,211 ------------------ ------------------ Cash and cash equivalents at end of the period $ 35,764 $ 29,596 ================== ================== Reconciliation of net income to cash provided by operating activities Net income $ 42,442 $ 67,204 Adjustments to reconcile net loss to net cash provided by operating activities Depreciation and amortization 119,102 130,856 Changes in operating assets and liabilities Accounts receivable 1,062,584 (210,884) Other receivables and prepaid expenses (29,312) 72,640 Accounts payable and accrued expenses (411,783) 729,377 Deferred rent (7,668) (7,668) Income tax liability 26,012 41,643 ------------------ ------------------ Net cash provided by operating activities $ 801,377 $ 823,168 ================== ==================
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 nine months ended September 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 third quarter of 1996 decreased by $1,167,570 , or by 31.0%, to $2,556,774 from $3,724,344 for the third quarter of 1995. This reduction was primarily due to a decrease in revenue from the Company's contract with the U.S. Customs Service ("USCS") which generated $2,546,698 of revenue in the third quarter of 1995, compared with $1,111,774 during the third quarter of 1996. The contract with USCS terminated on September 30, 1996. In the third quarter of 1996, the Company incurred a $12,219 net loss. This represented a $7,552 improvement over the third quarter of 1995 in which the Company incurred a net loss of $19,771. In the third quarter of 1996, the Company's gross profit percentage increased to 23.1%, compared to 19.0% during the third quarter of 1995. This increase is attributable to the winding-down of the lower margin business which the Company's health care segment previously conducted. Selling, general, and administrative expenses as a percentage of revenue increased to 23.4% during the third quarter of 1996, from 19.0% in the third quarter of 1995. This increase is due to the Company's declining revenue base. Year-to-date revenues for the Company for the nine months ended September 30, 1996 were $9,683,542 a $2,543,999 or 20.0% decreased from the corresponding nine months of 1995. This decrease was primarily attributed to the winding down of the Company's health care segment which operated through Allied Health and Information Systems, Inc. ("AHISI"). AHISI generated $47,756 of revenue during the first nine months of 1996, as compared to $1,915,909 of revenue generated during the first nine months of 1995. The Company's gross profit percentage decreased slightly by 0.1% from 20.6% during first nine months of 1995, to 20.5% during the first nine months of 1996. Selling, general and administrative expenses as a percentage of revenue increased to 19.6% during the first nine months of 1996, compared to 18.9% during the first nine months of 1995, primarily as a result of the decline in revenue, interest expense decreased by $73,067 during the first nine months of 1996, as compared to the first nine months of 1995. Interest income increased slightly to $9,944 in the first nine months of 1996, from $6,037 in the first nine months of 1995. Net income declined to $42,442 during the first nine months of 1996, compared to net income of $67,204 during the first nine months of 1995. In an attempt to expand its revenue base, in the third quarter ending September 30, 1996, the Company intensified its efforts to advance the Year 2,000 remediation process it is offering through the use of the Company's proprietary migration/conversion tool, omputer Aided Software Translator ("CAST"). As has been reported in the press and major trade publications, in the absence of remediation, many businesses face the threat of information systems failure when their systems interpret the year 2000 as the year 1900. The Company is of the opinion that CAST will be a particularly valuable tool in many environments as companies are forced to migrate their systems to current day languages or platforms as they also remedy the Year 2000 problem. Therefore, the Company has increased its marketing initiatives and is seeking to develop strategic alliances with major vendors in order to advance the Year 2000 solution it offers. Currently, the Company is optimistic about its prospects for its Year 2000 solution but no assurances can be provided that the Year 2000 segment of the Company's business will prove successful. Liquidity and Capital Resources In the third quarter of 1996, as with the third quarter of 1995, the Company financed its operations from current collections and through advances on its line of credit with its bank. As of September 30, 1996 the outstanding balance on its line of credit was $75,000, as compared to $704,000 as of September 30, 1995. Cash and cash equivalents at September 30, 1996 were $35,764, compared to $29,596 at September 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 The annual stockholders meeting was held on October 30, 1996. The following directors were elected to serve until the next annual meeting. Sandor Rosenberg George T. DeBakey John D. Sanders James D. Wester Bonnie K. Wachtel The stockholders approved an employee stock option plan, under which the Company may issue up to 250,000 options for shares of stock to employees, directors, and consultants of the Company. Item 6. Exhibits and Reports on Form 8-K (b) An amended 8-K was filed by the registrant during the quarter ended September 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: November 15, 1996 By:______________________ Sandor Rosenberg Chairman of the Board and President Date: November 15, 1996 By:______________________ Richard S. DeRose Treasurer