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, 1997 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.) 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 2222 Gallows Road, #300 Dunn Loring, VA 22027 (Former Address of principal executive offices) (Zip Code) 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, 1997: Common Stock, par value $.01, 5,839,371 shares Transitional small business disclosure format. Yes __________ No x ---------- PART I - FINANCIAL INFORMATION Item 1. 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, 1997 and 1996. 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, 1996. Item 2. Management's Discussion and Analysis of Financial Condition or Plan of Operation. Results of Operations The revenues of Information Analysis Incorporated (the "Company") which were generated in the second quarter of 1997 decreased by $1,259,298, or by 41.3%, to $1,787,946 from $3,047,244 for the second quarter of 1996. This reduction was primarily due to a decrease in revenue from the Company's contract with the U.S. Customs Service ("USCS") which generated $82,986 of revenue in the second quarter of 1997, compared with $1,981,024 during the second quarter of 1996. Except for modest extensions of certain tasks performed in a subcontractor capacity to USCS, the Company's principal contract with USCS terminated on September 30, 1996. In the second quarter of 1997, the Company incurred a $67,835 net loss. This represented a $21,831 reduction in comparison to the second quarter of 1996 in which the Company incurred a net loss of $46,004. In the second quarter of 1997, the Company's gross profit percentage improved to 25.1%, compared to 21.3% during the second quarter of 1996. The reduction in services for the USCS substantially contributed to this improvement since the profit margins on USCS services were generally less in comparison to the margins achieved from other operations of the Company. Selling, general, and administrative expenses as a percentage of revenue increased to 33.4% during the second quarter of 1997, from 23.5% in the second quarter of 1996. This increase is due to the Company's lower revenue base along with the expenses incurred in transitioning the Company from primarily a professional services organization to a product oriented enterprise. The Company's gross profit percentage increased by 3.1% from 19.5% during the first six months of 1996 to 22.6% during the first six months of 1997. Again, this was primarily the result of the reduction in services provided to the USCS from which lower profit margins were being achieved. Selling, general and administrative expenses as a percentage of revenue increased to 35.8% during the first six months of 1997, compared to 18.2% during the first six months of 1996. Again, this increase was due to the Company's lower revenue base and the additional transition expenses the Company incurred in repositioning its business to a product orientation. Interest expense decreased slightly by $1,561 during the first six months of 1997, as compared to the first six months of 1996. Interest income increased to $47,018 in the first six months of 1997, from $2,785 for the first six months of 1996. This increase was a result of raising $5 Million in funds from a private placement in the first quarter 1997. Net income declined to a $252,218 loss during the first six months of 1997, as compared to a net income of $54,661 during the first six months of 1996. During the second quarter of 1997, the Company continued to devote substantial resources towards the business surrounding UNICAST, the Company's Year 2000 remediation tool. UNICAST is an acronym for Universal Computer Aided Software Translator. As a single product, the Company's software had originally been named CAST, but in recognition of the capabilities of its growing number of component products, UNICAST was considered a more appropriate name. These efforts included integrating UNICAST with other Year 2000 products, expanding technical support capability and increasing sales, marketing and licensing efforts. In this quarter, 31 additional employees were hired to support the UNICAST business. The Company also capitalized $1,205,861 of development expenses in the second quarter for certain UNICAST enhancements. Liquidity and Capital Resources In the second quarter of 1997, the Company financed its operations from current collections and through proceeds obtained in the first quarter from a $5,000,000 private placement. As of June 30, 1997 the outstanding balance on the company's line of credit was $0. Cash and cash equivalents at June 30, 1997 were $3,618,491, compared to $93,765 at June 30, 1996. The Company renewed its line of credit for $1,500,000 on July 21, 1997. This line of credit expires June 25, 1998 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 - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of Shareholders was held on Monday, June 30, 1997. At the meeting, Sandor Rosenberg, James D. Wester, John D. Sanders, Bonnie K. Wachtel, Brendan J. Dawson, and Charles A May, Jr., were elected as directors to serve until the next annual meeting. Of the total votes cast for directors, 3,631,011 votes were cast in favor of Mr. Rosenberg, 3,631,461 votes were cast in favor of all the other directors, 950 votes were cast against Mr. Rosenberg and 500 votes were cast against all other directors. In addition, the shareholders voted 2,739,026 in favor of and 350,411 against (with 500 votes abstaining and 542,024 unvoted) the proposal to increase by 325,000 the number of options comprising the Company's stock option plan, thereby increasing from 2,250,000 to 2,575,000 the number of options available under the plan. The shareholders also voted in favor of increasing by 5,000,000 shares the authorized shares of the Company's Common Stock or from 10,000,000 shares to 15,000,000 shares. 3,625,058 votes were cast in favor of this proposal, 6,403 votes were cast against it, and 500 votes abstained. Item 6. Exhibits and Reports on Form 8-K (a) No reports on Form 8-K were filed for the quarter for which this report is filed (b) See the Index to Exhibits attached hereto. 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: July 31, 1997 By: /s/ Sandor Rosenberg ------------- -------------------- Sandor Rosenberg, Chief Executive Officer By: /s/ Richard S. DeRose --------------------- Richard S. DeRose, Executive Vice President and Treasurer INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET June 30, 1997 ASSETS Current Assets Cash and cash equivalents $3,618,491 Accounts receivable 1,614,859 Employee advances 23,017 Income taxes receivable 356,063 Deferred income taxes 98,662 Prepaid expenses 192,469 Other receivables 94,736 ---------- Total current assets 5,998,297 Fixed Assets At cost, net of accumulated depreciation and amortization of $1,304,878 559,535 Equipment under capital leases Net of accumulated amortization of $67,172 61,001 Capitalized software 1,876,247 Investments 10,000 Goodwill 41,502 Other receivables 226,694 Other Assets 24,980 ---------- Total assets $8,798,256 ========== INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET June 30, 1997 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable $ 977,493 Accrued payroll 364,426 Other accrued liabilities 107,664 Current portion of long-term debt 120,300 Current maturities of capital 98,662 lease obligations 18,229 ---------- Total current liabilities 1,588,112 Long-term debt 90,380 Capital lease obligations, net of current portion 30,031 Deferred income taxes 27,020 ---------- Total liabilities 1,735,543 ---------- Common stock, par value $0.01 15,000,000 shares authorized: 7,343,982 shares issued; 5,839,371 outstanding 73,440 Paid in capital in excess of par value 6,299,989 Retained earnings 1,543,597 Less treasury stock; 1,504,611 shares at cost (854,313) ---------- Total stockholders' equity $7,062,713 ---------- Total liabilities and stockholders' equity $8,798,256 ========== INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS For the six months ended June 30, --------------------------------- 1997 1996 --------- ---------- Cash flows from operating activities Cash received from customers $ 3,090,414 $ 8,000,987 Cash paid to suppliers and employees (2,923,575) (7,291,638) Interest received 47,018 2,785 Interest paid (12,422) (13,983) ----------- ------------ Net cash provided by operating activities 201,435 698,151 ----------- ------------ Cash flows from investing activities Loans and advances 11,306 (9,097) Acquisition of furniture and equipment (444,967) (31,074) Increase in capitalized software (1,689,283 0 ------------ ----------- Net cash used in investing activities (2,122,944) (40,171) ------------ ----------- Cash flows from financing activities Net borrowing (payments) under bank revolving line of credit 0 (500,000) Principal payments on debt and capital leases (11,303) (9,875) (Repurchase) of common stock 0 (36,750) Proceeds from private placement 5,000,000 0 Goodwill associated with purchase of a business 0 (99,606) Stock issued in purchase of a business 0 25,000 Proceeds from exercise of incentive stock options 227,417 0 ----------- ----------- Net cash provided (used) by financing activities 5,216,114 (621,231) ----------- ----------- Net increase in cash and cash equivalents 3,294,605 36,749 Cash and cash equivalents at beginning of the period 323,886 57,016 ----------- ---------- Cash and cash equivalents at end of the period $ 3,618,491 $ 93,765 =========== ============ Reconciliation of net income to cash provided by operating activities Net (loss) income $(252,218) $ 54,661 Adjustments to reconcile net (loss) income to net cash provided by operating activities Depreciation and amortization 144,562 77,610 Changes in operating assets and liabilities Accounts receivable (259,575) 874,219 Other receivables and prepaid expenses 10,035 (483,406) Accounts payable and accrued expenses 713,992 151,820 Deferred rent (852) (5,112) Income tax receivable liability (154,509) 28,359 ----------- ----------- Net cash provided by operating activities $ 201,435 $ 698,151 =========== =========== INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS For the three months ended June 30, ----------------------------------- 1997 1996 ----------- ----------- Sales Professional fees $ 1,669,134 $ 2,946,788 Software sales 128,812 100,456 ----------- ----------- Total sales 1,787,946 3,047,244 ----------- ----------- Cost of sales Cost of professional fees 1,218,601 2,321,967 Cost of software sales 121,281 80,490 ---------- ----------- Total cost of sales 1,339,882 2,402,457 ------------ ----------- Gross profit 448,064 644,787 Selling, general and administrative expenses 597,098 715,660 ------------ ---------- Loss from operations (149,034) (70,873) Other income and expenses Interest income 46,149 2,184 Interest expense (6,479) (5,880) ---------- --------- Loss before provision for income taxes (109,364) (74,569) Benefit for income taxes (41,529) (28,565) ------------ ----------- Net loss $ (67,835) $ (46,004) =========== =========== Net income per common and common equivalent share ($0.01) ($0.10) Weighted average common and common equivalent shares outstanding 6,245,159 461,353 INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the six months ended June 30, --------------------------------- 1997 1996 ---- ---- Sales Professional fees $ 3,157,404 $ 6,999,875 Software sales 192,585 128,893 ------------ ------------- Total sales 3,349,989 7,126,768 ------------ ------------- Cost of sales Cost of professional fees 2,419,108 5,633,024 Cost of software sales 172,144 102,088 ------------ ------------- Total cost of sales 2,591,252 5,735,112 ------------ ------------- Gross profit 758,737 1,391,656 Selling, general and administrative expenses 1,200,060 1,297,438 ------------ ------------ (Loss) income from operations (441,323) 94,218 Other income and (expenses) Interest income 47,018 2,785 Interest expense (12,422) (13,983) ------------- ------------ (Loss) income before provision for (406,727) 83,020 income taxes (Benefit) expenses for income taxes (154,509) 28,359 ------------- ------------ Net (loss) income $ (252,218) $ 54,661 ============= ============ (Loss) income per common and common equivalent share ($0.04) $0.12 Weighted average common and common equivalent shares outstanding 6,177,715 464,499 INDEX TO EXHIBITS Exhibit No. Description 27.1 Financial Data Schedule