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, 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 September 30, 1997: Common Stock, par value $.01, 5,990,819 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 nine months ended September 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. In February 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share, which is required to be adopted on December 31, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating primary earnings per share, the dilutive effect of stock options will be excluded. The impact of Statement No. 128 on the calculation of basic earnings per share and fully diluted earnings per share for these quarters is not expected to be material. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF OPERATION. The quarterly and annual operating results for Information Analysis Incorporated ("IAI" or the "Company") are affected by a wide variety of factors that could materially and adversely affect revenue and profitability including transitioning from primarily a services orientation to a product focus; the timing of customer orders for the Company's new products; introduction of new products; market acceptance of the Company's new products and its competitors' products; and the maturation of the market for the Company's products. As a result of these factors, among others, IAI may experience material fluctuations in operating results which, in turn, could adversely affect its business, financial condition and stock prices. This quarterly report contains certain forward-looking statements and information relating to IAI that are based on the beliefs of management and assumptions made by and information currently available to management. When used in this report, the words "believe", "anticipate", "expect," and words or phrases of similar import, as they relate to IAI, its subsidiaries or its management, are intended to identify forward-looking statements. These statements reflect the current risks, uncertainties and assumptions related to certain factors including, without limitation, competitive factors, general economic conditions, product introductions and acceptance, changes in industry practices, and one-time events. Based upon changing conditions, should any one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results may vary materially from those described herein. IAI does not intend to update these forward-looking statements. Results of Operations - --------------------- During 1997 the Company began to devote substantial resources towards the business surrounding UNICAST(TM), the Company's Year 2000 remediation tool. UNICAST is an acronym for Universal Computer Aided Software Translator. These efforts included integrating UNICAST with other Year 2000 products, expanding technical support capability and increasing sales, marketing and licensing efforts. In the third quarter, IAI has made a significant investment in a management team and infrastructure to support future commercial product revenue growth. The results for the first nine months of 1997 reflect a minimal amount of Year 2000 based revenue. The Company is optimistic about the prospects for its UNICAST product line, but no assurances can be provided that the Year 2000 segment of the Company's business will prove successful. The revenues of IAI generated in the third quarter of 1997 decreased by $740,351, or by 29.0%, to $1,816,423 from $2,556,774 for the third quarter of 1997. This reduction was primarily due to a decrease in revenue from the Company's contract with the U.S. Customs Service ("USCS") and reflects managements' decision to focus more efforts towards building its UNICAST product line. The USCS contract generated $71,110 of revenue in the third quarter of 1997, compared with $1,111,774 during the third quarter of 1996. Except for modest extensions of certain tasks performed in a subcontractor capacity to USCS, the Company's principal contract with USCS was completed on September 30, 1996. In the third quarter of 1997, the Company incurred a $404,485 net loss, as compared to a net loss of $12,219 in the third quarter of 1996. In the third quarter of 1997, the Company's gross profit percentage improved to 24.6%, compared to 23.1% during the third 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 63.2% during the third quarter of 1997, from 23.4% in the third quarter of 1996. This increase reflects the lower revenue base and the additional transition expenses the Company incurred in repositioning its business to a product orientation. The Company's gross profit percentage increased by 2.8% from 20.5% during the first nine months of 1996 to 23.3% during the first nine months of 1997. 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 45.4% during the first nine months of 1997, compared to 19.6% during the first nine months of 1996. This increase was due to the Company's lower revenue base and its investment in its commercial product line. Interest expense decreased slightly by $6,255 during the first nine months of 1997, as compared to the first nine months of 1996. Interest income increased to $103,631 in the first nine months of 1997, from $9,944 for the first nine 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 $656,703 loss during the first nine months of 1997, as compared to a net income of $42,442 during the first nine months of 1996. The Company also capitalized $1,220,958 of development expenses in the third quarter for certain UNICAST enhancements. Liquidity and Capital Resources - ------------------------------- Since transitioning to primarily a product orientation as opposed to its traditional services focus, the Company has principally relied upon the proceeds from its private placement completed in the first quarter, along with current collections from service engagements. The Company also maintains a $1.5 million line of credit for working capital, which expires in June, 1998. As of September 30, 1997, the Company's cash and cash equivalents totaled $1,498,317, compared to $35,764 at September 30, 1996. The outstanding balance on the line of credit as of September 30, 1997 was $0. The Company intends to meet its long term working capital needs from the revenues which it anticipates it will earn from UNICAST, including license fees, maintenance fees and Year 2000 engagements. Because IAI cannot predict with reasonable certainty when Year 2000 revenue will materialize for it and other companies similarly situated, the Company anticipates that it will require an infusion of additional capital to continue to operate at the same staffing levels it employed as of the end of the third quarter and the additional staffing levels it will require to meet the demands the company expects it will contront for Year 2000 engagements. As of September 30, 1997, the Company had initiated preliminary discussions with third parties towards raising this additional capital by the end of the year. The Company believes that capital will be available to it upon acceptable terms, but no assurances can be provided in this regard. The Company has no material commitments for capital expenditures. PART II - OTHER INFORMATION ITEM 5. OTHER INFORMATION In July, Brendan J. Dawson, a Director of the Company, was appointed as President and Chief Operating Officer. Prior to joining the Company, Mr Dawson had been CEO and president of MAXM Systems Corporation, a privately held software and services company which specialized in providing integrated operations management solutions. Mr Dawson had earlier served as Executive Vice President and COO at Legent Corporation. In August 1997, Information Analysis appointed Mr. Kevin Coyne as Senior Vice President to oversee development and support of its product line. Mr. Coyne, formerly Vice President at Computer Associates, had responsibility for its Discovery 2000 family of products. 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: November 7, 1997 By: /s/ Sandor Rosenberg ---------------- -------------------- Sandor Rosenberg, Chairman of the Board and President By: /s/ Richard S. DeRose --------------------- Richard S. DeRose, Executive Vice President and Treasurer INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET September 30, 1997 ASSETS As Of As Of 9/30/97 12/31/96 ----------- ---------- Current assets Cash and cash equivalents $1,498,317 $ 323,886 Accounts receivable 1,537,129 1,355,284 Employee advances 85,040 34,323 Income taxes receivable 603,970 201,554 Deferred income taxes 98,662 98,662 Prepaid expenses 184,313 104,554 Other receivables 102,034 192,686 ---------- ---------- Total current assets 4,109,465 2,310,949 Fixed assets At cost, net of accumulated depreciation and amortization of $1,369,037 682,682 241,311 Equipment under capital leases Net of accumulated amortization of $73,648 56,354 49,768 Capitalized software 3,097,205 186,964 Investments 10,000 10,000 Goodwill 26,976 70,554 Other receivables 226,042 226,694 Other assets 24,980 24,980 ---------- ---------- Total assets $8,233,704 $3,121,220 ========== ========== INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET September 30, 1997 LIABILITIES & STOCKHOLDERS' EQUITY As Of As Of 9/30/97 12/31/96 ------------- ------------ Current liabilities Accounts payable $ 618,474 $ 413,942 Accrued payroll 503,562 262,754 Other accrued liabilities 93,374 58,896 Current portion of long-term debt 37,045 120,300 Current maturities of capital lease obligations 18,229 18,229 Deferred rent 0 852 ----------- ----------- Total current liabilities 1,270,684 874,973 Long-term debt 90,380 90,380 Capital lease obligations, net of current portion 25,244 41,334 Deferred income taxes 27,020 27,020 ----------- ----------- Total liabilities 1,413,328 1,033,707 ----------- ----------- Common stock, par value $0.01 15,000,000 shares authorized;7,495,430 shares issued; 5,990,819 outstanding 74,954 6,772 Paid in capital in excess of par value 6,460,623 1,139,240 Retained earnings 1,139,112 1,795,814 Less treasury stock; 1,504,611 shares at cost (854,313) (854,313) ----------- ----------- Total stockholders' equity 6,820,376 2,087,513 ----------- ----------- Total liabilities and stockholders' equity $ 8,233,704 $ 3,121,220 =========== =========== INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the nine months ended September 30, --------------------------- 1997 1996 ----------- ----------- Sales Professional fees $ 4,800,563 $ 9,343,616 Software sales 365,849 339,926 ----------- ----------- Total sales 5,166,412 9,683,542 ----------- ----------- Cost of sales Cost of professional fees 3,636,708 7,409,611 Cost of software sales 324,338 292,717 ----------- ----------- Total cost of sales 3,961,046 7,702,328 ----------- ----------- Gross profit 1,205,366 1,981,214 Selling, general and administrative expenses 2,347,383 1,895,716 ----------- ----------- (Loss) income from operations (1,142,017) 85,498 Other income and (expenses) Interest income 103,631 9,944 Interest expense (20,733) (26,988) ----------- ----------- (Loss) income before provision for income (1,059,119) 68,454 taxes (Benefit) expenses for income taxes (402,416) 26,012 ----------- ----------- Net (loss) income $ (656,703) $ 42,442 =========== =========== (Loss) income per common and common equivalent share ($0.11) $0.01 Weighted average common and common equivalent shares outstanding * 6,243,887 4,172,706 * Dilutive effects of Common Stock equivalents were immaterial INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the three months ended September 30, --------------------------- 1997 1996 ----------- ----------- Sales Professional fees $ 1,643,159 $ 2,343,741 Software sales 173,264 213,033 ----------- ----------- Total sales 1,816,423 2,556,774 ----------- ----------- Cost of sales Cost of professional fees 1,217,600 1,776,587 Cost of software sales 152,194 190,629 ----------- ----------- Total cost of sales 1,369,794 1,967,216 ----------- ----------- Gross profit 446,629 589,558 Selling, general and administrative expenses 1,147,323 598,278 ----------- ----------- (Loss) income from operations (700,694) (8,720) Other income and (expenses) Interest income 56,613 7,159 Interest expense (8,311) (13,005) ----------- ----------- (Loss) income before provision for income (652,392) (14,566) taxes (Benefit) expenses for income taxes (247,907) (2,347) ----------- ----------- Net (loss) income $ (404,485) $ (12,219) =========== =========== (Loss) income per common and common equivalent share (0.06) (0.00) Weighted average common and common equivalent shares outstanding * 6,376,232 4,172,049 * Dilutive effects of Common Stock equivalents were immaterial INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
For the nine months ended September 30, --------------------------------------- 1997 1996 ------------- ------------- Cash flows from operating activities Cash received from customers $ 4,985,215 $ 10,746,126 Cash paid to suppliers and employees (5,669,600) (9,927,705) Interest received 103,631 9,944 Interest paid (20,733) (26,988) ------------ ------------ Net cash (used) provided by operating activities (601,487) 801,377 ------------ ------------ Cash flows from investing activities Loans and advances (50,717) (109,449) Acquisition of furniture and equipment (636,603) (110,310) Increase in capitalized software (2,910,241) 0 ------------ ------------ Net cash used in investing activities (3,597,561) (219,759) ------------ ------------ Cash flows from financing activities Net borrowing (payments) under bank revolving line of credit 0 (475,000) Principal payments on debt and capital leases (16,090) (14,540) (Repurchase) of common stock 0 (53,250) Proceeds from private placement 5,000,000 0 Goodwill associated with purchase of a business 0 (85,080) Stock issued in purchase of a business 0 25,000 Proceeds from exercise of incentive stock options 389,569 0 ------------ ------------ Net cash provided (used) by financing activities 5,373,479 (602,870) ------------ ------------ Net increase in cash and cash equivalents 1,174,431 (21,252) Cash and cash equivalents at beginning of the period 323,886 57,016 ------------ ------------ Cash and cash equivalents at end of the period $ 1,498,317 $ 35,764 ============ ============ Reconciliation of net income to cash provided by operating activities Net (loss) income $ (656,703) $ 42,442 Adjustments to reconcile net (loss) income to net cash provided by operating activities Depreciation and amortization 232,224 119,102 Changes in operating assets and liabilities Accounts receivable (181,197) 1,062,584 Other receivables and prepaid expenses 10,893 (29,312) Accounts payable and accrued expenses 396,564 (411,783) Deferred rent (852) (7,668) Income tax receivable liability (402,416) 26,012 ------------ ------------ Net cash (used) provided by operating activities $ (601,487) $ 801,377 ============ ============
INDEX TO EXHIBITS EXHIBIT NO. DESCRIPTION 10.1 Employment Contract for Brendan J. Dawson 27.1 Financial Data Schedule