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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10/Q
Quarterly Report
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1999
Commission File Number: 0-22325
INFORMATION ARCHITECTS CORPORATION
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(Exact name of registrant as specified in its charter)
North Carolina 87-0399301
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4064 Colony Road, Charlotte, NC 28211
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(Address of principal executive offices) (Zip Code)
704-365-2324
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(Registrants telephone number, including are 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 and Exchange Act of 1934
during the proceeding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
As of September 30, 1999, there were 19,393,809 shares of Information Architects
Corporation common stock, $0.001 par value, outstanding.
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PART I. FINANCIAL INFORMATION PAGE
ITEM 1: FINANCIAL STATEMENTS
Consolidated Balance Sheets
as of September 30, 1999 and December 31, 1998 3
Consolidated Statements of Operations (Unaudited) for the
Three and Nine Months ended September 30, 1999 and 1998 4
Consolidated Statements of Cash Flows (Unaudited)
for the Nine Months ended September 30, 1999 and 1998 5
Notes to Unaudited Consolidated Financial Statements 6
Supplemental Schedule of Operating Segments (Unaudited) 7 -8
ITEM 2: Management's Discussion and Analysis of Financial
Condition And Results of Operations
Overview 9
Results of Operations for the Three and Nine Months Ended
September 30, 1999, Compared with the Three and Nine Months
ended September 30, 1998 9
Financial Condition and Liquidity 10
Year 2000 Compliance 11
PART II. OTHER INFORMATION
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS 12
ITEM 6: Exhibits and Reports on Form 8-K 12
Signatures 13
Computations of Earnings per Share 14
Financial Data Schedule 15
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INFORMATION ARCHITECTS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 889,815 $ 2,962,570
Accounts receivable, net 6,279,275 5,231,116
Costs and estimated earnings in excess of
billings 627,909 2,213,036
Prepaid expenses 292,902 304,621
Other receivables 194,199 -
Deferred tax asset 1,800,000 1,800,000
-------------------------- ------------------------
10,084,100 12,511,343
PROPERTY AND EQUIPMENT, NET 3,207,964 2,561,253
SOFTWARE COSTS, NET 2,705,770 2,254,429
GOODWILL, NET 5,711,483 6,047,183
OTHER ASSETS 801,970 97,186
-------------------------- ------------------------
$ 22,511,287 $ 23,471,394
========================== ========================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 4,254,068 $ 2,168,152
Billings in excess of costs and estimated
earnings on contracts in progress 71,906 -
Current portion of capital lease obligation 218,031 51,063
Note payable 225,000 -
Loans payable, stockholder 2,034,773 3,042,029
-------------------------- ------------------------
6,803,778 5,261,244
-------------------------- ------------------------
CONVERTIBLE DEBENTURE PAYABLE 5,000,000 -
CAPITAL LEASE OBLIGATION 131,758 121,327
-------------------------- ------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $0.001 par value, 50,000,000
shares authorized, 19,393,809 and 17,505,686 19,394 17,506
Additional paid-in capital 35,760,518 31,111,734
Deficit (25,227,649) (12,696,567)
Foreign currency translation adjustment 23,488 (23,100)
-------------------------- ------------------------
10,575,751 18,409,573
Less: Receivable from warrant exercise - (320,750)
-------------------------- ------------------------
Total Stockholders' Equity 10,575,751 18,088,823
-------------------------- ------------------------
$ 22,511,287 $ 23,471,394
========================== ========================
</TABLE>
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INFORMATION ARCHITECTS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
9/30/99 9/30/98 9/30/99 9/30/98
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
EARNED REVENUES $ 4,175,567 $8,760,716 $14,916,254 $26,728,957
----------------- ----------------- ---------------- ---------------
EXPENSES
Payroll and Related Expenses 5,900,222 4,978,726 17,937,638 13,548,730
Depreciation and Amortization 641,169 393,363 1,933,235 1,085,817
Rent and Occupancy 729,781 362,292 1,564,596 1,048,311
Other Operating Expenses 931,993 1,011,966 3,384,719 3,446,649
Bad Debt Expense 199,519 200,000 399,519 448,750
Litigation Costs 53,532 24,051 172,926 697,633
----------------- ----------------- ---------------- ---------------
8,456,216 6,970,398 25,392,633 20,275,890
----------------- ----------------- ---------------- ---------------
OPERATING INCOME (LOSS) (4,280,649) 1,790,318 (10,476,379) 6,453,067
OTHER INCOME (EXPENSE)
Acquisition Costs (291,616) - (589,604) -
Interest Expense (414,100) (78,895) (887,360) (175,865)
Interest Income 14,269 4,619 41,390 12,873
Other (555,587) 15,573 (619,129) (12,760)
----------------- ----------------- ---------------- ---------------
(1,247,034) (58,703) (2,054,703) (175,752)
----------------- ----------------- ---------------- ---------------
NET INCOME (LOSS) $ (5,527,683) $ 1,731,615 $(12,531,082) $ 6,277,315
================= ================= ================ ===============
EARNINGS PER SHARE:
BASIC $ (0.29) $ 0.10 $ (0.69) $ 0.36
================= ================= ================ ===============
FULLY DILUTED $ (0.29) $ 0.10 $ (0.69) $ 0.36
================= ================= ================ ===============
AVERAGE SHARES OUTSTANDING:
BASIC 18,960,899 17,449,668 18,233,797 17,409,707
================= ================= ================ ===============
DILUTED 18,960,899 17,647,256 18,233,797 17,607,295
================= ================= ================ ===============
</TABLE>
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INFORMATION ARCHITECTS CORPORATION
CONSOLIDATED STATEMENTS OF CASH
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
9/30/99 9/30/98
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net Income (Loss) $ (12,531,082) $ 6,277,315
Adjustments to Reconcile Net Income (Loss) (Used in) provided by Operating
Activities
Stock Based Compensation 898,752 169,051
Allowance for Doubtful Accounts 399,519 448,750
Depreciation and Amortization 1,933,235 1,085,817
Gain Realized on Sale of Fixed Assets 352,922 -
(Increase) Decrease in:
Accounts Receivable (1,401,089) (5,391,756)
Costs and Estimated Earnings in Excess of Billings 1,585,127 (3,423,627)
Other Current Assets (182,480) (197,674)
Increase (Decrease) in:
Accounts Payable and Accrued Expenses 2,290,643 1,099,112
Billings in Excess of Costs and Estimated Earnings 71,906 (21,939)
----------------------- -----------------------
Net Cash (Used in) provided by Operations (6,582,547) 45,049
----------------------- -----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Property and Equipment (1,913,176) (1,940,329)
Increase in Other Assets (687,880) (60,187)
Decrease in Other Receivables 320,750 410,000
Loans Receivable Increase - -
----------------------- -----------------------
Net Cash Used in Investing Activities (2,280,306) (1,590,516)
----------------------- -----------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Loans 8,000,000 -
Proceeds from Issuance of Stock 26,851 531,504
Loans from Shareholders (1,007,256) 2,054,256
Repayment of Notes Payable (25,000) -
Repayment of Capital Lease Obligations (204,497) (32,850)
----------------------- -----------------------
Net Cash provided by Financing Activities 6,790,098 2,552,910
----------------------- -----------------------
NET INCREASE (DECREASE) IN CASH (2,072,755) 1,007,443
CASH @ BEGINNING OF PERIOD 2,962,570 1,526,924
----------------------- -----------------------
CASH @ END OF PERIOD $ 889,815 $ 2,534,367
======================= =======================
SUPPLEMENTAL DISCLOSURES
INTEREST PAID $ 455,068 $ 18,730
======================= =======================
ACQUISITION OF EQUIPMENT UNDER CAPITAL LEASE OBLIGATION $ 381,897 $ 55,786
======================= =======================
UNREALIZED CURRENCY GAINS $ 46,588 $ 24,600
======================= =======================
</TABLE>
We acquired computer software during 1999 for $750,000 of our common stock.
A former officer of us repaid his debt to us with 66,667 shares of common stock
and real property.
During the second quarter of 1999, we paid off a $3,000,000 debenture note, plus
$51,000 in accrued interest, by the issuance of 1,442,000 shares of our common
stock.
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We paid for $250,000 of acquisition costs with the issuance of a $250,000
short-term note.
INFORMATION ARCHITECTS CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Except as set forth in Note 5 below, the interim unaudited financial
statements as of September 30, 1999 and 1998 and for the nine and three
month periods then ended, reflect all adjustments that, in the opinion
of management, which are necessary for a fair statement of the results
for the interim periods presented. All adjustments were of a normal
recurring nature.
2. No tax benefits were recorded for the nine and three-month periods
ended September 30, 1999, due to uncertainty of realization. The
Federal and State tax provision for the nine-month period ($2,500,000)
and ($690,000) for the three month period ended September 30, 1998 was
offset by an increase in the estimated deferred tax benefit for the
same amount.
3. We have adopted Financial Accounting Standards Board ("FASB") Statement
No. 128, "Earnings per Share". Basic earnings per common share is
computed by dividing the new earnings (loss) by the weighed average
number of shares of common stock outstanding to be dilutive common
stock equivalents. Treasury shares have been excluded from the weighted
average number of shares.
4. We have adopted Financial Accounting Standards Board ("FASB") Statement
No. 130, "Reporting Comprehensive Income". This statement requires
reporting of change in owners' equity that does not result directly
from transactions with owners. An analysis of these changes follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
9/30/99 9/30/98 9/30/99 9/30/98
<S> <C> <C> <C> <C>
Net Income (Loss) $(5,527,683) $ 1,731,615 $(12,531,082) $ 6,277,315
Foreign Currency Translation
Adjustments - Net (76,872) (1,447) 46,588 (24,600)
-------------- ----------------- ---------------- ---------------
Total $(5,604,555) $ 1,730,168 $(12,484,494) $ 6,252,715
============== ================= ================ ===============
</TABLE>
5. The 1998 revenue and income amounts set forth in the foregoing tables
do not reflect the adjustments set forth in Note 14 to our 1998
consolidated financial statements attached to our 1998 Form 10-K. This
note stated that during the fourth quarter of 1998, we recorded certain
adjustments, related to revenue recognition and the classification of
demonstration expenses, which reduced overall revenues for fiscal 1998
by $1,659,000. Of this amount, approximately $1,150,000, $228,000 and
$281,000 are allocable to the first, second and third quarters,
respectively. The adjustments also reduced net earnings by $1,000,000,
which is allocable to the first quarter.
6. During the second quarter 1999, we changed our name from Alydaar
Software Corporation to Information Architects Corporation.
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INFORMATION ARCHITECTS CORPORATION
SUPPLEMENTAL SCHEDULE OF OPERATING SEGMENTS
PERIODS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
We currently have two reportable business segments: software reengineering
services and internet services The software reengineering segment has
concentrated on correction and validation of existing mainframe computer
software systems' ability to manage the Year 2000 problem (Y2K). These services
also include software conversion services. The second reportable business
segment, internet services (e-commerce), which was established in 1999 to assist
customers in transforming their existing information systems' architecture to
support scalable and flexible architecture for Internet, Intranet and Extranet
applications.
<TABLE>
<CAPTION>
THREE MONTH ENDED 9/30/99 NINE MONTH ENDED 9/30/99
CONSOLIDATED CONSOLIDATED
Y2K E-COMMERCE TOTAL Y2K E-COMMERCE TOTAL
<S> <C> <C> <C> <C> <C> <C>
Revenues from external customers $4,121,335 $ 54,232 $ 4,175,567 $14,827,662 $ 88,592 $14,916,254
Interest Income 14,269 - 14,269 41,390 - 41,390
Interest Expense 412,989 1,111 414,100 886,249 1,111 887,360
Depreciation & amortization 552,124 89,045 641,169 1,751,705 181,530 1,933,235
Segment (loss) 3,052,243) (2,475,440) (5,527,683) (6,874,859) (5,656,223) (12,531,082)
Segment assets - - - 21,089,452 1,421,835 22,511,287
Expenditures for segment assets - - - 1,555,352 1,572,301 3,127,653
RECONCILIATION OF SEGMENT
INFORMATION TO CONSOLIDATED
AMOUNTS
REVENUES:
Total Earned Revenues $4,175,567 $14,916,254
Intersegment Revenues - -
---------------- ----------------
Total Consolidated Revenues $4,175,567 $14,916,254
================ ================
PROFIT OR LOSS:
Total Loss for Reportable Segments $ (5,527,683) $(12,531,082)
Intersegment Profits - -
---------------- ----------------
Income before Income Taxes $ (5,527,683) $(12,531,082)
================ ================
</TABLE>
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INFORMATION ARCHITECTS CORPORATION
SUPPLEMENTAL SCHEDULE OF OPERATING SEGMENTS
PERIODS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTH ENDED 9/30/99 NINE MONTH ENDED 9/30/99
<S> <C> <C> <C>
ASSETS
Total Assets for Reportable Segments $ 26,851,936
Elimination of Intercompany Receivables (4,340,649)
--------------------
$ 22,511,287
====================
GEOGRAPHIC INFORMATION
Revenues Revenues Long-Lived Assets
United States $ 3,637,292 $ 11,102,386 $ 12,389,340
Canada - 653,388 -
Europe & Other 538,275 3,160,480 -
------------------- -------------------- --------------------
TOTAL $ 4,175,567 $ 14,916,254 $ 12,389,340
=================== ==================== ====================
MAJOR CUSTOMERS:
We have earned revenues from the following
significant customers:
AMOUNT PER CENT AMOUNT PER CENT
City Government $ 1,878,708 45.0% $ 2,782,593 18.7%
Printing Company NA NA
Banking Institution NA $ 1,549,195 10.4%
Insurance Company NA $ 1,861,373 12.5%
</TABLE>
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ITEM 2: MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The statements made in this Form 10-Q that are not historical facts contain
"forward-looking information" within the meaning of the Private Securities
Litigation Reform Act of 1995, and Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934, both as amended, which can
be identified by the use of forward-looking terminology such as "may", "will",
anticipates", "expects", "projects", "estimates", "believes" or "continue", the
negative thereof, other variations or comparable terminology. Important factors,
including certain risks and uncertainties with respect to such forward-looking
statements that could cause actual results to differ materially from those
reflected in such forward looking statements include, but are not limited to our
ability to manage growth and acquisitions of technology or people,
diversification of our business, the effect of economic and business conditions,
including risks inherent in international operations, the ability to attract and
retain technical personnel and other risks detailed from time to time in our SEC
reports. We assume no obligation to update the information in this Form 10-Q.
OVERVIEW
Information Architects Corporation provides dynamic content aggregation and
syndication services for the internet. Our Web-based solutions provide the
bridge that businesses need to protect their existing investment in legacy and
PC-based data and still capitalize on the internet revolution. Our software
architecture provides customers with an efficient, low cost, low maintenance
framework for the internet that will position them with state-of-the-art
internet technology for the new millennium. These Web-based solutions also
enable our customers to make timely decisions, transact business, disseminate
information and collaborate among co-workers, customers, suppliers and partners
by transforming any type of electronic information, regardless of platform or
application, into real-time, web browser presentations.
Our flagship offering, the Metaphoria(TM) Virtual Web Server is a patented, JAVA
based, open internet technology that addresses the market need for the
convergence of multiple data management strategies, including: content
management, knowledge management, document management, data management and data
warehousing. Without moving the original data, the Metaphoria Virtual Web Server
provides a personalized view of the information that is independent from the
software application. The "digital content" from multiple sources can be
delivered to the end user in a real-time Web browser presentation providing
interaction and update capability, as well.
We have seen an excellent response to our initial contacts for our Metaphoria
offering. However, the launching of our Internet and E-commerce offering is
still in its early stages. We anticipate a continued favorable response but the
potential must be evaluated from the perspective of a start-up Internet
opportunity in its early stages of development. Some of these risks include the
impact of start-up and acquisition costs, the volatility of the emerging
internet marketplace, the ability to gain an edge on our competition, proper
visibility and the risk of government regulation in the internet sector. Other
risks that we face include, but are not limited to, the ability to restructure
our people and strategies to effectively penetrate the E-commerce marketplace,
successfully implement our marketing strategies, and develop ongoing
technologies ahead of our competitors. There are no assurances that we will
succeed in addressing any or all of these risks.
RESULTS OF OPERATIONS - THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED
WITH COMPARABLE PERIODS ENDED SEPTEMBER 30, 1998
As noted in the 1998 audited consolidated financial statements in our annual
report on Form 10-K, we recorded certain adjustments related to revenue
recognition and reclassification of demonstration expenses, which reduced
revenues, by $1,659,000. Of this amount, approximately $1,150,000, $228,000 and
$281,000 are allocable to the first, second and third quarter, respectively. The
adjustments also reduced net earnings by $1,000,000, which is allocated to the
first quarter of 1998.
Revenue for 1999 decreased by $4,585,000 or (52%) and $11,813,000 (or 44%) for
the three and nine month
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periods ended September 30, 1999, respectively, versus the same periods in 1998.
The decrease was the result of a decline in demand for Year 2000 services, which
we expect to continue. In addition, the market initiated a shift in service mix
resulting in a higher percentage of validation services in 1999 that yielded a
substantially lower price per unit versus 1998, which saw a larger percentage of
the higher priced remediation services. Our new Internet service business has
not yet generated measurable revenue to offset this decrease.
Total operating expenses increased by $1,486,000 (or 21%) and $5,116,000 (or
25%) for the three and nine month periods ended September 30, 1999,
respectively, versus the same periods in 1998. When comparing expenses between
1999 and 1998 it should be noted that 1998 expenses were 100% for support of the
Year 2000 business. Expenses for investing in the start-up of our Internet
syndication and aggregation offering were $2,530,000 for the three months ending
September 30,1999 and $5,745,000 for the nine months ending September 30, 1999.
The percentage of investment in our Internet offering is expected to increase as
the Year 2000 business decreases and we continue to restructure for our new
Internet business.
Payroll and related costs comprised the majority of the increase in operating
expenses. For the three and nine month periods ended September 30, 1999, these
expenses increased $921,000 (or 18%) and $4,389,000 (or 32%), respectively. In
1998, the Year 2000 business looked robust and we began increasing staff as the
year progressed. By early 1999, we had more staff then we did in 1998.
Therefore, our 1999 expenses exceeded our 1998 expenses. During this period we
began retooling our staff to transition to the Internet business and began
streamlining our Year 2000 operations to reflect market conditions. The net Year
2000 reductions will be realized in the last quarter of 1999 and the percentage
of payroll and related costs associated with our new Internet offering will
continue to increase as the percentage of Year 2000 expense declines.
Depreciation expense for the three and nine month periods ended September 30,
1999 increased by $248,000 (or 63%) and $847,000 (or 78%), respectively, for the
same periods in 1998. This reflects the proportionate full year impact of
half-year convention for assets placed in service in 1998.
Other (expense) net of other income increased by $1,188,000 (or 2014%) and
$1,879,000 (or 1068%) for the three and nine month periods ended September
30,1999, respectively, versus the same periods in 1998. These increases were due
primarily to increased acquisition costs incurred during 1999 related to our new
Metaphoria Internet product, increased interest expense related to 1999
financing and leasehold termination expense related to the closing of several
offices and consolidation of operations at our new Charlotte facility.
FINANCIAL CONDITION AND LIQUIDITY
At September 30, 1999, we had working capital of $3,280,000 as compared to
$12,508,000 at September 30, 1998, a decrease of ($9,228,000) or (74%). Cash and
cash equivalents decreased $1,644,000 (or 65%) to $890,000 at September 30,
1999, from $2,534,000 at September 30, 1998. As a result of the more rapid than
anticipated decline in our Year 2000 revenues and expansion costs associated
with our new Internet business offering, we have been and expect to continue
operating at a loss. In order to fund our expected losses as set forth above, we
will be required to reduce the existing levels of operating expenses as well as
to raise additional debt or equity financing. However, there can be no
assurances that we will be successful in our efforts.
On July 30, 1999, we received $5,000,000 of financing in the form of convertible
debentures. In addition, we entered into a letter with the same financier under
which we would establish a $5,000,000 equity line to meet our possible future
capital needs. We have entered into a lease for a portion of the costs
associated with the furniture and equipment for our new facility. We have also
contracted for the purchase of new accounting software and have arranged to
finance this purchase through a financing lease in the fourth quarter of 1999.
In addition to the financing set forth above, we have taken and will continue to
reduce the existing levels of operating expenses commensurate with the level of
current and anticipated revenues. Our management believes that these changes
will assist us in reducing overhead as we make the transition from being a
provider of Year 2000 services to Internet products and services.
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<PAGE> 11
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer programs that were written using
two digits rather than four to identify the applicable year. Any of our computer
equipment, software and devices with embedded technology that are time-sensitive
may mistakenly identify a date field using "00" as the year 1900, rather than
the year 2000.
STATE OF READINESS.
We have provided Year 2000 remediation and validation services to Fortune 500
companies and government agencies and employed the same methods and processes to
complete our own internal Year 2000 project. We established a Year 2000 task
force, comprised of members representing our various areas of business
operation, to assess, remediate and test the impact of Year 2000 on our
information technology ("IT") and non-IT systems, material third party
relationships, and services. As identified by the task force, our Year 2000
issues that may have a material impact on our ability to continue our normal
business practices include: internal business systems; internet and intranet
service; telecommunications; power; and the compliance and readiness of our
third party suppliers and vendors.
INTERNAL SYSTEMS. The task force has divided our internal IT Year 2000 project
into three major phases: (1) identification, assessment and planning; (2)
remediation; and (3) testing and contingency planning. The identification,
assessment and planning phase involves identifying all systems used by us,
assessing these systems' state of readiness and planning the remaining portions
of the project. During the remediation phase, we replaced obsolete systems and
updated (or repaired) the hardware, embedded systems or applications both
internally developed and those purchased from third party vendors so that they
are Year 2000 compliant. During the testing and contingency planning phase of
the project, we performed acceptance testing and reviewed the results to
determine that the updated applications or internally remediated systems are
ready to return to production as well as removed any unused and outdated
hardware and software, and migrated the various systems to production status. We
have completed the first two phases and the testing portion of the third phase.
We have substantially completed all contingency planning and will complete such
planning by the end of November 1999.
THIRD PARTY SUPPLIERS AND VENDORS. In addition to our own compliance efforts, we
conducted an assessment of the third parties with which we have material
relationships to determine if they are Year 2000 compliant. We have contacted
our key vendors and suppliers and received responses indicating that these key
vendors and suppliers have addressed their Year 2000 issues or will address
their Year 2000 issues by the end of the year. Specifically, we received
responses from the vendors and suppliers supplying either IT or non-IT systems
for our headquarters facility and they have indicated that they have addressed
their Year 2000 issues or will address their Year 2000 issues by the end of the
year.
COSTS TO ADDRESS YEAR 2000 ISSUES.
The costs to address Year 2000 issues are being funded out of the cash flow from
operations. The total costs associated with addressing the Year 2000 issues is
not expected to be material to our financial position. To date the total cost of
the project has been approximately $100,000. These costs consist primarily of
the cost of internal labor needed to complete our internal systems compliance
project. The remainder of the costs are associated with upgrades and replacement
of certain IT systems and efforts surrounding other non-IT aspects of the Year
2000 project. Replacement of IT and non-IT systems and the timing thereof which
occured as a result of the move to the new headquarters building and certain IT
related upgrades covered under existing maintenance agreements arose in the
ordinary course of our growth, and are not considered costs associated with the
Year 2000 issue.
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<PAGE> 12
RISK OF YEAR 2000 ISSUES.
We have substantially completed a contingency plan for handling Year 2000
problems that are not detected and corrected prior to their occurrence, and
continue to assess what additional steps should be taken. Despite steps taken by
us to address all Year 2000 problems and creating a contingency plan in the
event there is a Year 2000 problem, the failure to correct a material Year 2000
problem could result in an interruption in, or a failure of, certain normal
business activities or operations. If such failures occur, our results of
operations, liquidity, and financial condition could be materially and adversely
affected and we may be required to incur unanticipated expenses to remedy any
problems not addressed by our compliance efforts. Additionally, if any of our
material suppliers or vendors is not fully Year 2000 compliant, it is possible
that a system failure or miscalculations causing disruptions in our operations
or potential problems with our product and service offerings could result.
Our most likely reasonable worst case scenario is that we could become involved
in litigation arising out of our Year 2000 remediation and validation business.
There is increasing litigation arising out of failures or potential failures in
computer systems as a result of the Year 2000 problem. In the event we become a
party to any such litigation, the cost of defending the litigation or an adverse
outcome could result in payment of extraordinary expenses that will affect our
operational results. To date, we are not a party to any litigation arising out
of a Year 2000 failure. We have attempted to limit our liability for Year 2000
claims through provisions in our contracts with customers, limiting our damages,
generally providing no warranties on our services through the Year 2000, and
disclaiming all other warranties. These contractual protections may not be
enforceable in all instances, and may not otherwise protect us from the costs
involved in defending a Year 2000 claim. Although there is legislation in the
United States that provides certain procedural and substantive requirements for
a Year 2000 claim, we are unsure how such legislation may apply to any
particular claim we receive.
PART II. OTHER INFORMATION
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
Pursuant to a May 27, 1999 agreement between us and Grayson & Associates, Inc.,
on July 30, 1999 we issued warrants for 113,122 shares of common stock, with the
expiration date of July 30, 2004 and an exercise price of $2.21. The warrants
were issued under the exemption set forth in Section 4(2) of the Securities Act
of 1933. Grayson & Associates, Inc. has piggyback registration rights for the
underlying common stock.
On August 27, 1999 we issued warrants for 15,000 shares of common stock to Jay
Gilbertson for becoming one of our Directors. The warrants have an exercise
price of $2.25 and vest 5,000 warrants per year on the first, second and third
anniversary of the issue date. The warrants expire on August 27, 2004. The
warrants were issued under the exemption set forth in Section 4(2) of the
Securities Act of 1933.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
Exhibit No.
11. Computation of Earnings Per Share...Unaudited
27. Financial Data Schedule
Reports on Form 8-K
Current report on Form 8-K filed with the Securities and
Exchange Commission on September 30, 1999.
-12-
<PAGE> 13
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on our behalf by
the undersigned thereunto duly authorized.
INFORMATION ARCHITECTS CORPORATION
(Registrant)
Date: November 15,1999 /s/ Robert F. Gruder
Robert F. Gruder,
Chief Executive Officer
Date: November 15,1999 /s/ J. Wayne Thomas
J. Wayne Thomas,
Chief Financial Officer
-13-
<PAGE> 1
EXHIBIT 11
INFORMATION ARCHITECTS CORPORATION
COMPUTATION OF EARNINGS PER SHARE
(UNAUDITED)
<TABLE>
<CAPTION>
- ---------------------------------------------- ----------------------------------- ---------------------------------
THREE MONTHS ENDED: NINE MONTHS ENDED:
- ---------------------------------------------- ----------------------------------- ---------------------------------
9/30/99 9/30/98 9/30/99 9/30/98
- ---------------------------------------------- ----------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net Income (Loss) $ (5,527,683) $ 1,731,615 $ (12,530,739) $ 6,277,315
- ---------------------------------------------- ----------------- ----------------- ---------------- ----------------
Average # Shares Outstanding 18,960,899 17,449,668 18,233,797 17,409,707
- ---------------------------------------------- ----------------- ----------------- ---------------- ----------------
Diluted Average # Shares Outstanding 18,960,899 17,647,256 18,233,797 17,607,295
- ---------------------------------------------- ----------------- ----------------- ---------------- ----------------
Basic Earnings (Loss) Per Share $ (0.29) $ 0.10 $ (0.69) $ 0.36
- ---------------------------------------------- ----------------- ----------------- ---------------- ----------------
Diluted Earnings Per Share $ (0.29) $ 0.10 $ (0.69) $ 0.36
- ---------------------------------------------- ----------------- ----------------- ---------------- ----------------
</TABLE>
-14-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 1999 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN OUR
FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 890
<SECURITIES> 0
<RECEIVABLES> 6,712
<ALLOWANCES> 433
<INVENTORY> 0
<CURRENT-ASSETS> 10,084
<PP&E> 5,236
<DEPRECIATION> 2,028
<TOTAL-ASSETS> 22,511
<CURRENT-LIABILITIES> 6,803
<BONDS> 5,132
0
0
<COMMON> 19
<OTHER-SE> 10,557
<TOTAL-LIABILITY-AND-EQUITY> 22,511
<SALES> 14,916
<TOTAL-REVENUES> 14,916
<CGS> 0
<TOTAL-COSTS> 17,938
<OTHER-EXPENSES> 3,498
<LOSS-PROVISION> 400
<INTEREST-EXPENSE> 887
<INCOME-PRETAX> (12,531)
<INCOME-TAX> 0
<INCOME-CONTINUING> (12,531)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,531)
<EPS-BASIC> (0.69)
<EPS-DILUTED> (0.69)
</TABLE>
