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
MARCH 31, 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 March 31, 1997:
Common Stock, par value $.01, 1,887,557 shares
Transitional small business disclosure format.
Yes No x
--------- ---------
<PAGE>
PART I
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
three months ended March 31, 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.
<PAGE>
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31, 1997
ASSETS
Current assets
Cash and cash equivalents $ 4,534,664
Accounts receivable 1,545,638
Employee advances 33,875
Income taxes receivable 314,534
Deferred income taxes 98,662
Prepaid expenses 102,798
Other receivables 154,177
------------
Total current assets 6,784,348
Fixed assets
At cost, net of accumulated depreciation
and amortization of $1,247,976 441,885
Equipment under capital leases
Net of accumulated amortization of $61,344 44,477
Capitalized software 670,386
Investments 10,000
Goodwill 56,028
Other receivables 226,694
Other assets 24,980
------------
Total assets $ 8,258,798
============
<PAGE>
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31, 1997
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 481,400
Accrued payroll 340,691
Other accrued liabilities 136,552
Current portion of long-term debt 120,300
Current maturities of capital
lease obligations 18,229
------------
Total current liabilities 1,097,172
Long-term debt 90,380
Capital lease obligations, net of
current portion 37,414
Deferred income taxes 27,020
------------
Total liabilities 1,251,986
------------
Common stock, par value $0.01
10,000,000 shares authorized; 2,389,094
shares issued 23,891
Paid in capital in excess of par value 6,225,803
Retained earnings 1,611,431
Less treasury stock; 501,537 shares at cost (854,313)
------------
Total stockholders' equity 7,006,812
------------
Total liabilities and stockholders' equity $ 8,258,798
============
<PAGE>
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the three months ended March 31
------------------------------------------
1997 1996
------------------ ---------------
<S><C>
Cash flows from operating activities
Cash received from customers $ 1,371,689 $ 3,925,478
Cash paid to suppliers and employees (1,527,065) (3,258,374)
Interest received 869 601
Interest paid (5,943) (8,103)
------------------ ------------------
Net cash (used) provided by operating activities (160,450) 659,602
------------------ ------------------
Cash flows from investing activities
Loans and advances 448 (12,450)
Acquisition of furniture and equipment (245,564) (6,295)
Increase in capitalized software (483,422) --
------------------ ------------------
Net cash used in investing activities (728,538) (18,745)
------------------ ------------------
Cash flows from financing activities
Net borrowing (payments) under bank revolving
line of credit -- (550,000)
Principal payments on debt and capital leases (3,920) (4,467)
(Repurchase) of common stock -- (20,750)
Proceeds from private placement 5,000,000 --
Proceeds from exercise of incentive stock options 103,686 --
------------------ ------------------
Net cash provided (used) by financing activities 5,099,766 (575,217)
------------------ ------------------
Net increase in cash and cash equivalents 4,210,778 65,640
Cash and cash equivalents at end of the period 323,886 57,016
------------------ ------------------
Cash and cash equivalents at end of the period $ 4,534,664 $ 122,656
================== ==================
Reconciliation of net income to cash provided by operating activities
Net (loss) income $ (184,383) $ 100,665
Adjustments to reconcile net loss to
net cash provided by operating activities
Depreciation and amortization 64,802 39,155
Changes in operating assets and liabilities
Accounts receivable (190,354) (154,046)
Other receivables and prepaid expenses 40,265 5,912
Accounts payable and accrued expenses 223,052 613,548
Deferred rent (852) (2,556)
Income tax receivable liability (112,980) 56,924
------------------ ------------------
Net cash (used) provided by operating activities $ (160,450) $ 659,602
================== ==================
</TABLE>
<PAGE>
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the three months ended March 31,
---------------------------------------------
1997 1996
-------------- --------------
<S><C>
Sales
Professional fees $ 1,498,270 $ 4,053,087
Software sales 63,773 26,437
---------------- ----------------
Total sales 1,562,043 4,079,524
---------------- ----------------
Cost of sales
Cost of professional fees 1,200,507 3,311,057
Cost of software sales 50,863 21,598
---------------- ----------------
Total cost of sales 1,251,370 3,332,655
---------------- ----------------
Gross profit 310,673 746,869
Selling, general and administrative expenses 602,962 581,778
---------------- ----------------
(Loss) income from operations (292,289) 165,091
Other income and (expenses)
Interest income 869 601
Interest expense (5,943) (8,103)
---------------- ----------------
(Loss) income before provision for income (297,363) 157,589
taxes
(Benefit) expenses for income taxes (112,980) 56,924
---------------- ----------------
Net (loss) income $ (184,383) $ 100,665
================ ================
(Loss) income per common and common
equivalent share (0.09) $0.22
Weighted average common and common
equivalent shares outstanding 2,036,757 465,978
</TABLE>
<PAGE>
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 first quarter of 1997 decreased by $2,517,481, or by 61.7%, to
$1,562,043 from $4,079,524 for the first 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 $121,117 of revenue in the first
quarter of 1997, compared with $3,171,109 during the first quarter of 1996.
Except for certain modest extensions of certain tasks, the contract with USCS
terminated on September 30, 1996. In the first quarter of 1997, the Company
incurred a $(184,383) net loss. This represented a $285,048 reversal in
comparison to the first quarter of 1996 in which the Company generated net
income of $100,665.
In the first quarter of 1997, the Company's gross profit percentage increased to
19.9%, compared to 18.3% during the first quarter of 1996. This increase is
attributable to the phase out of the Company's health care division, Allied
Health and Information Systems, Inc., through which lower profit margins were
being realized in comparison to other operations of the Company. Selling,
general, and administrative expenses as a percentage of revenue increased to
38.6% during the first quarter of 1997, from 14.2% in the first quarter of 1996.
This increase is due to the Company's lower revenue base.
During the first quarter of 1997, the Company continued to devote substantial
resources towards the business surrounding CAST, the Company's Year 2000
remediation tool. These efforts included integrating CAST with other Year 2000
products, expanding technical support capability and increasing sales, marketing
and licensing efforts. In this quarter, 21 additional employees were hired for
CAST. The Company also capitalized $483,422 of development expenses for certain
CAST enhancements.
In the quarter-ended March 31, 1997, the Company announced its first license
agreement for CAST. This license is with Computer Associates International, Inc.
("CA"). As a result of this license, CA has added CAST to its suite of tools
which are geared to assessing, managing, remediating and testing Year 2000
efforts. In anticipation of, and following, this license agreement, the Company
concentrated efforts to enable CAST to address Year 2000 remediation of three CA
products in particular, CA-ADS, CA-Ideal and CA-Easytrieve in conjunction with
CA 2000 solution products. The Company anticipates further CAST enhancement
efforts through 1997 to expand CAST's functionality to include additional
computer languages. In addition, the Company for the remainder of the year will
be continuing other activities pertaining to CAST, including increasing
technical support and continuing sales, marketing and licensing efforts.
<PAGE>
Liquidity and Capital Resources
- -------------------------------
In the first quarter of 1997, the Company financed its operations from current
collections and through proceeds obtained in a $5,000,000 private placement. As
of March 31, 1997 the outstanding balance on the company's line of credit was
$0. Cash and cash equivalents at March 31, 1997 were $4,534,664, compared to
$122,656 at March 31, 1996.
The Company's line of credit of $1,500,000 expires June 19, 1997 at which time
it is subject to renewal. The line of credit coupled with funds generated from
operations and proceeds from the private placement is sufficient to meet the
Company's operating cash requirements.
The Company has no material commitments for capital expenditures.
<PAGE>
PART II - OTHER INFORMATION
ITEM 2. CHANGE IN SECURITIES.
(a) In the first quarter of 1997, the Company split its stock on a three for one
basis, thereby increasing its authorized common stock from 1,000,000 shares to
3,000,000 shares. At a special meeting of the shareholders of the Company which
was held on February 4, 1997, the Company's shareholders voted to amend and
restate the Company's articles of incorporation so as to (i) increase the
authorized shares to 10,000,000, (ii) limit officer and director liability to
the extent permitted under Virginia law and (iii) provide that all actions which
would otherwise require the approval of holders of more than two-thirds of all
shares will now only require the approval of the holders of more than one-half
of all shares. Also, the Company, through a stock dividend of two shares for
each share held, declared an additional three for one stock split effective
April 21, 1997.
(c) Between February 27, 1997 and March 5, 1997, the Company sold 857,142 shares
of its Common Stock at a price of $5.833 per share. (The number of shares and
price per share have been adjusted to reflect the three for one stock split
accomplished by a stock dividend of two shares of Common Stock for each
outstanding share of Common Stock held by each record holder on April 7, 1997
and payable on April 21, 1997.) The shares were sold only to accredited
investors within the meaning of Regulation D promulgated under the Securities
Act of 1933, as amended. The shares were sold to several institutional investors
along with individuals. The Company relied on Rules 505 and 506 of Regulation D
in claiming exemption from registration. All purchasers were required to certify
to their assets, net worth or income to substantiate their qualification to
purchase shares in this offering.
For this offering, the Company used the services of Newby & Company of
Rockville, Maryland ("Newby") and First Colonial Securities Group, Inc. of Boca
Raton, Florida ("FCSG") to assist in the placement of shares. Commissions were
paid in the form of ten year warrants equal to ten percent of the shares placed
through each company. The warrants are exercisable at $6.4167 per share. Of the
total warrants, Newby received 51,429 and FCGS received 34,284.
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On February 4, 1997, the Company held a special meeting of its shareholders. At
the meeting the shareholders voted to amend the Company's articles of
incorporation to (i) increase the authorized common stock to 10,000,000 shares,
(ii) limit officer and director liability to the extent permitted under Virginia
law and (iii) provide that all actions which would otherwise require the
approval of holders of more than two-thirds of all shares will now only require
the approval of holders of more than one-half of all shares. At the time of the
meeting, 502,999 shares were issued and outstanding of which 380,775 voted in
favor of the amendment and 4,150 voted against it.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See the Index to Exhibits attached hereto.
(b) No reports on Form 8-K were filed for the quarter for which this report is
filed.
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: May 6, 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
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
3.1 Amended and Restated Articles of Incorporation of the
Company incorporated by referenced from Exhibit No. 3.1 to
the Company's Form 10-KSB for the fiscal year ending
December 31, 1996 as filed with the Securities and Exchange
Commission ("SEC") on April 14, 1997.
3.2 Amended By-Laws of the Company incorporated by reference from
the Company's Form S-18 filed with the SEC on November 20,
1986.
4.1 Registration Rights Agreement dated February 27, 1997
between the Company and certain purchasers of its Common
Stock incorporated by reference from Exhibit 10.11 to the
Company's Form 10-KSB for the fiscal year ending December
31, 1996 as filed with the SEC on April 14, 1997.
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S 10-QSB AS FOR THE QUARTER ENDED MARCH 31, 1997 AND IS QUALIFIED BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 4,534,664
<SECURITIES> 0
<RECEIVABLES> 1,545,638
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,784,348
<PP&E> 1,795,682
<DEPRECIATION> 1,309,320
<TOTAL-ASSETS> 8,258,798
<CURRENT-LIABILITIES> 1,097,172
<BONDS> 0
0
0
<COMMON> 23,891
<OTHER-SE> 6,982,921
<TOTAL-LIABILITY-AND-EQUITY> 8,258,798
<SALES> 1,562,043
<TOTAL-REVENUES> 1,562,912
<CGS> 1,251,370
<TOTAL-COSTS> 1,854,332
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,943
<INCOME-PRETAX> (297,363)
<INCOME-TAX> (112,980)
<INCOME-CONTINUING> (184,383)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (184,383)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
