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
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
11240 WAPLES MILL ROAD, #400
FAIRFAX, VA 22030
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(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
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(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
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<PAGE>
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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
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Sandor Rosenberg, Chairman of the
Board and President
By: /s/ Richard S. DeRose
---------------------
Richard S. DeRose, Executive Vice
President and Treasurer
<PAGE>
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30, 1997
ASSETS
As Of As Of
9/30/97 12/31/96
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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
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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
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Total assets $8,233,704 $3,121,220
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<PAGE>
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30, 1997
LIABILITIES & STOCKHOLDERS' EQUITY
As Of As Of
9/30/97 12/31/96
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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
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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
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Total liabilities 1,413,328 1,033,707
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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
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Total liabilities and stockholders' equity $ 8,233,704 $ 3,121,220
=========== ===========
<PAGE>
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the nine months ended
September 30,
---------------------------
1997 1996
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Sales
Professional fees $ 4,800,563 $ 9,343,616
Software sales 365,849 339,926
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Total sales 5,166,412 9,683,542
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Cost of sales
Cost of professional fees 3,636,708 7,409,611
Cost of software sales 324,338 292,717
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Total cost of sales 3,961,046 7,702,328
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Gross profit 1,205,366 1,981,214
Selling, general and administrative expenses 2,347,383 1,895,716
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(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)
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(Loss) income before provision for income (1,059,119) 68,454
taxes
(Benefit) expenses for income taxes (402,416) 26,012
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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
<PAGE>
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended
September 30,
---------------------------
1997 1996
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Sales
Professional fees $ 1,643,159 $ 2,343,741
Software sales 173,264 213,033
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Total sales 1,816,423 2,556,774
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Cost of sales
Cost of professional fees 1,217,600 1,776,587
Cost of software sales 152,194 190,629
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Total cost of sales 1,369,794 1,967,216
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Gross profit 446,629 589,558
Selling, general and administrative expenses 1,147,323 598,278
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(Loss) income from operations (700,694) (8,720)
Other income and (expenses)
Interest income 56,613 7,159
Interest expense (8,311) (13,005)
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(Loss) income before provision for income (652,392) (14,566)
taxes
(Benefit) expenses for income taxes (247,907) (2,347)
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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
<PAGE>
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the nine months ended September 30,
---------------------------------------
1997 1996
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<S> <C>
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
============ ============
</TABLE>
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
10.1 Employment Contract for Brendan J. Dawson
27.1 Financial Data Schedule
<TABLE>
<S> <C>
(703) 383-3000
[INFORMATION Information (800) 829-7614
ANALYSIS Analysis Fax:(703) 293-7979
LOGO] Incorporated 11240 Waples Mill Road, Suite 400, Fairfax, Virginia 22030 E-Mail: www.infoa.com
- --------------------------------------------------------------------------------------------------------------
</TABLE>
Exhibit No. 10.1
June 30, 1997
Brendan J. Dawson
9402 Turnberry Drive
Potomac, MD 20854
Dear Brendan:
I am pleased to offer you the position of President and Chief Operating Officer
with Information Analysis Incorporated (IAI) reporting to me. In that role you
will be responsible for the day to day operations of the company. Your
annualized rate of pay will be $200,000 and your start date will be as mutually
agreed to.
Additional terms of this offer are:
Stock Options
- -------------
You will be granted 100,000 Information Analysis Incorporated incentive
stock options. The exercise price for each option will be the current fair
market value of an IAI share of Common Stock on the date your employment
commences. 25,000 of these options will become exercisable on each of the first
four quarter anniversaries succeeding the date your employment commences.
(For purposes hereof, options which are exercisable are hereafter referred to
as "vested".) If your employment terminates prior to all of the options being
vested, you will only have the right to exercise that number of options which
were vested as of the date of termination. Notwithstanding the foregoing, if
prior to the time all your options are vested, a change of control occurs or
IAI transfers all or substantially all of its assets, then upon any such event,
all of the options will become vested.
Optional Compensation
- ---------------------
You will have the right to receive up to an additional $300,000 (hereafter
"Optional Compensation") for serving as president and chief operating officer
for a period of one year from your employment commencement date. You will have
15 months from your employment date to decide whether to receive the Optional
Compensation. Against the potential obligation of the Company to pay you the
Optional Compensation, upon commencement of your employment, the Company will
advance you the sum of $50,000. To secure the Company's contingent obligation to
pay the
<PAGE>
remaining Optional Compensation to you, the Company will deposit into a
segregated account for your benefit $100,000 on January 1, 1998.
Subject to the further provisions hereof, after the one year anniversary of your
employment you will have the right to receive payment of the Optional
Compensation by providing written notice to the Company. Upon receipt of such
notice, you will receive within ten business days $100,000. The remaining
$150,000 will be paid to you on or before January 1, 1999. In addition, upon
receipt of such notice, your rights in and to any of the stock options not
previously exercised will terminate and you will be deemed to have forfeited all
of the remaining options. In the event that any options have been exercised
prior to such notice, the fair market value of the IAI stock received upon and
as of the date of exercise of the option less the aggregate prices paid upon
such exercise will be totaled. This total amount will be subtracted from the
Optional Compensation ($300,000), and the positive difference, if any, will be
due you in accordance with the time frames set out in this paragraph. The
initial $50,000 advance upon commencement of employment will become due and
payable to the Company to the extent that such advance exceeds the Optional
Compensation then payable to you. If notice is not received within the 15 months
of your employment date, the right to receive the Optional Compensation will
terminate and the initial $50,000 of Optional Compensation will be due the
Company based on a mutually agreeable plan of repayment within 12 months, but
you will retain the rights to all of your options.
Termination
- -----------
If your employment terminates other than for cause within the first year of
your employment, you will have the option of receiving a prorated sum of the
Optional Compensation (i.e., for 9 months you can receive 75% of the $300,000)
or the Company stock options vested to date. If at any time IAI terminates your
employment other than for cause, you will be entitled to receive one year's
severance pay of $200,000, payable in normal payroll increments. If the Company
is acquired and you are terminated, you may elect to receive the severance pay
in one lump sum. You are also entitled to terminate your employment if you are
assigned duties that are substantially changed from your responsibilities in
effect immediately prior to the Change of Control of the Company. If the Company
terminates you for cause all Optional Compensation will be forfeited.
As a member of the IAI staff, you will receive twenty (20) paid vacation days
per year, nine (9) paid holidays per year, and five (5) paid sick days per year.
In lieu of using IAI's insurance plan, IAI will pay 20% co-pay of your existing
IBM medical plan up to a maximum of $10,000. Please review the attached summary
of benefits for further information.
Additionally, you will be eligible to participate in the company sponsored 401K
Profit Sharing Plan. Eligibility is after completion of 1,000 hours worked and
entry into the plan would be the following January or July.
<PAGE>
The IAI Policy & Procedures Manual contains further information on company
procedures and policies and should be referred to for additional information.
Brendan, I know that in joining IAI you will be making a major advancement in
your career, and that you will make a significant contribution to the growth
and well being of the company.
We at IAI look forward to your joining us, as we are confident that you will
have both a rewarding and a most enjoyable experience at IAI. Please indicate
your acceptance by signing and dating below.
Sincerely,
/s/ Sandor Rosenberg
- ----------------------
Sandor Rosenberg
President
Accepted: Brendan J. Dawson Date: 6/30/97
--------------------------------- ---------
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE REGISTRANT'S 10-QSB AS FOR THE QUARTER ENDED SEPTEMBER 30, 1997
AND IS QUALIFIED BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,498,317
<SECURITIES> 0
<RECEIVABLES> 1,537,129
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,109,465
<PP&E> 2,181,721
<DEPRECIATION> 1,442,685
<TOTAL-ASSETS> 8,233,704
<CURRENT-LIABILITIES> 1,270,684
<BONDS> 0
0
0
<COMMON> 74,954
<OTHER-SE> 6,745,422
<TOTAL-LIABILITY-AND-EQUITY> 8,233,704
<SALES> 5,166,412
<TOTAL-REVENUES> 5,270,043
<CGS> 3,961,046
<TOTAL-COSTS> 6,308,429
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,733
<INCOME-PRETAX> (1,059,119)
<INCOME-TAX> (402,416)
<INCOME-CONTINUING> (656,703)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (656,703)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
