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, 1999 FILE NO. 0-22405
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
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 November 1, 1999:
Common Stock, par value $.01, 6,918,673 shares
Transitional small business disclosure format.
Yes _______ No ___x___ .
<PAGE>
INFORMATION ANALYSIS INCORPORATED
FORM 10-QSB
Index
<TABLE>
<CAPTION>
Page
PART I. FINANCIAL INFORMATION Number
<S> <C> <C>
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of
September 30, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Operations
for the three months and nine months ended
September 30, 1999 and September 30, 1998 4
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 1999 and
September 30, 1998 5
Notes to Unaudited Condensed Consolidated
Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART II OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 11
EXHIBIT INDEX 12
</TABLE>
2
<PAGE>
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of As of
September 30, 1999 December 31, 1998
(UNAUDITED) (AUDITED)
---------------- ------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 135,757 $ 176,399
Accounts receivable, net 2,564,947 4,419,795
Employee advances 10,307 29,678
Prepaid expenses 80,217 89,629
Other receivables 112,321 56,059
------------ -----------
Total current assets 2,903,549 4,771,560
Fixed assets, net 344,426 650,474
Equipment under capital leases, net 14,462 25,743
Capitalized software, net 2,585,267 3,406,522
Other receivables 49,454 50,226
Other assets 59,330 98,275
-------------- -------------
Total assets $5,956,488 $9,002,800
========== ==========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,858,370 $2,323,394
Accrued payroll and related liabilities 324,777 692,778
Other accrued liabilities 757,515 1,091,574
Revolving line of credit 1,126,700 1,796,200
Current maturities of capital lease obligations 8,436 14,995
------------- -------------
Total current liabilities 4,075,798 5,918,941
- -
----------------- ---------------
Total liabilities 4,075,798 5,918,941
Common stock, par value $0.01, 15,000,000 shares authorized;
8,423,284 and 8,358,784 shares issued, 6,918,673 and
6,854,173 outstanding at September 30,1999 and
December 31, 1998, respectively 84,233 83,588
Additional paid in capital 12,658,795 12,639,666
Retained earnings (10,008,025) (8,785,082)
Less treasury stock; 1,504,611 shares at cost (854,313) (854,313)
------------- -----------
Total stockholders' equity 1,880,690 3,083,859
--------- ---------
Total liabilities and stockholders' equity $5,956,488 $9,002,800
========== ==========
See accompanying notes
</TABLE>
3
<PAGE>
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended September 30,
(UNAUDITED) 1999 1998
---- ----
Net sales:
<S> <C> <C>
Professional services $ 1,548,178 $ 2,643,329
Software sales 549,767 112,791
------- -------
Total sales 2,097,945 2,756,120
Cost of goods sold and services provided:
Cost of professional services 1,037,233 3,056,744
Cost of software sales 791,447 397,473
------- -------
Total cost of goods sold and services provided 1,828,680 3,454,217
Gross margin 269,265 (698,097)
Operating expenses:
Selling, general and administrative 702,495 1,879,292
Research and development - 353,282
---------- ----------
Total operating expenses 702,495 2,232,574
Operating (loss) (433,230) (2,930,671)
Other (expense) income (32,301) 15,479
---------- ----------
(Loss) before income taxes (465,531) (2,915,192)
Provision for income taxes -- --
--------- --------
Net (loss) $ (465,531) $ (2,915,192)
============= ==============
Earnings per common share:
Basic $(0.07) $(0.43)
======= =======
Diluted $(0.07) $(0.43)
======= =======
Weighted average common shares outstanding:
Basic 6,918,673 6,724,851
Diluted 6,918,673 6,724,851
Nine months ended September 30,
(UNAUDITED) 1999 1998
---- ----
Net sales:
Professional services $ 6,988,853 $ 8,023,280
Software sales 1,150,366 4,718,844
--------- ----------------
Total sales 8,139,219 12,742,124
Cost of goods sold and services provided:
Cost of professional services 4,713,115 7,026,486
Cost of software sales 1,528,403 2,010,145
--------- -------------
Total cost of goods sold and services provided 6,241,518 9,036,631
Gross margin 1,897,701 3,705,493
Operating expenses:
Selling, general and administrative 2,943,048 5,296,215
Research and development 72,935 1,032,302
------ ---------
Total operating expenses 3,015,983 6,328,517
Operating (loss) (1,118,282) (2,623,024)
Other (expense) income (104,662) 97,703
-------------- ------------
(Loss) before income taxes (1,222,944) (2,525,321)
Provision for income taxes -- --
--------- --------
Net (loss) $ (1,222,944) $ (2,525,321)
================ ==============
Earnings per common share:
Basic $(0.18) $(0.38)
======= =======
Diluted $(0.18) $(0.38)
======= =======
Weighted average common shares outstanding:
Basic 6,910,713 6,633,364
Diluted 6,910,713 6,633,364
</TABLE>
4
<PAGE>
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
---------------------------------------
(UNAUDITED) 1999 1998
<S> <C> <C>
Net (loss) $(1,222,944) $(2,525,321)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation 222,819 219,863
Amortization 15,547 55,296
Software Amortization of Capitalized Software 821,253 872,993
Loss on sale of fixed assets 25,361 -
Changes in operating assets and liabilities
Accounts receivable 1,854,848 (3,542,810)
Other receivables and prepaid expenses 12,238 (313,926)
Refundable income taxes - 32,681
Accounts payable and accrued expenses (1,167,084) 2,113,791
----------- -----------
Net cash provided (used) by operating activities $562,038 ($3,087,433)
-------- -----------
Cash flows from investing activities
Acquisition of furniture and equipment (1,961) (257,530)
Increase in capitalized software - (3,172,550)
Proceeds from sale of fixed assets 55,566 -
--------- -----------------
Net cash provided (used) in investing activities 53,605 (3,430,080)
------- ----------
Cash flows from financing activities
Net (payments) borrowed under bank revolving line of credit (669,500) 393,600
Principal payments on capital leases (6,559) (18,199)
Net Proceeds from private placement - 5,646,685
Proceeds from exercise of stock options and warrants 19,774 402,820
--------- -----------
Net cash (used) provided by financing activities (656,285) 6,424,906
---------- ----------
Net (decrease) in cash and cash equivalents (40,642) (92,607)
Cash and cash equivalents at beginning of the period 176,399 363,753
Cash and cash equivalents at end of the period $135,757 $271,146
======== ========
Supplemental cash flow Information
Interest paid $112,049 $12,204
See accompanying notes
</TABLE>
5
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS.
INFORMATION ANALYSIS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared by
Information Analysis Incorporated ("IAI" or the "Company"). Financial
information included herein is unaudited, however, in the opinion of management,
all adjustments (which include normal recurring adjustments) considered
necessary for a fair presentation have been made. Certain information and
footnote disclosures normally included in annual financial statements prepared
in accordance with generally accepted accounting principles have been omitted,
but the Company believes that the disclosures made are adequate to make the
information presented not misleading. For more complete financial information,
these financial statements should be read in conjunction with the audited
financial statements and notes thereto for the year ended December 31, 1998
included in the Company's annual report on Form 10-KSB. Results for interim
periods are not necessarily indicative of the results for any other interim
period or for the full fiscal year.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-QSB contains forward-looking statements regarding the Company's
business, customer prospects, or other factors that may affect future earnings
or financial results that are subject to the safe harbor created by the Private
Securities Litigation Reform Act of 1995. Such statements involve risks and
uncertainties which could cause actual results to vary materially from those
expressed in the forward-looking statements. Investors should read and
understand the risk factors detailed in the Company's 10-KSB for the fiscal year
ended December 31, 1998 and in other filings with the Securities and Exchange
Commission.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF
OPERATION.
OVERVIEW
Prior to 1997, IAI was primarily dedicated to providing a range of information
technology services such as software applications development, software
conversions, information systems reengineering and systems integration. In 1996,
IAI acquired the rights to a software tool which IAI initially intended to
utilize for systems conversion services as companies sought to migrate from
mainframe legacy systems to more modern day platforms and environments. After
acquiring the rights to this tool, which IAI named UNICAST, IAI recognized that
the tool's functionality was capable of being extended to address the Year 2000
problem currently confronting many computer systems. This problem basically
prevents certain software applications from recognizing dates and executing
transactions involving years subsequent to 1999.
The Company's main focus had been to license the UNICAST product to
third-parties who were either engaged in the business of correcting date impacts
in other parties' software or undertaking this remediation process for their own
software. IAI also sought to perform remediation services in its own large
volume production environment, called a solutions factory, in which it could
utilize its own automation tools. During the latter part of 1998, IAI began to
appreciate that Year 2000 market demand was not developing to the extent which
third-parties had projected. Therefore, the Company began to devote greater
resources to modernization and conversion services and web based solutions. The
changes in the Company's focus between 1998 and 1999 substantially account for
many of the differences in the Company's financial performance when periods in
1999 are compared to corresponding periods in 1998.
THREE MONTHS ENDED SEPTEMBER 30, 1999 VERSUS THREE MONTHS ENDED SEPTEMBER 30,
1998
REVENUE
IAI's revenues in the third quarter of fiscal 1999 were $2,097,945,
compared to $2,756,120 in the third quarter of fiscal 1998, a decrease of 24%.
Professional services revenues were $1,548,178 in 1999 versus $2,643,329 in
1998, a decrease of 41%, and product revenues were $549,767 in 1999 versus
$112,791 in 1998, an increase of 387%. This increase was mostly related to
JETFORM product sales.
GROSS MARGIN
Gross margins were $269,265, or 13% of sales, in the third quarter of
fiscal 1999 versus ($698,097), or (25%) of sales, in the third quarter of fiscal
1998. Of the $269,265 in 1999, $510,945 was attributable to professional
services and ($241,680) was due to software sales. Gross margins as a percentage
of sales were 33% for professional services and (44%) for software sales. In the
third quarter of 1998, the Company reported gross margins of approximately (16%)
for professional services and (252%) for software. The gross margin for 1998 was
adversely impacted by a prior period adjustment. The gross margin from software
sales for 1999 was adversely impacted by software amortization costs of UNICAST.
For third quarter 1999, were amortization excluded, overall gross margin would
have been approximately 26%.
SELLING, GENERAL & ADMINISTRATIVE (SG&A)
SG&A was $702,495, or 33% of revenues, in the third quarter of 1999
versus $1,879,292, or 68% of revenues, in the third quarter of 1998, a decrease
of 63%. The decrease in SG&A is attributable to the continued scaling back of
SG&A expenses through the third quarter of 1999 as the Company continues its
transition back to information technology services.
7
<PAGE>
RESEARCH AND DEVELOPMENT (R&D)
R&D expenditures were $0 in the third quarter of fiscal 1999 versus
$353,282 in the third quarter of fiscal 1998, as the Company terminated software
maintenance expenses.
PROFIT/LOSS
The Company reported a net loss of $465,531, or ($0.07) per share basic
and diluted in the third quarter of 1999 compared to a net loss of $2,915,492,
or ($0.43) per share basic and diluted in the third quarter of 1998. In general,
the losses are a combination of the continuing amortization of capitalized
software and expenses associated with the Company's prior Year 2K initiatives,
which the Company has not yet been able to eliminate. The Company's earnings per
share calculations are based upon the weighted average of shares of common stock
outstanding. The dilutive effect of stock options are included for purposes of
calculating diluted earnings per share, except for periods when the Company
reports a net loss, in which case the inclusion of stock options would be
antidilutive.
8
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1999 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 1998
REVENUE
IAI's revenues in the first nine months of fiscal 1999 were $8,139,219,
compared to $12,742,124 in the first nine months of fiscal 1998, a decrease of
36%. Professional services revenues were $6,988,853 in 1999 versus $8,023,280 in
1998, a decrease of 13%, and product revenues were $1,150,366 in 1999 versus
$4,718,844 in 1998, a decrease of 76%.
GROSS MARGIN
Gross margins were $1,897,701, or 23% of sales, in the first nine
months of fiscal 1999 versus $3,705,493, or 29% of sales, in the first nine
months of fiscal 1998. Of the $1,897,701 in 1999, $2,275,738 was attributable to
professional services and ($378,037) was due to software sales. Gross margins as
a percentage of sales were 33% for professional services and (33%) for software
sales. The gross margin from software sales for 1999 was adversely impacted by
software amortization costs of UNICAST.
SELLING, GENERAL & ADMINISTRATIVE
SG&A was $2,943,048, or 36% of revenues, in the first nine months of
1999 versus $5,296,215, or 42% of revenues, in the first nine months of 1998.
The decrease in SG&A is attributable to the continued scaling back of SG&A
expenses through the third quarter of 1999 as the Company continues its
transition back to information technology services.
RESEARCH AND DEVELOPMENT
R&D expenditures were $72,935 in the first nine months of fiscal 1999
versus $1,032,302 in the first nine months of fiscal 1998. The decrease is due
to lower software maintenance expenses in 1999.
PROFIT/LOSS
The Company reported a net loss of $1,222,944, or ($0.18) per share
basic and diluted in the first nine months of 1999 compared to a net loss of
$2,525,321, or ($0.38) per share basic and diluted in the first nine months of
1998. In general, the losses are a combination of the continuing amortization of
capitalized software and expenses associated with the Company's prior Year 2K
initiatives, which the Company has not yet been able to eliminate. The Company's
earnings per share calculations are based upon the weighted average of shares of
common stock outstanding. The dilutive effect of stock options are included for
purposes of calculating diluted earnings per share, except for periods when the
Company reports a net loss, in which case the inclusion of stock options would
be antidilutive.
LIQUIDITY AND CAPITAL RESOURCES
Through the first nine months of 1999, the Company financed its operations from
current collections and through its bank line of credit. Cash and cash
equivalents at September 30 ,1999 were $135,757 compared to $271,146 at
September 30,1998. As of September 30, 1999 the Company had an outstanding
balance on its line of credit of $1,126,700.
The Company's line of credit of $2,000,000 with First Virginia Bank expired on
June 19,1999. First Virginia Bank has executed forbearance agreements with the
Company which effectively extends the line of credit until January 5, 2000. The
Company is in negotiations with various organizations to obtain a new line of
credit. The current line of credit, coupled with funds generated from
operations, assuming the operations are cash flow positive, should be sufficient
to meet the Company's operating cash requirements. The Company, however, may be
required from time to time to delay the timely payment of its accounts payable.
The Company cannot be certain that there will not be a need for additional
working capital in the near future. It is uncertain whether the Company will be
able to obtain such additional working capital.
The Company has no material commitments for capital expenditures.
9
<PAGE>
YEAR 2000
The Company has previously examined its internal operating systems to insure
that each is year 2000 compliant. All of the Company's software systems were
evaluated, and to the extent required, upgraded to be year 2000 compliant. The
Company does not believe that it has any material risks as a result of year 2000
impacts on its systems.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The securities class action law suit, Goldenberg v. Information Analysis Inc.,
et al., Civil Action No. 99-439A, filed on March 30, 1999, against the Company
and two of its officers in the United States District Court for the Eastern
District of Virginia, Alexandria Division, has been dismissed by order of the
court. See the Company's Form 10-QSB for the period ending March 31, 1999. In
this case the plaintiffs were seeking the certification of a class to assert
claims for damages under Sections 10(b) and 20(a) of the Securities Exchange Act
of 1934. The dismissal resulted from the failure of the plaintiffs to file a
complaint which complied with requirements imposed under the Private Securities
Litigation Reform Act of 1995.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit
3.1 Amended and Restated Articles of Incorporation effective March 18,
1997
3.2 Articles of Amendment to the Articles of Incorporation
3.3 Amended By-Laws of the Company
4.1 Copy of Stock Certificate
27.1 Financial Data Schedule
(b) No reports on Form 8-K were filed for the quarter for which this report is
filed.
10
<PAGE>
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 12, 1999 By:______________________________
----------------- Sandor Rosenberg, Chairman of the
Board and President
By:______________________________
Richard S. DeRose, Executive Vice
President and Treasurer
11
<PAGE>
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION LOCATION
3.1 Amended and Restated Articles of Incorporated by reference from
Incorporation effective March 18, the Registrant's Form 10-KSB/A
1997 for the fiscal year ending
December 31, 1996
3.2 Articles of Amendment to the Incorporated by reference from
Articles of Incorporation the Registrant's Form 10-KSB/A
for the fiscal year ending
December 31, 1998
3.3 Amended By-Laws of the Company Incorporated by reference from
the Registrant's Form S-18 dated
November 20, 1986 (Commission
File No. 33-9390).
4.1 Copy of Stock Certificate Incorporated by reference from
the Registrant's Form 10-KSB/A
for the fiscal year ending
December 31, 1998
27.1 Financial Data Schedule Filed with this Form 10-QSB
12
<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, 1999 AND IS QUALIFIED
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 135,757
<SECURITIES> 0
<RECEIVABLES> 2,677,266
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,903,549
<PP&E> 2,294,710
<DEPRECIATION> 1,984,022
<TOTAL-ASSETS> 5,956,488
<CURRENT-LIABILITIES> 4,075,798
<BONDS> 0
0
0
<COMMON> 84,233
<OTHER-SE> 1,796,457
<TOTAL-LIABILITY-AND-EQUITY> 5,956,488
<SALES> 8,139,219
<TOTAL-REVENUES> 8,316,730
<CGS> 6,241,518
<TOTAL-COSTS> 9,257,501
<OTHER-EXPENSES> 105,002
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 112,049
<INCOME-PRETAX> (1,222,944)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,222,944)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,222,944)
<EPS-BASIC> (0.18)
<EPS-DILUTED> (0.18)
</TABLE>
