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, 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, SUITE 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 April 30, 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
Page
PART I. FINANCIAL INFORMATION Number
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of
March 31, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Operations
for the three months ended
March 31, 1999 and March 31 1998 4
Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 1999 and
March 31, 1998 5
Notes to Unaudited Condensed Consolidated
Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 6
PART II OTHER INFORMATION
Item 1. Legal Proceedings 8
Item 6. Exhibits and Reports on Form 8-K 9
SIGNATURES 9
<PAGE>
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As Of As Of
March 31, 1999 December 31, 1998
Unaudited Audited
---------- ----------
<S><C>
ASSETS
Current assets:
Cash and cash equivalents $137,280 $176,399
Accounts receivable, net 3,909,367 4,419,795
Employee advances 32,107 29,678
Prepaid expenses 140,437 89,629
Other receivables 56,298 56,059
---------- ----------
Total current assets 4,275,489 4,771,560
Fixed assets, net 544,062 650,474
Equipment under capital leases, net 21,983 25,743
Capitalized software, net 3,132,348 3,406,522
Other receivables 49,454 50,226
Other assets 122,625 98,275
---------- ----------
Total assets $8,145,961 $9,002,800
========== ==========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,941,413 $2,323,394
Accrued payroll and related liabilities 488,503 692,778
Other accrued liabilities 696,221 1,091,574
Revolving line of credit 1,833,200 1,796,200
Current maturities of capital lease obligations 12,809 14,995
---------- ----------
Total current liabilities 4,972,146 5,918,941
---------- ----------
Total liabilities 4,972,146 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 March 31, 1999 and
December 31, 1998, respectively 84,233 83,588
Additional paid in capital 12,658,794 12,639,666
Retained earnings (8,714,899) (8,785,082)
Less treasury stock; 1,504,611 shares at cost (854,313) (854,313)
---------- ----------
Total stockholders' equity 3,173,815 3,083,859
---------- ----------
Total liabilities and stockholders' equity $8,145,961 $9,002,800
========== ==========
</TABLE>
SEE ACCOMPANYING NOTES
3
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INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the three months ended
--------------------------
March 31,
---------
1999 1998
Unaudited Unaudited
---------- -----------
<S><C>
Sales
Professional fees $3,515,958 $2,037,040
Software sales 319,706 2,131,966
---------- ----------
Total sales 3,835,664 4,169,006
Cost of sales
Cost of professional fees 2,095,509 1,592,662
Cost of software sales 375,711 574,921
---------- ----------
Total cost of sales 2,471,220 2,167,583
---------- ----------
Gross profit 1,364,444 2,001,423
Selling, general and administrative expenses 1,186,837 1,686,207
Research & Development 72,935 287,753
---------- ----------
Income from operations 104,672 27,463
Other (expense) income (34,489) 32,040
---------- ----------
Income before provision for income taxes 70,183 59,503
Provision for income taxes 0 0
Net income $70,183 $59,503
======= =======
Earnings per common share
Basic $0.01 $0.01
Diluted $0.01 $0.01
Weighted average common shares outstanding
Basic 6,894,529 6,497,215
Diluted 8,029,979 8,205,965
</TABLE>
SEE ACCOMPANYING NOTES
4
<PAGE>
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Three Months Ended
--------------------------
March 31,
---------
1999 1998
Unaudited Unaudited
--------- ---------
<S><C>
Net income $70,183 $59,503
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 84,816 69,663
Amortization 5,265 26,877
Amortization of capitalized software 274,174 201,400
Loss on sale of fixed assets 8,286 --
Changes in operating assets and liabilities
Accounts receivable 510,428 (1,960,819)
Other receivables and prepaid expenses (77,054) (152,033)
Accounts payable and accrued expenses (981,610) 473,531
---------- ------------
Net cash (used) by operating activities $(105,512) $(1,281,878)
---------- ------------
Cash flows from investing activities
Acquisition of furniture and equipment -- (160,592)
Increase in capitalized software -- (976,753)
Proceeds from sale of fixed assets 11,805 --
---------- -----------
Net cash provided (used) in investing activities 11,805 (1,137,345)
------------- -----------
Cash flows from financing activities
Net borrowing (payments) under bank revolving line of credit 37,000 (599,600)
Principal payments on capital leases (2,186) (4,090)
Net Proceeds from private placement -- 5,646,685
Proceeds from exercise of stock options and warrants 19,774 368,388
------ ---------
Net cash provided by financing activities 54,588 5,411,383
------ ---------
Net (decrease) increase in cash and cash equivalents (39,119) 2,992,160
Cash and cash equivalents at beginning of the period 176,399 363,753
Cash and cash equivalents at end of the period $137,280 $3,355,913
======== ==========
Supplemental cash flow Information
Interest paid $38,562 $6,092
</TABLE>
SEE ACCOMPANYING NOTES
5
<PAGE>
FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS MADE BY THE COMPANY'S MANAGEMENT MAY BE CONSIDERED TO
BE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION ACT OF 1995. FORWARD-LOOKING STATEMENTS ARE BASED ON VARIOUS FACTORS
AND ASSUMPTIONS THAT INCLUDE KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES. THE
WORDS "BELIEVE", "EXPECT", "ANTICIPATE" AND "PROJECT" AND SIMILAR EXPRESSIONS
IDENTIFY FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE THE
STATEMENT WAS MADE. SUCH STATEMENTS MAY INCLUDE, BUT NOT BE LIMITED TO,
PROJECTIONS OF REVENUES, INCOME OR LOSS, EXPENSES, PLANS, AS WELL AS ASSUMPTIONS
RELATING TO THE FOREGOING. FORWARD-LOOKING STATEMENTS ARE INHERENTLY SUBJECT TO
RISKS AND UNCERTAINTIES, SOME OF WHICH CANNOT BE PREDICTED OR QUANTIFIED,
INCLUDING, BUT NOT LIMITED TO THE SIZE AND TIMING OF ORDERS AND CONTRACTS,
CHANGES IN ECONOMIC CONDITIONS, THE COST OF LABOR, CHANGES IN TECHNOLOGY AND
GENERAL COMPETITIVE FACTORS. THE COMPANY UNDERTAKES NO OBLIGATION AND DOES NOT
INTEND TO UPDATE, REVISE OR OTHERWISE PUBLICLY RELEASE THE RESULTS OF ANY
REVISIONS TO THESE FORWARD-LOOKING STATEMENTS THAT MAY BE MADE TO REFLECT FUTURE
EVENTS OR CIRCUMSTANCES.
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.
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
6
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tool which IAI initially intended to utilize for systems conversion services as
companies seek 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 as the so-called millenium bug began to emerge.
Therefore, the Company began to devote greater resources to modernization and
conversion services. Today, IAI has a short-term and long-term business strategy
which involves the use of UNICAST. In the short-term, the Company believes
UNICAST can continue to produce license fee revenues from system integrators and
other users who acquire UNICAST to automate the correction of date impacts. The
Company intends to continue to utilize its own solutions factory not only to
generate such license fees but also to earn additional service revenue as it
undertakes third-party engagements to remedy software. In the long-term, UNICAST
is expected to facilitate the Company's ability to provide systems modernization
services to companies that seek to migrate from mainframe legacy systems to
modern environments, including current computer languages, databases,and
mainframe, midrange, client servers, intranet and internet platforms. It is
still uncertain whether and to what extent the Company's strategies will prove
successful.
THREE MONTHS ENDED MARCH 31, 1999 VERSUS THREE MONTHS ENDED MARCH 31, 1998
REVENUE
IAI's revenues in the first quarter of fiscal 1999 were $3.8 million,
compared to $4.2 million in the first quarter of fiscal 1998, a decrease of 8%.
Professional services revenue was $3.5 million versus $2.0 million, an increase
of 73%, and product revenue was $0.3 million versus $2.1 million. The increase
in professional services revenue is attributable, in part, to the Company's
strategy to reemphasize services as its core business focus. The Company
believes that the decrease in product sales was attributable to a general
decline in the market place for Year 2000 products.
GROSS MARGINS
Overall gross margins were $1.4 million, or 36% of sales, in the first
quarter of fiscal 1999 versus $2.0 million, or 48% of sales, in the first
quarter of fiscal 1998. Of the $1.4 million in 1999, $1.4 million was
attributable to services and $(0.1) million was due to software sales. The
decrease in software sales from which the Company has realized higher profit
margin percentages caused the overall percentage reduction in profit margin. For
the first quarter of 1999, gross margins as a percentage of sales were 40% for
professional services and (18%) for software sales. In the first quarter of
1998, the Company reported gross margins of approximately 22% for services and
73% for software sales.
7
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses (SG&A) were $1.2 million,
or 31% of revenues, in the first quarter of 1999 versus $1.7 million, or 40% of
revenues, in the first quarter of 1998, a decrease of 30%. The decrease is
attributable to the Company's reduction in marketing and support expenses for
its Year 2000 products. The Company believes that SG&A expenses will decline as
a percentage of revenue if overall revenue increases.
RESEARCH AND DEVELOPMENT
Research and Development (R&D) expenditures were $0.1 million in the
first quarter of fiscal 1999 versus $0.3 in the first quarter of fiscal 1998.
The decrease is due to lower software maintenance expenses in 1999. IAI had no
capitalized software development cost in the first quarter of 1999 and $0.7
million in the first quarter of 1998.
PROFITS
The Company generated an operating profit of $105,000 in the first
quarter of 1999 compared to $28,000 in the first quarter of 1998. In general,
the profit reflected a substantial improvement in gross margins in sales of
professional services, combined with an overall reduction in expenses. Because
of a net operating loss carryforward, the Company did not accrue for income
taxes in the first quarter of 1999.
LIQUIDITY AND CAPITAL RESOURCES
In the first quarter of 1999, the Company financed its operations from
current collections and through its bank line of credit. Cash and cash
equivalents at March 31, 1999 were $137,280, compared to $3,355,913 at March 31,
1998. In the first quarter of 1998, the Company had raised $5,646,685 which
accounts in substantial part for the reduction in cash and cash equivalents
between the first quarters ending in 1999 and 1998.
The Company's line of credit of $2,000,000 expires June 19, 1999 at
which time it is subject to renewal. The Company is out of compliance with
certain covenants pertaining to its credit facility but the Company's bank has
not declared a default. The Company believes its line of credit, coupled with
funds being generated from operations, assuming the operations are profitable,
should be sufficient to meet IAI's current operating cash requirements. The
Company, however, may be required from time to time to delay the timely payment
of its accounts payable.
The Company has no material commitments for capital expenditures.
PART II - OTHER INFORMATION
ITEM 2. LEGAL PROCEEDINGS
On March 30, 1999, a class action complaint was filed against the
Company, Sandor Rosenberg, its chairman and chief executive officer, and Richard
S. DeRose, its chief financial officer, in the United States District Court for
the Eastern District of Virginia, Alexandria Division. The claims asserted in
the litigation arise under Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934 and the rules promulgated under these sections. The named plaintiff
in the case is Elka Goldenberg who is seeking to have the court certify the case
for a class action status and to certify her as the representative on behalf of
the class.
8
<PAGE>
The complaint alleges that public misrepresentations and the failure to
disclose material adverse information caused the market price of the Company's
securities to be artificially inflated between the period of February 26, 1998
through September 25, 1998. As a result thereof, the complaint alleges that all
persons who sold or acquired the Company's securities during the period
indicated were damaged. No amount has been specified in the complaint for
damages.
Although the complaint was filed on March 30, 1999, as of May 13, 1999,
service of process has not yet been effected on the Company or the individual
defendants. Therefore, no obligation yet exists to respond to the complaint. The
Company is of the opinion that the complaint is without merit and that, other
than defense costs should the Company need to respond to the complaint, no
financial exposure will result to the Company or the two officers named as
defendants. The Company's counsel has been in discussion with the plaintiff's
attorneys towards having the complaint dismissed.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See the Index to Exhibits attached hereto.
(b) Form 8-K was filed on January 11, 1999 and is incorporated by reference in
which a change was made as to the Company's certifying accountant.
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 13, 1999 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
9
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INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
27.1 Financial Data Schedule
10
<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, 1999 and is qualified by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> US$
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 137,280
<SECURITIES> 0
<RECEIVABLES> 3,909,367
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,275,489
<PP&E> 2,489,998
<DEPRECIATION> 1,923,954
<TOTAL-ASSETS> 8,145,961
<CURRENT-LIABILITIES> 4,972,146
<BONDS> 0
0
0
<COMMON> 84,233
<OTHER-SE> 3,089,582
<TOTAL-LIABILITY-AND-EQUITY> 8,145,961
<SALES> 3,835,664
<TOTAL-REVENUES> 3,890,185
<CGS> 2,471,220
<TOTAL-COSTS> 3,730,992
<OTHER-EXPENSES> 50,448
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38,562
<INCOME-PRETAX> 70,183
<INCOME-TAX> 0
<INCOME-CONTINUING> 70,183
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 70,183
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
