_____________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2001
Commission 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, Virginia 22030
(Address of principal executive offices) (Zip Code)
(703) 383-3000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
(Title of Class)
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 the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No
The issuer's revenue for its most recent fiscal year was $6,086,474.
The aggregate market value of the Registrant's Common Stock held by
non-affiliates as of March 27, 2002 was approximately $3,374,940.
As of March 27, 2002 the Registrant had 10,283,515 shares of Common Stock
outstanding.
_____________________________________________________________
Information Analysis Incorporated 2001 Report on Form 10-KSB
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This Form 10-KSB contains forward-looking statements. These statements are
based on certain assumptions and involve risks and uncertainties. Actual future
results may vary materially from those discussed herein. Any statements that are
not historical facts should be forward-looking statements. These forward-looking
statements are subject to the safe harbor created by the Private Securities
Litigation Reform act of 1995. IAI does not undertake any obligation to publicly
release the result of any revision which may be made to any forward-looking
statements after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events.
PART I
Item 1. Business Description
Overview
Founded in 1979, Information Analysis Incorporated ("IAI" or "the Company")
is in the business of modernizing client information systems. Since its
inception, IAI has performed software development and conversion projects for
over 100 commercial and government clients including Computer Sciences
Corporation, IBM, Computer Associates, MCI, Sprint, Citibank, U.S. Customs
Service, U.S. Department of Agriculture, U.S. Department of Energy, U.S. Army,
U.S. Air Force, Veterans Administration, and the Federal Deposit Insurance
Corporation. Today, IAI primarily applies its technology, services and
experience to legacy software migration and modernization and to developing
web-based solutions.
The migration and modernization market is complex and diverse as to the
multiple requirements clients possess to upgrade their older systems. In the
early 1990's, many organizations tried to convert or re-engineer their mainframe
legacy systems to PC client server environments. Many of these attempts failed
because the technology for client servers lacked sufficient hardware performance
and capacity. The available software languages and tools were also immature. By
the mid 1990's, organizations did establish mid-level server technology (Unix)
to off-load and decentralize some of their decision support or departmental
systems, and they connected local area networks of PCs to provide better user
interfaces. However, many large legacy systems remained in use because of the
enormous cost to re-engineer these systems.
Currently, the options available to modernize these systems are many.
Performance and capacity of client server systems, both UNIX and NT, rival the
traditional mainframe systems. There is a plethora of software that can
interface with legacy systems via PC interfaces. New software development
languages also allow users to warehouse and data-mine information from legacy
databases. Finally, the arrival of the internet and intranet technology offers a
different approach at collecting and processing large volumes of user
transactions, processes which are the forte of older legacy systems.
Companies are being driven for various reasons to address the upgrading of
their legacy systems. The Y2K experience has impressed on them the difficulty of
finding and retaining staff with outdated technical skills, much of which are
practiced by senior programmers in their fifties. Hardware platforms such as
Unisys and Honeywell are reaching the horizon of their usefulness, and older
programming and data base languages are poorly supported by their providers.
Additionally, maintenance costs are skyrocketing as vendors squeeze the most out
of clients before the life-cycles of hardware and software expire. In addition,
the internet has added a new level of pressure to compete in the electronic
marketplace with their sector rivals. The next ten years should see an upsurge
of movement and change as organizations revamp their older legacy systems.
The web solutions market is the fastest growing segment of the computer
consulting business as individuals, small companies, large companies, and
governmental agencies rush to establish a presence on the Internet. The range of
products and services involved in this sector is extensive and therefore,
require some specialization for a small company such as IAI to make an impact.
Most small web companies are involved in building web-sites and typically have
many short duration projects. More complex web applications generally require
knowledge of clients' back-end systems based on mainframe or mid-level
computers. Few small companies have the expertise to develop these more
sophisticated web applications. However, these types of applications will be
more prominent in the future as the web is better understood and this will be
the area that future expenditures will grow the most.
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The commercial and government sectors of the market can be quite different
in their requirements on the Internet, as, generally, companies are interested
in cataloging and selling items versus government agencies that wish to
disseminate data to the citizenry. There is some overlap in common functionality
when web applications are designed for procurement transactions or customer
relations. What distinguishes the government requirements is that most
government processes are based on forms. Many government agencies rely on
thousands of internal and external forms to conduct their business. Any company
that wishes to develop governmental web applications must address the forms
issue. Accelio (previously known as JetForm), the electronic forms product
resold and supported by IAI is the predominant forms software in the federal
government.
Description of Business and Strategy
Since the mid-90's IAI has migrated clients from older computer languages
generally associated with legacy computer systems to more modern languages used
with current-day computer system platforms. In fixing their legacy systems to
comply with Y2K dates impacts, many organizations became aware of the evolving
obsolescence of these systems and are now beginning to fund their modernization.
In addition, as part of this modernization many organizations wish to extend
these legacy systems to interface with Internet applications The company's
strategy has been to develop and/or acquire tools that will facilitate the
modernization process and differentiate the Company's offerings in the
marketplace.
The Company has developed a series of workbench tools called ICONS. These
tools, used in conjunction with IAI's methodology, enhance a programmer's
ability to convert code to new platforms and/or computer languages. ICONS can be
used with a variety of languages such as DATACOM COBOL and IDEAL, and Unisys
COBOL. ICONS will 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, data
bases, and mainframe, midrange, client servers, intranet and internet platforms.
IAI has structured the company to address the wide range of requirements
that it envisions the market will demand. The suite of ICONS tools give IAI, in
its opinion, a competitive edge in performing certain conversions and migrations
faster and more economically than many other vendors. The diverse capabilities
of IAI's staff in mainframe technology and client server implementations help to
assure that IAI staff can analyze the original systems properly to conduct
accurate and thorough conversions.
IAI's modernization methodology has developed over the past several years
through the completion of successful conversion projects. Senior members of
IAI's professional staff can perform both technical and business requirements
analyses, and prepare general and detail design documentation, develop project
plans including milestones, staffing, deliverables, and schedules. The actual
work can be performed at client sites or at IAI's premises, which has mainframe
and client server facilities for the use of IAI's personnel.
During the past year and a half IAI has secured contracts to modernize
several large legacy systems for a federal agency. These projects are giving IAI
staff valuable experience with state of the art web-application products
recently released by Oracle Corporation. Personnel with these skills are in
great demand and can form the nucleus of a new business division within IAI. It
is management's intention to build on these contracts and expand revenues in
this area over the next five years.
The Company is also using the experience it has acquired as an Accelio
reseller to help secure engagements for web-based applications requiring forms.
The Accelio product has evolved over the years into a robust tool that can form
the backbone of applications, especially those requiring forms. The company has
used this expertise to penetrate a number of federal government clients and
build sophisticated web applications. IAI's knowledge of legacy system languages
has been instrumental in connecting these web applications to legacy databases
residing on mainframe computers. The company has built a core group of
professionals that can build this practice over the coming years.
Concentrating on the niche of electronic forms-related web applications
through IAI's relationship with Accelio, the company has developed a cadre of
professionals that can quickly and efficiently develop web applications. IAI
will focus on federal government clients during 2002 and leverage the company's
outstanding reputation with federal clients to penetrate these agencies. IAI
will be able to reference
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successful projects completed or in development for the Department of Veterans
Affairs (VA), Federal Mediation and Conciliation Service (FMCS), U.S. Department
of Agriculture (USDA), Immigration and Naturalization Service (INS), General
Services Administration (GSA), Army Reserve, and U.S. Air Force Logistics
Command (AFLC).
Competition
The competition in the conversion and modernization market is very strong.
Many software professional services companies have had some involvement in this
area and profess proficiency in performing these projects. The Company also
faces competition from other companies which purport to substantially automate
the process through software tools including Alydaar, Crystal Systems Solutions
and Sapiens International. "Off the shelf" software for enterprise resource
planning, such as SAP and Baan, provides an additional source of competition,
although, to date, the cost and lengthy installation time for enterprise
resource planning software has slowed its implementation in the market place. No
matter what type of solution is offered, many of the Company's competitors have
greater name recognition than the Company, a larger, more established customer
base, and significantly greater financial and market resources in comparison to
the Company.
Patents and Proprietary Rights
The Company depends upon a combination of trade secret and copyright laws,
nondisclosure and other contractual provisions and technical measures to protect
its proprietary rights in its methodologies, databases and software. The Company
has not filed any patent applications covering its methodologies and software.
The Company distributes ICONS under agreements that grant customers
non-exclusive licenses and contain terms and conditions restricting the
disclosure and use of the Company's databases or software and prohibiting the
unauthorized reproduction or transfer of its products. In addition, IAI attempts
to protect the secrecy of its proprietary databases and other trade secrets and
proprietary information through agreements with employees and consultants.
The Company also seeks to protect the source code of ICONS as trade secrets
and under copyright law. The copyright protection accorded to databases,
however, is fairly limited. While the arrangement and selection of data can be
protected, the actual data is not, and others are free to create software
performing the same function. The Company believes, however, that the creation
of competing databases would be very time consuming and costly.
Backlog
As of December 31, 2001, the Company estimated its backlog at approximately
$4 million. Of the entire backlog, the Company believes approximately 95% will
be completed by December 31, 2002. This backlog consists of outstanding
contracts and general commitments from current clients. The Company regularly
provides services to certain clients on an as-needed basis without regard to a
specific contract. General commitments represent those services which the
Company anticipates providing to such clients during a twelve-month period.
Employees
As of December 31, 2001, the Company employed 43 full-time and part-time
individuals. In addition, the Company maintained independent contractor
relationships with 20 individuals for computer services. Approximately 80% of
the Company's professional employees have at least four years of related
experience. For computer related services, the Company believes that the diverse
professional opportunities and interaction among its employees contribute to
maintaining a stable professional staff with limited turnover.
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Item 2. Properties
The Company's offices are located at 11240 Waples Mill Road, Suite 400,
Fairfax, VA. 22030. IAI holds a lease for 12,345 square feet. This lease expires
on February 29, 2004.
Item 3. Legal Proceedings
The Company is not aware of any legal proceedings against it at this time.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted during the fourth quarter of fiscal 2001 to a vote
of security holders, either through the solicitation of proxies or otherwise.
PART II
Item 5. Market for the Company's Common Stock and Related Stockholder Matters
The Company's Common Stock (symbol: IAIC) has been traded on over the
counter bulletin board (OTCBB) since July 29, 1999. The following table sets
forth, for the fiscal periods indicated, the high and low bid prices of the
Common Stock, as reported:
Fiscal Year Ended December 31, 2000 Fiscal Year Ended December 31, 2001
----------------------------------- -----------------------------------
Quarter Ended: Quarter Ended:
3/31/00 6/30/00 9/30/00 12/31/00 3/31/01 6/30/01 9/30/01 12/31/01
------- ------- ------- -------- ------- ------- ------- --------
High $2.156 $1.063 $0.594 $0.438 $0.300 $0.740 $0.410 $0.590
Low $0.531 $0.375 $0.260 $0.040 $0.090 $0.200 $0.120 $0.130
The quotations on which the above data are based reflect inter-dealer
prices without adjustment for retail markup, markdown or commission, and may not
necessarily represent actual transactions.
As of December 31,2001, the Company had 119 stockholders of record. The Company
has never paid a cash dividend on its Common Stock. The Company does not
anticipate the payment of cash dividends to the holders of Common Stock in the
foreseeable future.
The Company issued to six accredited investors a total of $125,000 of three
year 12% convertible notes, having a conversion price of $0.25 per share. The
Company relied upon section 4(2) in issuing these notes without registration
under the Securities Act of 1933.
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Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
During 2001 IAI sales and marketing organizations were focused to
capitalize on its services and tools to address the legacy modernization and
conversion market. Additional resources were added to support Web-based
solutions and staff augmentation.
IAI was profitable in 2001after considering an extraordinary gain. The
Company's expenses related to sales, marketing, and administrative
infrastructure were reduced and revenue increased during 2001. As we continue to
build backlog, we believe the Company's economic prospects will improve.
Results of Operations
The following table sets forth, for the periods indicated, selected information
from the Company's Consolidated Statements of Operations, expressed as a
percentage of revenue:
Years Ended
-----------------------------
December 31, December 31,
2001 2000
---- ----
Revenue 100.0% 100.0%
Cost of Goods Sold 75.3% 74.1%
Gross Profit 24.7% 25.9%
Operating Expenses
Selling, general and administrative 27.6% 38.7%
Loss from operations (2.9%) (12.8%)
Non recurring item 0.0% 0.0%
Other (expense) income (0.5%) (0.7%)
Loss before income taxes (3.4%) (13.5%)
Net income (loss) 1.6% (13.5%)
Extraordinary Gain 5.0% 0
2001 Compared to 2000
Revenue. Fiscal 2001 revenue increased $0.3 million, or 5.5%, to $6.1 million
from $5.8 million in fiscal year 2000. Revenue from software sales decreased
$0.4 million, or 43.6%, to $0.4 million in fiscal year 2001 from $0.8 million in
fiscal year 2000. Revenue from professional services increased $0.7 million, or
13.9%, to $5.6 million in fiscal year 2001 from $4.9 million in fiscal year
2000.
Gross Profit. Gross profit was $1.5 million in fiscal 2001 versus $1.4 million
in 2000,or 24.7% of revenue in 2001 compared to 25.9% of revenue in 2000.
Professional services gross margin was 29.8% of revenue in 2001, compared to
25.8% in 2000. The increase in professional services gross margin was primarily
attributable to new contracts in 2001, which generated a higher gross margin for
the year. Software sales gross margin was (35.0%) of revenue in 2001, down from
26.5% in 2000. The decrease in software sales gross margin was do to lower
software sales and the amortization for capitalized software during fiscal year
2001.
Selling, General and Administrative (SG&A). Fiscal 2001 SG&A expense decreased
to $1.7 million, or 27.6% of revenue, from $2.2 million, or 38.7% of revenue in
2000, a decrease in expenses of 24.6%. The decrease is due to a continued effort
by management to scale back expenses as the Company positions itself to meet its
current needs.
Liquidity and Capital Resources
The proceeds derived from the $125,000 convertible notes issued in
2001, along with current collections and net borrowing of $(2,591) from the
Company's bank provided financing for the Company's operations in 2001. Certain
creditors accepted 582,042 shares of common stock and two creditors
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accepted warrants for 47,636 shares of common stock in satisfaction of their
claims in the amount of $519,057. For fiscal year 2001, net cash provided by
operating, investing and financing activities of $5,000 along with net income of
$96,953 resulted in cash and cash equivalents of $102,640 at year end. 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 a line of credit of $800,000 until April 23,
2002. The Company is in negotiations with First Virginia Bank and expects to
have the line of credit extended.
The Company cannot be certain that there will not be a need for
additional cash resources at some point in fiscal 2002. Accordingly, the Company
may from time to time consider additional equity offerings to finance business
expansion. The Company is uncertain that it will be able to raise additional
capital.
Item 7. Financial Statements and Supplementary Data
See Consolidated Financial Statements included herein beginning on page
F-1.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
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PART III
Item 9. Directors and Executive Officers of the Registrant
The executive officers and directors of the Company are:
NAME DIRECTOR SINCE OFFICE HELD WITH COMPANY
- ---- -------------- ------------------------
Sandor Rosenberg 1979 Chairman of the Board, Chief Executive
Officer
Richard S. DeRose 1991 Executive Vice President, Chief Financial Officer,
Secretary
Stanley A. Reese 1993 Senior Vice President, Chief Operating Officer
Charles A. May, Jr. 1997 Director
Bonnie K. Wachtel 1992 Director
James D. Wester 1985 Director
Directors serve until the next annual meeting of shareholders or until
successors have been elected and qualified. Officers serve at the discretion of
the Board of Directors.
Sandor Rosenberg, 55, is the founder of the Company and has been Chairman of the
Board and Chief Executive Officer of the Company since 1979. Mr. Rosenberg holds
a BS degree in Aerospace Engineering from Rensselaer Polytechnic Institute, and
has done graduate studies in Operations Research at George Washington
University.
Richard S. DeRose, 63, has been Executive Vice President since 1991. From 1979
to 1991 he served as the President and CEO of DHD, Inc. and was a founder of the
company. Prior to DHD, Mr. DeRose held several management positions in the
information technology and telecommunications industries at RCA, Burroughs, and
MCI. Mr. DeRose holds a BS degree in Science from the US Naval Academy and an MS
degree in Computer Systems Management from the US Naval Postgraduate School,
Monterey.
Stanley A. Reese, 45, joined the Company in 1993. Mr. Reese has been Senior Vice
President since 1997 and Chief Operating Officer since March 1999. From 1992 to
1993, he served as Vice President, Technical Services at Tomco Systems, Inc.
Prior to Tomco Systems, he served as Senior Program manager at ICF Information
Technology, Inc. Mr. Reese has over 17 years experience managing and marketing
large scale mainframe and PC-based applications. Mr. Reese holds a BA in History
from George Mason University
Charles A. May, Jr., 64, is a consultant focusing on national security and
defense conversion issues. In 1992, he retired as a Lt. General from the Air
Force where he last served as Assistant Vice Chief of Staff, Headquarters US Air
Force, Washington, D.C. He is a graduate of the US Air Force Academy, where he
once served as an Associate Professor of Political Science. General May has also
graduated from the NATO Defense College and has completed the University of
Pittsburgh's Management Program for Executives.
Bonnie Wachtel, 46, has served as vice president and general counsel of Wachtel
& Co., Inc., a Washington, D.C.-based brokerage and investment banking firm,
since 1984. Ms. Wachtel holds BA and MBA degrees from the University of Chicago
and a JD from the University of Virginia. She is a director of Integral Systems,
Inc., a provider of computer systems and software for the satellite
communications market; and VSE Corporation, a provider of technical services to
the federal government.
James Wester, 63, has been a computer services marketing consultant for more
than 15 years. Since 1984, he has been president of Results, Inc., a computer
services marketing firm. Mr. Wester holds a BME degree from Auburn University
and an MBA from George Washington University.
There are no family relationships between any directors or executive officers of
IAI.
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Compliance with Section 16(a) of the Exchange Act
Section 16(a) ("Section 16(a)") of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), requires executive officers and Directors and
persons who beneficially own more than ten percent (10%) of the Company's Common
Stock to file initial reports of ownership and reports of changes in ownership
with the Securities and Exchange Commission (the "Commission") and any national
securities exchange on which the Company's securities are registered. Executive
officers, Directors and greater than ten percent (10%) beneficial owners are
required by the Commission's regulations to furnish the Company with copies of
all Section 16(a) forms they file.
Based solely on a review of the copies of such forms furnished to the Company
and written representations from the executive officers and Directors, the
Company believes that all Section 16(a) filing requirements applicable to its
executive officers, Directors and greater than ten percent (10%) beneficial
owners were satisfied, except for Traditions LP and any filing required in
connection with option grants.
Item 10. Executive Compensation
The Summary Compensation Table below sets forth individual compensation
information for the Chief Executive Officer and the other executive officers
serving as executive officers as of December 31, 2001 (collectively "Named
Executive Officers"):
Summary Compensation Table
Name and Principal Annual Compensation Securities
------------------- Underlying
Position Year Salary Bonus Options (#)
- -------- ---- ------- ----- -------
Sandor Rosenberg 2001 $85,165 -- --
Chairman of the Board and 2000 $76,904 -- --
Chief Executive Officer 1999 $76,457 -- --
- ----------------------------- ------------------------------------------- --------------------
Richard S. DeRose 2001 $87,017 -- --
Executive Vice President 2000 $75,000 -- 50,000
Chief Financial Officer 1999 $97,617 -- 20,000
- ----------------------------- ------------------------------------------- --------------------
Stanley A. Reese 2001 $82,742 -- 50,000
Senior Vice President and 2000 $75,000 -- --
Chief Operating Officer 1999 $97,867 -- 20,000
- ----------------------------- ----------------------------------------------------------------
No Named Executive Officer has received any perquisite or benefit, securities,
or property that exceeded the lesser of $50,000 or 10% of the total annual
salary and bonus reported for such executive officer.
The following table sets forth all option grants during 2001 to all
executive officers.
Option Grants in Last Fiscal Year
Number of Securities
Name Underlying Options % of Total Options Granted Exercise Expiration
----
Granted To Employees in Fiscal Year Price Date
------- --------------------------- ----- -----
Stanley A. Reese 50,000 37.5% $0.200 09/07/11
The following table depicts option exercise activity in the last fiscal
year and fiscal year-end option values with respect to each of the Named
Executive Officers. The value of unexercised in-the-money options at December
31, 2001 equals the market value of the underlying common stock at December 31,
2001 minus the option exercise price. The fair market value of the Company's
common stock at December 31, 2001 was $0.55.
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Aggregated Option Exercises in Last Fiscal Year and FY End Option Values
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money Options at
Acquired Options at 12/31/01 12/31/01
------------------- --------
Name on Value Exercisable Unexercisable Exercisable Unexercisable
- ---- ----- ----------- ------------- ----------- -------------
Exercise Realized
-------- --------
Richard S. DeRose -- -- 167,900 -- $15,285 --
Stanley A. Reese -- -- 178,750 -- $18,428 --
Directors of the Company who are not executive officers of the Company
receive a stipend of $500 per quarter plus reimbursement of reasonable expenses
incurred in attending meetings.
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Item 11. Security Ownership of Certain Beneficial Owners and Managers
The following table sets forth, as of March 27, 2002, the number of shares
and percentage of the Company's Common Stock owned by all persons known by the
Company to own beneficially more than 5% of the Company's Common Stock, by each
director, by each executive officer named in the Summary Compensation Table, and
by all directors and executive officers as a group. This information has been
obtained in part from such persons and in part from the Company's records. Each
person has sole voting and investment power with respect to the shares indicated
except for shares which may be acquired upon exercise of options and as
otherwise noted.
NAME AND ADDRESS OF SHARES BENEFICIALLY
BENEFICIAL OWNER (1) OWNED (2) % OF CLASS
- -----------------------------------------------------------------------------------------
Sandor Rosenberg, Chairman, CEO, and Director 1,752,800 17.0%
Richard S. DeRose, Executive Vice President 365,900 (3) 3.5%
Stanley A. Reese, Senior Vice President 200,750 (4) 1.9%
Charles A. May, Jr., Director 16,000 (5) *
Bonnie K. Wachtel, Director 112,800 (6) 1.1%
James D. Wester, Director 427,355 (7) 4.0%
Kenneth Parsons 712,500 (8) 6.5%
Traditions LP 1,500,000 (9) 13.9%
All directors and executive officers as a group 2,875,605 (10) 26.4%
*less than 1%
(1) The address of all beneficial holders is care of the Company, except
Ms. Wachtel, whose address of record is 1101 14/th/ St. NW, Washington,
DC 20001.
(2) All shares are held outright by the individuals listed. References to
options and warrants include all options and warrants exercisable
within 60 days of March 27, 2002.
(3) Includes options on 167,900 shares.
(4) Includes options on 178,750 shares.
(5) Includes options on 16,000 shares.
(6) Includes options on 13,000 shares.
(7) Includes warrants on 108,000 shares and options for 190,000 shares.
(8) Includes options on 712,500 shares.
(9) Includes warrants on 500,000 shares.
(10) Includes options on 565,650 shares and warrants for 108,000 shares.
Item 13. Exhibits, Financial Statements Schedules, and Reports on Form 8-K
(a) (1) Financial Statements:
Report of Independent Auditors F-1
Balance Sheet F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Stockholders' Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6-F-17
(a) (2) Exhibits:
See Exhibit Index on page 12.
(b) No reports were filed on Form 8-K during the last quarter of
2001.
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Signatures
Pursuant to the requirements of Section 13 or 15(d), of the Securities Exchange
Act of 1934, the registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
INFORMATION ANALYSIS INCORPORATED
By:
Sandor Rosenberg, President
April 12, 2002
Pursuant to the requirements of the Securities Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature Title Date
/s/ Sandor Rosenberg Chairman of the Board April 12, 2002
- ---------------------------- and President
Sandor Rosenberg
/s/ Charles A. May, Jr. Director April 12, 2002
- ----------------------------
Charles A. May
/s/ Bonnie K. Wachtel Director April 12, 2002
- ----------------------------
Bonnie K. Wachtel
/s/ James D. Wester Director April 12, 2002
- ----------------------------
James D. Wester
/s/ Richard S. DeRose Treasurer April 12, 2002
- ----------------------------
Richard S. DeRose
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Exhibit Index
Exhibit Description Location
No.
3.1 Amended and Restated Articles of Incorporation Incorporated by reference from the
effective March 18, 1997 Registrant's Form 10-KSB/A for the
fiscal year ending December 31, 1996
and filed on July 3, 1997
3.2 Articles of Amendment to the Articles of Incorporation Incorporated by reference from the
Registrant's Form 10-KSB/A for the
fiscal year ending December 31, 1997
and filed on March 30, 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, 1997
and filed on March 30, 1998
4.2 Form of Warrant issued in December 1999 and January Incorporated by reference from the
2000 Registrant's Form 10-KSB for the fiscal
year ending December 31, 2000 and filed
on March 29, 2000
4.3 Common Stock and Warrant Purchase Agreement dated Incorporated by reference from the
December 1999 Registrant's Form 10-KSB for the fiscal
year ending December 31, 2000 and filed
on March 29, 2000
4.4 Form of 12% 3 year convertible note Incorporated by reference from the
Registrant's Form 10-QSB for the period
ending September 30, 2001 and filed on
November 12, 2001.
4.5 Form of Warrant issued to trade creditors who Incorporated by reference from the
exchanged claims for warrants. Registrant's Form 10-QSB for the
period ending September 30, 2001
and filed on November 12, 2001.
10.1 Office Lease for 18,280 square feet at 11240 Waples Incorporated by reference from the
Mill Road, Fairfax, Virginia 22030. Registrant's Form 10-KSB/A for the
fiscal year ending December 31, 1996
and filed on July 3, 1997
10.2 Company's 401(k) Profit Sharing Plan through Aetna Incorporated by reference from the
Life Insurance and Annuity Company. Registrant's Form 10-KSB/A for the
fiscal year ending December 31, 1996
and filed on July 3, 1997
10.3 1986 Stock Option Plan Incorporated by reference from the
Registrant's Form S-8 filed on December
20, 1988
10.4 1996 Stock Option Plan Incorporated by reference from the
Registrant's Form S-8 filed on June 25,
1996
10.5 Line of Credit Agreement with First Virginia Bank Incorporated by reference the
Registrant's Form 10-KSB for the fiscal
year ending December 31, 1995 and filed
April 15, 1996
12
Information Analysis Incorporated 2001 Report on Form 10-KSB
- --------------------------------------------------------------------------------
(Commission File No. 33-9390).
10.6 Warrant Agreement between James D. Wester, a director, Incorporated by reference from the
and the Company dated February 24, 1993 Registrant's Form 10-KSB/A for the
fiscal year ending December 31, 1996
and filed on July 3, 1997
10.7 Office lease for 19,357 square feet at 3877 Fairfax Incorporated by reference from the
Ridge Road, Fairfax, Virginia Registrant's Form 10-QSB for the period
ending March 31, 1998 and filed on May
15, 1998.
10.8 Modification of Office Lease to 12,345 square feet at Incorporated by reference from the
11240 Waples Mill Road, Fairfax, Virginia 22030. Registrant's Form 10-QSB for the period
ending March 31, 2001 and filed on
May 11, 2001.
21.1 List of Subsidiaries. Filed with this Form 10-KSB
23.1 Consent of independent auditors, Rubino & Filed with this Form 10-KSB
McGeehin, Chartered
13
Information Analysis Incorporated 2001 Report on Form 10-KSB
- --------------------------------------------------------------------------------
Exhibit 21.1
SUBSIDIARIES OF
INFORMATION ANALYSIS INCORPORATED
Name under which
Name State of Incorporation Subsidiary Does Business
Allied Health & Information Systems, Inc. VA N/A
International Software Services Corporation VA N/A
Information Analysis Incorporated 2001 Report on Form 10-KSB
- --------------------------------------------------------------------------------
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Form SB-2 No.
333-95775 dated September 4, 2000 and Registration Statements (Form S-8 No.
33-26249 and No. 33-305136) pertaining to the 1986 Stock Option Plan and 1996
Stock Option Plan of Information Analysis Incorporated and in the related
prospectus' of our report dated March 29, 2002 with respect to the consolidated
financial statements and schedule of Information Analysis Incorporated included
in the Annual Report (Form 10-KSB) for the year ended December 31, 2001.
/s/ Rubino & McGeehin, Chartered
Bethesda, Maryland
April 15, 2002
Information Analysis Incorporated 2001 Report on Form 10-KSB
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Information Analysis Incorporated
We have audited the accompanying consolidated balance sheet of Information
Analysis Incorporated and subsidiaries as of December 31, 2001, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the years ended December 31, 2001 and 2000. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Information Analysis Incorporated and subsidiaries as of December 31, 2001, and
their consolidated results of operations and cash flows for the years ended
December 31, 2001 and 2000, in conformity with accounting principles generally
accepted in the United States.
The accompanying consolidated financial statements have been prepared assuming
Information Analysis Incorporated and subsidiaries will continue as a going
concern. As discussed in Note 16, the Company has suffered recurring losses from
operations and has cash flows problems and financing requirements that raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regards to these matters are described in Note 16. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
March 29, 2002
Bethesda, MD /S/ Rubino & McGeehin, Chartered
F-1
Information Analysis Incorporated 2001 Report on Form 10-KSB
- --------------------------------------------------------------------------------
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
---------------
December 31, 2001
-----------------
ASSETS
Current assets
Cash and cash equivalents $ 102,640
Accounts receivable, net of allowance of $469,957 1,526,372
Prepaid expenses 22,255
Note receivable 75,000
Other receivables 22,203
------------
Total current assets 1,748,470
Fixed assets, net of accumulated depreciation
and amortization of $2,237,780 34,654
Capitalized software, net of accumulated amortization
of $472,045 292,065
Other receivables 31,865
Other assets 58,275
------------
Total assets $ 2,165,329
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Revolving line of credit $ 596,000
Accounts payable 1,024,717
Accrued payroll and related liabilities 294,489
Other accrued liabilities 175,158
Deferred revenue 157,882
------------
Total current liabilities 2,248,246
Long-term liabilities
Notes payable 125,001
------------
Total liabilities 2,373,247
------------
Stockholders' equity
Common stock, $0.01 par value, 30,000,000 shares authorized,
11,788,126 shares issued, 10,283,515 shares outstanding 117,881
Additional paid-in capital 14,122,019
Accumulated deficit (13,593,505)
Less treasury stock, 1,504,611 shares, at cost (854,313)
------------
Total stockholders' equity (deficit) (207,918)
------------
Total liabilities and stockholders' equity $ 2,165,329
============
The accompanying notes are an integral part of the consolidated financial
statements
F-2
Information Analysis Incorporated 2001 Report on Form 10-KSB
- --------------------------------------------------------------------------------
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------
For the years ended December 31,
2001 2000
--------------- ------------
Sales
Professional fees $ 5,606,815 $ 4,920,931
Software sales 479,659 849,710
--------------- ------------
Total sales 6,086,474 5,770,641
--------------- ------------
Cost of sales
Cost of professional fees 3,936,288 3,653,333
Cost of software sales 647,643 624,654
--------------- ------------
Total cost of sales 4,583,931 4,277,987
--------------- ------------
Gross profit 1,502,543 1,492,654
Selling, general and administrative expenses 1,681,479 2,231,056
--------------- ------------
Loss from operations (178,936) (738,402)
Other expenses (31,031) (42,338)
--------------- ------------
Loss before provision for income taxes and
extraordinary item (209,967) (780,740)
Provision for income taxes - -
--------------- ------------
Net loss before extraordinary item (209,967) (780,740)
Extraordinary gain-settlement of debt with equity 306,920 -
--------------- ------------
Net income (loss) $ 96,953 $ (780,740)
=============== ============
Earnings per common share - Basic and Diluted
Net loss before extraordinary item $ (0.02) $ (0.08)
Extraordinary gain 0.03 -
--------------- ------------
Net income (loss) $ 0.01 $ (0.08)
=============== ============
Weighted average common shares outstanding
Basic 9,970,133 9,576,981
=============== ============
Diluted 9,970,133 9,576,981
=============== ============
The accompanying notes are an integral part of the consolidated financial
statements
F-3
Information Analysis Incorporated 2001 Report on Form 10-KSB
- --------------------------------------------------------------------------------
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------
Shares of
Common Additional
Stock Common Paid-in Accumulated Treasury
Issued Stock Capital Deficit Stock Total
------------- ------------ ---------------- --------------- ----------- -----------------
Balances, December 31, 1999 10,723,284 $ 107,233 $ 13,763,904 $ (12,909,718) $ (854,313) $ 107,106
Exercise of stock options and
warrants 112,800 1,128 30,498 - - 31,626
Stock issued for private
placement 250,000 2,500 122,500 - - 125,000
Stock issued as contingent
payment of debt 120,000 1,200 (1,200) - - -
Net loss - - - (780,740) - (780,740)
------------ ----------- -------------- ------------- --------- -------------
Balances, December 31, 2000 11,206,084 112,061 13,915,702 (13,690,458) (854,313) (517,008)
Stock issued as settlement
of debt 582,042 5,820 206,317 - - 212,137
Net Income - - - 96,953 - 96,953
------------ ----------- -------------- ------------- --------- -------------
Balances, December 31, 2001 11,788,126 $ 117,881 $ 14,122,019 $ (13,593,505) $ (854,313) $ (207,918)
============ =========== ============== ============= ========= =============
The accompanying notes are an integral part of the consolidated financial
statements
F-4
Information Analysis Incorporated 2001 Report on Form 10-KSB
- --------------------------------------------------------------------------------
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
----------------
For the years ended December 31,
2001 2000
------------------------ ----------------------
Net income (loss) $ 96,953 $(780,740)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary gain (306,920)
Depreciation and amortization 73,822 188,484
Amortization of capitalized software 199,487 154,548
Gain on sale of fixed assets (9,537) -
Changes in operating assets and liabilities
Accounts receivable (452,431) 828,303
Other receivables and prepaid expenses 99,494 11,699
Accounts payable and accrued expenses 74,683 (557,215)
Deferred revenue 157,882 -
--------- ---------
Net cash used by operating activities (66,567) (154,921)
--------- ---------
Cash flows from investing activities:
Acquisition of furniture and equipment (5,630) -
Proceeds from sale of fixed assets 9,547 -
Increase in capitalized software - (182,447)
--------- ---------
Net cash provided (used) by investing activities 3,917 (182,447)
--------- ---------
Cash flows from financing activities:
Net (payments) borrowings under bank revolving line of credit (2,591) 97,091
Net received on long-term note payable 125,000 -
Principal payments on capital leases - (6,936)
Proceeds from private placement of common stock - 125,000
Proceeds from exercise of stock options and warrants - 31,626
--------- ---------
Net cash provided by financing activities 122,409 246,781
--------- ---------
Net increase (decrease) in cash and cash equivalents 59,759 (90,587)
Cash and cash equivalents, beginning of the year 42,881 133,468
--------- ---------
Cash and cash equivalents, end of the year $ 102,640 $ 42,881
========= =========
Supplemental cash flow information
Interest paid $ 48,219 $ 60,999
========= =========
Non-cash financing activity
Issuance of common stock to settle debt $ 212,137
=========
Non-cash operating activity
Reduction of accounts payable through issuance of equity $ 519,057
=========
The accompanying notes are an integral part of the consolidated financial
statements
F-5
Information Analysis Incorporated 2001 Report on Form 10-KSB
- --------------------------------------------------------------------------------
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------
1. Summary of Significant Accounting Policies
Operations
----------
Information Analysis Incorporated (the Company) was incorporated under
the corporate laws of the Commonwealth of Virginia in 1979 to develop
and market computer applications software systems, programming
services, and related software products and automation systems.
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, International Software
System Corporation (ISSC) and Allied Health & Information Systems, Inc.
(AHISI). Upon consolidation, all material intercompany accounts,
transactions and profits are eliminated.
Accounting Estimates
--------------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management
to make estimates and assumptions that affect certain reported amounts
and disclosures. Accordingly, actual results could differ from these
estimates.
Revenue Recognition
-------------------
The Company provides services under various pricing arrangements.
Revenue from "cost-plus-fixed-fee" contracts is recognized on the basis
of reimbursable contract costs incurred during the period, plus a
percentage of the fixed fee. Revenue from "firm-fixed-price" contracts
is recognized on the percentage-of-completion method. Under this
method, individual contract revenues are recorded based on the
percentage relationship that contract costs incurred bear to
management's estimate of total contract costs. Revenue from "time and
material" contracts is recognized on the basis of hours utilized, plus
other reimbursable contract costs incurred during the period. Contract
losses, if any, are accrued when their occurrence becomes known and the
amount of the loss is reasonably determinable. Changes in job
performance, job conditions and estimated profitability, including
final contract settlements, may result in revisions to costs and income
and are recognized in the period in which the revisions are determined.
Revenue from software sales is recognized upon delivery, when
collection of the receivable is probable. Maintenance revenue is
recognized ratably over the maintenance period.
F-6
Information Analysis Incorporated 2001 Report on Form 10-KSB
- --------------------------------------------------------------------------------
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------
1. Summary of Significant Accounting Policies (continued)
Segment Reporting
-----------------
The Company adopted Statement No. 131, "Disclosures about Segments of
an Enterprise and Related Information," in 1998, and concluded that it
operates in one business segment, providing products and services to
modernize client information systems.
Government Contracts
--------------------
Company sales to departments or agencies of the United States
Government are subject to audit by the Defense Contract Audit Agency
(DCAA), which could result in the renegotiating of amounts previously
billed. Audits by DCAA were completed through the year ended December
31, 1997. No amounts were changed as a result of the audits. Management
is of the opinion that any disallowance of costs for subsequent fiscal
years by the government auditors, other than amounts already provided,
will not materially affect the Company's financial statements.
Cash and Cash Equivalents
-------------------------
For the purposes of the statement of cash flows, the Company considers
all highly liquid investments with maturities of ninety days or less at
the time of purchase to be cash equivalents. Deposits are maintained
with a federally insured bank. Balances at times exceed insured limits,
but management does not consider this to be a significant concentration
of credit risk.
Fixed Assets
------------
Fixed assets are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized over the term of the lease or the
estimated life of the improvement, whichever is shorter. Maintenance
and minor repairs are charged to operations as incurred. Gains and
losses on dispositions are recorded in current operations.
Advertising
-----------
All costs related to advertising the Company's products are expensed in
the period incurred.
F-7
Information Analysis Incorporated 2001 Report on Form 10-KSB
- --------------------------------------------------------------------------------
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------
1. Summary of Significant Accounting Policies (continued)
Software Development Costs
--------------------------
The Company has capitalized costs related to the development of the
ICONS software product. In accordance with Statement of Financial
Accounting Standards No. 86, capitalization of costs begins when
technological feasibility has been established and ends when the
product is available for general release to customers. Amortization is
computed and recognized for the product when available for general
release to customers based on the greater of (a) the ratio that current
gross revenues for the product bear to the total of current and
anticipated future gross revenues for that product or, (b) the
straight-line method over the economic life of the product. Capitalized
costs and amortization periods are management's estimates and may have
to be modified due to inherent technological changes in software
development.
Stock-Based Compensation
------------------------
The Company records compensation expense for all stock-based
compensation plans using the intrinsic value method prescribed by APB
Opinion No. 25, "Accounting for Stock Issued to Employees." The
Company's annual financial statements disclose the required pro forma
information as if the fair value method prescribed by Financial
Accounting Standards Board's Statement No. 123, "Accounting for
Stock-Based Compensation," had been adopted.
Earnings Per Share
------------------
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, warrants and, for 2001, convertible notes, are
included for purposes of calculating diluted earnings per share, except
for periods when the Company reports a net loss before extraordinary
item, in which case the inclusion of such equity instruments would be
antidilutive.
Income Taxes
------------
Under Financial Accounting Standards Board Statement No. 109,
"Accounting for Income Taxes," the liability method is used in
accounting for income taxes. Under this method, deferred tax assets and
liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities, and are measured
using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
F-8
Information Analysis Incorporated 2001 Report on Form 10-KSB
- --------------------------------------------------------------------------------
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_____________________
1. Summary of Significant Accounting Policies (continued)
Fair Market Value of Financial Instruments
------------------------------------------
The Company's financial instruments include trade receivables, other
receivables, accounts payable, and notes payable. Management believes
the carrying value of financial instruments approximates their fair
market value, unless disclosed otherwise in the accompanying notes.
2. Receivables
Accounts receivable at December 31, 2001, consist of the following:
Billed-federal government $ 1,921,565
Billed-commercial and other 18,750
-------------
Total billed 1,940,315
Unbilled 56,015
Less: allowance of doubtful accounts (469,958)
-------------
Accounts receivable, net $ 1,526,372
=============
Billed receivables from the federal government includes amounts due
from both prime contracts and subcontracts where the federal government
is the end customer. Unbilled receivables are for services provided
through the balance sheet date which are expected to be billed and
collected within one year.
At December 31, 2001, there is a note receivable of $75,000 from a
customer. The note bears interest of 7% and is due September 30, 2002.
3. Fixed Assets
A summary of fixed assets and equipment at December 31, 2001, consist
of the following:
Furniture and equipment $ 341,055
Leasehold improvements and other 204,634
Computer equipment and software 1,726,745
-------------
2,272,434
Less: accumulated depreciation and amortization (2,237,780)
-------------
Total $ 34,654
=============
Depreciation expense for the years ended December 31, 2001 and 2000,
was $73,822 and $188,484 respectively.
F-9
Information Analysis Incorporated 2001 Report on Form 10-KSB
- --------------------------------------------------------------------------------
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_____________________
4. Software Development Costs
Software development costs as of December 31, 2001, consist of the
following:
Cumulative costs incurred $ 764,110
Accumulated amortization (472,045)
-------------
Net software development costs $ 292,065
=============
Amortization expense for the years ended December 31, 2001 and 2000,
was $199,487 and $154,548, respectively.
At December 31, 2001, capitalized software development cost is for the
ICONS software tool. All costs related to other products have been
fully amortized or written off.
5. Other Assets
Other assets at December 31, 2001, consist of the following:
Security deposits $ 48,275
Other 10,000
------------
Total other assets $ 58,275
============
6. Other Accrued Liabilities
Other accrued liabilities at December 31, 2001, consist of the
following:
Royalties payable $ 18,558
Accrued payables 146,489
Other 10,111
------------
Total other accrued liabilities $ 175,158
============
F-10
Information Analysis Incorporated 2001 Report on Form 10-KSB
- --------------------------------------------------------------------------------
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________________________
7. Revolving Line of Credit
At December 31, 2001, the Company had a revolving line of credit with a
bank providing for demand or short-term borrowings up to $1,000,000.
The bank has executed a forbearance agreement with the Company for
demand or short-term borrowings up to $800,000, which effectively
extends the line of credit until April 23, 2002. Draws against this
line are limited by varying percentages of the Company's accounts
receivable balances depending on the source of the receivables and
their age. The bank is granted a security interest in certain assets if
there are borrowings under the line of credit. Interest on outstanding
amounts is payable monthly at the bank's prime rate plus 2.5% (7.25% at
December 31, 2001). The lender has a first priority security interest
in the Company's receivables and a direct assignment of its U.S.
Government contracts. The revolving line of credit, among other
covenants, requires the Company to comply with certain financial
ratios. The Company was not in compliance with any of the financial
ratios at December 31, 2001, when there was an outstanding balance of
$596,000 on the line.
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 timely payments 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.
8. Commitments and Contingencies
Operating Leases
----------------
The Company leases facilities and equipment under long-term operating
lease agreements. Rent expense was $141,936 and $212,756 for the years
ended December 31, 2001 and 2000, net of sublease income of $288,398
and $301,306, respectively. During 2001, the Company renegotiated its
lease without penalty to lease less space in the current building. The
future minimum rental payments to be made under long-term operating
leases principally for facilities, and giving effect to the
aforementioned reduction in space, are as follows:
Year ending December 31, 2002 $ 369,100
2003 361,000
2004 82,300
------------
Total minimum rent payments $ 812,400
============
F-11
Information Analysis Incorporated 2001 Report on Form 10-KSB
- --------------------------------------------------------------------------------
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_________________________
8. Commitments and Contingencies (continued)
The above minimum lease payments reflect the base rent under the lease
agreements. However, these base rents can be adjusted each year to
reflect increases in the consumer price index and the Company's
proportionate share of real estate tax increases on the leased
property. The leases are secured by security deposits in the amount of
$48,275.
The aggregate future minimum rentals to be received under
non-cancelable subleases as of December 31, 2001, is $531,200 of which
$239,400 is receivable in 2002, $230,200 is receivable in 2003, and
$61,600 is receivable in 2004.
9. Income Taxes
The tax effect of significant temporary differences representing
deferred tax assets and deferred tax liabilities at December 31, 2001,
are as follows:
Deferred tax assets:
Net operating loss carry forward $ 6,264,700
Accrued vacation 59,800
Allowance for bad debts 178,600
Intangibles 41,100
Fixed assets 87,900
Other 1,600
-------------
Subtotal 6,633,700
Valuation allowance (6,633,700)
-------------
Total -
-------------
The provision for income taxes is at an effective rate different from
the federal statutory rate due principally to the following:
F-12
Information Analysis Incorporated 2001 Report on Form 10-KSB
- --------------------------------------------------------------------------------
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------
9. Income Taxes (continued)
December 31,
2001 2000
---- ----
Income (loss) before taxes, including
extraordinary item for 2001 $ 96,953 $ (780,740)
============= =============
Income taxes (benefit) on above amount at federal
statutory rate 23,200 (265,500)
State income taxes, net of federal benefit 4,900 (31,200)
(Decrease) increase in valuation allowance (29,600) 295,000
Effect of change in estimates and non-deductible
items
1,500 1,700
------------- -------------
Provision for income taxes $ - $ -
============= =============
The Company has recognized a valuation allowance to the full extent of
its net deferred tax assets since the likelihood of realization of the
benefit cannot be determined.
The Company has net operating loss carryforwards of approximately $16.5
million, which expire, if unused, in the year 2020. The tax benefits of
approximately $2.3 million of net operating losses related to stock
options will be credited to equity when the benefit is realized through
utilization of the net operating loss carryover.
10. Major Customers
Traditionally, the Company's clients have spanned a wide range of
enterprises in the private sector along with government agencies. The
Company's prime contracts and subcontracts with agencies of the federal
government accounted for 98% of the Company's 2001 revenues and 73% of
the 2000 revenues. The Company's subcontracts with two prime
contractors accounted for 38% of the Company's 2001 revenue.
11. Retirement Plans
The Company adopted a Cash or Deferred Arrangement Agreement (CODA)
which satisfies the requirements of section 401(k) of the Internal
Revenue Code, on January 1, 1988. This defined contribution retirement
plan covers substantially all employees. Participants can elect to have
up to 15% of their salary reduced and contributed to the plan. The
Company is required to make a matching contribution of 25% of the first
6% of this salary reduction. The Company can also make additional
contributions at its discretion. There was no expense under the plan
for the years ended December 31, 2001 and 2000. Payments for 2001 and
2000 were paid from the Company's forfeiture account, which offset any
matching expenses incurred in both years.
F-13
Information Analysis Incorporated 2001 Report on Form 10-KSB
- --------------------------------------------------------------------------------
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------
12. Stock Options and Warrants
The Company has an incentive stock option plan, which became effective
June 25, 1996. The plan provides for the granting of stock options to
certain employees and directors. The maximum number of shares for which
options may be granted under the plans is 2,575,000. Options expire no
later than ten years from the date of grant or when employment ceases,
whichever comes first, and vest over periods determined by the Board of
Directors. The average vesting period for options granted in 2001 was
eight months. The exercise price of each option equals the quoted
market price of the Company's stock on the date of grant. The stock
option plan is accounted for under Accounting Principles Board (APB)
Opinion No. 25. Accordingly, no compensation has been recognized for
the plan. Had compensation cost for the plans been determined based on
the estimated fair value of the options at the grant date consistent
with the method of Statement of Financial Accounting Standards (SFAS)
No. 123, the Company's net income and earnings would have been:
------------------------------------------------------------------------------------------------------
2001 2000
---- ----
Net income (loss) As reported $ 96,953 $ (780,740)
Pro forma $ 71,958 $ (812,440)
Net income (loss) As reported $ 0.01 $ (0.08)
per share Pro forma $ 0.01 $ (0.08)
------------------------------------------------------------------------------------------------------
The fair value of the options granted in 2001 and 2000 is estimated on
the date of the grant using the Black-Scholes options-pricing model
assuming the following:
2001 2000
---- ----
Dividend yield None None
Risk-free interest rate 4.59% 5.5%
Expected volatility 163.7% 135.7%
Expected term of options 3 years 3 years
The effects on 2001 and 2000 pro forma net income and earnings per
share of expensing the estimated fair value of stock options are not
necessarily representative of the effects on reported net income for
future years due to such things as the vesting period of the stock
options and the potential for issuance of additional stock options in
future years. The weighted average fair value per option granted in
2001 and 2000, was $0.18 and $0.43, respectively.
F-14
Information Analysis Incorporated 2001 Report on Form 10-KSB
- --------------------------------------------------------------------------------
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------
12. Stock Options and Warrants (continued)
The following table summarizes information about stock options
outstanding at December 31, 2001:
Options Outstanding Options Exercisable
----------------------------------------------------- -----------------------------------------
Weighted
Weighted Average
Number Average Remaining Weighted
Range of of Exercise Contractual Number of Average
Exercise Prices Options Price Life Options Exercise Price
---------------------- ---------------- ---------------- ------------------ ------------------- ---------------------
Less than $1.00 1,473,650 $ 0.40 6.0 years 1,294,150 $ 0.43
$1.00 and more 178,300 $ 5.76 5.7 years 178,300 $ 5.76
--------- -------------
Total 1,651,950 $ 0.98 5.9 years 1,472,450 $ 1.07
========= =============
Unexercisable options are as follows: 1,000 at $0.51 per share; 3,500
options at $0.36 per share; 4,000 options at $0.35 per share; 7,000
options at $0.30 per share; 2,000 options at $0.24 per share; 41,500
options at $0.21 per share; 119,000 options at $0.20 per share; 1,500
options at $0.15 per share. Transactions involving the plan were as
follows:
December 31,
2001 2000
---- ----
Weighted Weighted
Average Average
Shares Price Shares Price
---------------- ------------- ---------------- ---------------
Outstanding, beginning of year 1,455,950 $ 1.14 1,505,550 $ 1.11
Granted 239,000 0.21 94,000 0.43
Exercised 0 (112,800) 0.28
Canceled (43,000) 2.07 (30,800) 0.90
------------- ------------
Outstanding, end of year 1,651,950 $ 0.98 1,455,950 $ 1.14
============= ======== ============ ========
F-15
Information Analysis Incorporated 2001 Report on Form 10-KSB
- --------------------------------------------------------------------------------
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------
12. Stock Options and Warrants (continued)
The Board of Directors has also granted warrants to directors,
employees and others. No warrants were issued to directors or employees
in 2001 and 2000. In 2001, the Company issued 47,636 warrants to
certain creditors in satisfaction of their claims totaling $38,109.
There were no warrants exercised in 2001 or 2000. As of December 31,
2001, outstanding warrants are 1,717,975 of which 1,633,000 expire
within 3 years and 84,975 expire thereafter. The purchase price for
shares issued upon exercise of these warrants range from $0.01 to $6.42
per share. These warrants are exercisable immediately.
13. Convertible Notes Payable
During 2001, the Company issued to accredited investors $125,000 of
3-year 12% convertible notes, having a conversion price of $0.25 per
share. Notes totaling $80,000 were issued to stockholders, officers and
directors.
14. Extraordinary Gain
During 2001, the Company issued 582,042 shares of stock and 47,636
warrants to certain creditors in satisfaction of claims totaling
$519,057. The stock was recorded at its market value based upon quoted
trade prices, and the transactions resulted in an extraordinary gain of
$306,920.
15. Computation Of Earnings (Loss) Per Share
For the years ended December 31,
2001 2000
---- ----
Numerator for basic and diluted earnings
(loss) per share - net income (loss) $ 96,953 $ (780,740)
--------------- --------------
Denominator for basic earnings per
share - weighted average shares 9,970,133 9,576,981
Effect of dilutive securities:
Stock options, warrants, and convertible
notes payable assumed conversions - -
------------- -------------
Denominator for diluted earnings per
share - adjusted weighted average
shares and assumed conversions 9,970,133 9,576,981
------------- -------------
Basic net earnings (loss) per share $ 0.01 $ (0.08)
Diluted net earnings (loss) per share $ 0.01 $ (0.08)
F-16
Information Analysis Incorporated 2001 Report on Form 10-KSB
- --------------------------------------------------------------------------------
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------
16. Going Concern Evaluation
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The
Company has realized approximately $97,000 in net income after
extraordinary items for the year ended December 31, 2001 but incurred
losses of approximately $210,000 and $800,000 before extraordinary
items for the years ended December 31, 2001 and 2000, respectively. The
gain in 2001 contributed to improved cash flow and financial position.
The Company, however, remains in violation of loan covenants with its
bank and has negotiated a forbearance agreement through April 23, 2002
(see Note 7).
A breach of any of the terms and conditions of the forbearance
agreement, or subsequent breaches of the financial covenants under the
credit facility, could result in acceleration of the Company's
indebtedness, in which case the debt would become immediately due and
payable. Based upon current projections, management does not believe
the Company will comply with the existing financial covenants unless
they are modified. If the forbearance agreement is not extended after
April 23, 2002, the Company may not be able to repay the credit
facility or borrow sufficient funds from another financial institution
to refinance it. Management expects that the forbearance agreement will
be extended under its existing terms.
Management is seeking alternative financing and capital sources to
replace the existing credit facility. The Company's ability to continue
operations, however, is contingent upon obtaining new financing and
capital, returning to profitable operations, and continuing to reduce
overhead and general administrative costs. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
F-17