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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, 1999
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 $9,585,772
The aggregate market value of the Registrant's Common Stock held by non-
affiliates as of March 15, 2000 was approximately $10,989,859.
As of March 15, 2000 the Registrant had 9,478,673 shares of Common Stock
outstanding.
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Information Analysis Incorporated 1999 Report on Form 10-KSB
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This Form 10-KSB contains forward looking statementsRichard DeRoseFinancial
Printing GroupThis 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 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.
Now that Year 2000 projects are virtually completed, 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 small 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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Information Analysis Incorporated 1999 Report on Form 10-KSB
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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. 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.
The Company is also using the experience it has acquired as a JetForm
reseller to help secure engagements for web based applications requiring forms..
The JetForm 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. During 1999 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 JetForm, the company has developed a cadre of
professionals that can quickly and efficiently develop web applications. IAI
will focus on federal government clients during 2000 and leverage the company's
outstanding reputation with federal clients to penetrate these agencies. IAI
will be able to reference successful projects completed or in development for
the Veterans Affairs (VA), Federal Mediation and Conciliation Service (FMCS),
U.S. Department of Agriculture (USDA), Immigration and Naturalization Service
(INS), and U.S. Air Force Logistics Command (AFLC).
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Information Analysis Incorporated 1999 Report on Form 10-KSB
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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, 1999, the Company estimated its backlog at approximately
$3.8 million. Of the entire backlog, the Company believes approximately 95%
will be completed by December 31, 2000. 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, 1999, the Company employed 54 full-time and part-time
individuals. In addition, the Company maintained independent contractor
relationships with 18 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.
Item 2. Properties
The Company's offices are located at 11240 Waples Mill Road, Suite 400,
Fairfax, VA. 22030. IAI holds a lease for 18,280 square feet. This lease
expires on February 28, 2004.
Item 3. Legal Proceedings
The Company is not aware of any legal proceedings against it at this time.
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Information Analysis Incorporated 1999 Report on Form 10-KSB
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Item 4. Submission of Matters to a Vote of Security Holders
IAI held its Annual Meeting of Shareholders on December 14, 1999. At that
meeting, shareholders cast votes for Board of Directors for the coming year, and
for the ratification of the Board's selection of Rubino and McGeehin as outside
auditors. Messrs. Rosenberg, May, and Wester: and Ms. Wachtel each received
6,266,385 votes in favor of their serving on the Board with 53,329 votes against
or withheld. Rubino and McGeehin was ratified with 6,263,880 votes in favor,
and 40,284 votes against and 15,550 votes abstained.
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, on the NASDAQ National
Market from June 2, 1998 to July 28 1999, the NASDAQ Small Cap Market from
September 8, 1997 to June 1, 1998; and over the counter prior to September 8,
1997. 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, 1998 Fiscal Year Ended December 31, 1999
------------------------------------------------------- ------------------------------------------------------
Quarter Ended: Quarter Ended:
3/31/98 6/30/98 9/30/98 12/31/98 3/31/99 6/30/99 9/30/99 12/31/99
-------- -------- -------- --------- -------- -------- -------- ---------
High $ 20.75 $ 16.375 $ 14.50 $ 2.438 $ 1.593 $ 0.750 $ 0.625 $ 1.218
Low $ 11.75 $ 9.875 $ 1.531 $ 1.063 $ 0.625 $ 0.375 $ 0.125 $ 0.156
The quotations on which the above data are based for periods prior to
September 8, 1997 and after July 29, 1999 reflect inter-dealer prices without
adjustment for retail markup, markdown or commission, and may not necessarily
represent actual transactions. From September 8, 1997 to July 28, 1999, the
prices reflect the high and low bid prices as reported by NASDAQ.
As of December 31, 1999, the Company had 111 stockholders of record. The
Company has not paid a cash dividend on its Common Stock for the last two fiscal
years. The Company does not anticipate the payment of cash dividends to the
holders of Common Stock in the foreseeable future.
The Company raised $1,150,000 through a private placement of 2,300,000
shares of common stock and 1,150,000 five-year warrants which expire on December
31, 2004, exercisable at $1.00 per share. All investors were accredited
individuals. The Company relied upon Regulation D under the Securities Act of
1933 as amended in connection with the issuance of these unregistered shares.
4
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
1999 was a transition year for the Company. During this year the following
occurred:
. During 1999, IAI reoriented its sales and marketing organizations 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.
. Other product and service activities which have produced revenues in prior
years were further de-emphasized.
. A private placement of shares to fund certain operations for 2000.
The effect of this re-orientation has been to change IAI's focus from
primarily offering Year 2000 conversion services to an information technology
organization offering a balance of services and products in legacy
modernization, conversion, and re-engineering, and Web solutions. Management
expects this change will be more evident in 2000 since the Company has ceased
any work in the remediation area.
IAI was not profitable in 1999. The Company's expenses related to sales,
marketing, administrative, and research and development infrastructure exceeded
the gross profits from its revenues. As the Company transitions away from Year
2000 efforts, the Company believes its 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, 1999 December 31, 1998
Revenue 100.0% 100.0%
Cost of Goods Sold 80.3% 82.7%
Gross Profit 19.7% 17.3%
Operating Expenses
Selling, general and administrative 40.1% 45.5%
Research and development 0.6% 11.0%
(Loss) from operations (21.0%) (39.2%)
Non recurring item (20.6%) (20.1%)
Other (expense) income (1.4%) 0.5%
(Loss) before income taxes (43.0%) (58.9%)
Provision for income taxes (0.0%) (0.0%)
Net (loss) (43.0%) (58.9%)
1999 Compared to 1998
Revenue. Fiscal 1999 revenue decreased $5.7 million, or 37.5%, to $9.6 million
in fiscal year 1999 from $15.3 million in fiscal year 1998. The reason for this
decrease was primarily due to lower over-all Year 2000 sales in both product and
professional services sales. Revenue from software sales decreased $3.9 million,
or 74.6%, to $1.3 million in fiscal year 1999 from $5.2 million in fiscal year
1998. Revenue from professional services decreased $1.9 million, or 18.4%, to
$8.3 million in fiscal year 1999 from $10.1 million in fiscal year 1998.
Revenue overall attributable to year 2000 work decreased $7.2 million, or 71.3%,
to $2.9 million in 1999 from $10.1 million in 1998.
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Information Analysis Incorporated 1999 Report on Form 10-KSB
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Gross Profit. Gross profit was $1.9 million in fiscal 1999 versus $2.6 million
in 1998,or 19.7% of revenue in 1999 compared to 17.3% of revenue in 1998.
Professional services gross margin was 30.1% of revenue in 1999, compared to
4.3% in 1998. The increase in professional services gross margin was primarily
attributable to the non-existence of certain fixed-price Year 2000 contracts in
1999, which had a negative effect on the gross margin during the same period in
1998. Software sales gross margin was (45.5%) of revenue in 1999, down from
42.2% in 1998. The decrease in software sales gross margin was do to the
acceleration in amortization for UNICAST capitalized software. In 1999 UNICAST
after write-offs is fully amortized.
Selling, General and Administrative (SG&A). Fiscal 1999 SG&A expense decrease
to $3.8 million, or 40.1% of revenue, from $7.0 million, or 45.5% of revenue in
1998, a decrease in expenses of 44.9%. The decrease was do to a concerted
effort by management to scale back expenses during the Company's transition away
from its Year 2000 products, services, and support for the UNICAST product line.
Research and Development (R&D). Fiscal 1999 R&D expense decreased to $0.1
million, or 0.6% of revenue, from $1.7 million, or 11% of revenue in 1998. The
decrease is due to lower software maintenance for the Company's versions of its
UNICAST product line of tools.
Year 2000 Compliance
The Company has installed and tested a new version of our accounting
system. It is in production at this time and is Year 2000 compliant. The Company
uses off the shelf Microsoft Windows software for internal ad hoc reporting.
This software is certified by the vendor to be Year 2000 compliant.
Liquidity and Capital Resources
IAI raised $1.2 million from a private placement during fiscal 1999. This
private placement, along with current collections and net borrowing of $0.5
million from the Company's bank provided financing for the Company's operations
in 1999. For fiscal year 1999, net cash proved by operating and financing
activities of $0.3 million along with a net loss of $4.1 million resulted in a
cash and cash equivalent of $0.2 million. 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 $1,000,000 until April 20, 2000. The Company is in
negotiations with various organizations to obtain a new line of credit.
The Company cannot be certain that there will not be a need for additional
cash resources at some point in fiscal 2000. 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
On January 11, 1999, the Company dismissed Ernst & Young, LLP ("Ernst &
Young") as its independent accountant. The report of Ernst & Young for fiscal
year ended December 31, 1997 (the sole fiscal year for which Ernst & Young was
engaged) did not contain an adverse opinion or a disclaimer of opinion, nor was
such report qualified or modified as to uncertainty, audit scope or accounting
principles. During the fiscal year ended December 31, 1997 and for all
subsequent interim periods thereafter prior to the dismissal of Ernst & Young,
there were no disagreements on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreement(s), if not resolved to the satisfaction of Ernst & Young, would
have caused it to make a reference to the subject matter of the disagreement(s)
in connection with its reports. The Company's determination to change
accountants was approved by its audit committee.
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Information Analysis Incorporated 1999 Report on Form 10-KSB
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Effective January 11, 1999, the Company engaged Rubino & McGeehin, Chtd.
("Rubino & McGeehin") as its new independent accountant to audit the Company's
financial statement, commencing with the fiscal year ended December 31, 1998.
During the period that Ernst & Young served as the Company's independent
accountant, including all interim periods within 1998, the Company (or someone
on its behalf) never consulted Rubino & McGeehin regarding any matter. Rubino &
McGeehin did serve as the Company's independent accountant prior to the
Company's engagement of Ernst & Young.
7
PART III
Item 9. Directors and Executive Officers of the Registrant
The information required by item 9 concerning Directors and Executive
Officers of the Registrant is incorporated herein by reference to the Company's
definitive Proxy Statement for its 2000 Annual Meeting of Shareholders which
will be filed pursuant to Regulation 1414A within 120 days after the end of the
Company's last fiscal year.
Item 10. Executive Compensation
The information required by item 10 concerning Executive Compensation is
incorporated herein by reference to the Company's definitive Proxy Statement for
its 2000 Annual Meeting of Shareholders which will be filed pursuant to
Regulation 1414A within 120 days after the end of the Company's last fiscal
year.
Item 11. Security Ownership of Certain Beneficial Owners and Managers
The information required by item 11 concerning Security Ownership of
Certain Beneficial owners and Managers is incorporated herein by reference to
the Company's definitive Proxy Statement for its 2000 Annual Meeting of
Shareholders which will be filed pursuant to Regulation 1414A within 120 days
after the end of the Company's last fiscal year.
Item 13. Exhibits, Financial Statements Schedules, and Reports on Form 8-K
(a) (1) Financial Statements:
Report of Independent Auditors F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Stockholders' Equity F-4
Consolidated Statements of Cash Flow F-5
Notes to Consolidated Financial Statements F-6-F-18
(a) (2) Exhibits:
See Exhibit Index on page 10.
(b) No reports were filed on Form 8-K during the last quarter of
1999.
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Information Analysis Incorporated 1999 Report on Form 10-KSB
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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
March 29, 2000
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 March 29, 2000
___________________________ and President
Sandor Rosenberg
/s/ Charles A. May, Jr. Director March 29, 2000
___________________________
Charles A. May
/s/ Bonnie K. Wachtel Director March 29, 2000
___________________________
Bonnie K. Wachtel
/s/ James D. Wester Director March 29, 2000
___________________________
James D. Wester
/s/ Richard S. DeRose Treasurer March 29, 2000
___________________________
Richard S. DeRose
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Information Analysis Incorporated 1999 Report on Form 10-KSB
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Exhibit Index
Exhibit
No. Description Location
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 Incorporated by reference from the
Incorporation 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 Filed with this Form 10-KSB
2000
4.3 Common Stock and Warrant Purchase Agreement dated Filed with this Form 10-KSB
December 1999
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 (Commission File No.
33-9390).
10.6 Warrant Agreement between James D. Wester, a Incorporated by reference from the
director, 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 Royalty Agreement between James D. Wester and the Incorporated by reference from the
Company in exchange for development expense advances. Registrant's Form 10-KSB/A for the
fiscal year ending December 31, 1996
and filed on July 3, 1997
10.8 Amended Royalty Agreement between James D. Wester Incorporated by reference from the
and the Company in exchange for development expense Registrant's Form 10-QSB for the period
advances. ending March 31, 1998 and filed on May
15, 1998.
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Information Analysis Incorporated 1999 Report on Form 10-KSB
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10.9 Software License Agreement dated March 24, 1997 Incorporated by reference from the
between the Company and Computer Associates, Registrant's Form 10-QSB/A for the
International, Inc., Quarter ended March 31, 1997 and filed
on July 18, 1997.
10.10 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.
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
27.1 Financial Data Schedule. Filed with this Form 10-KSB
11
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, 1999, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the years ended December 31, 1999 and 1998. 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 generally accepted auditing
standards. 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, 1999, and
their consolidated results of operations and cash flows for the years ended
December 31, 1999 and 1998, in conformity with generally accepted accounting
principles.
/s/ Rubino & McGeehin, Chartered
________________________________
February 24, 2000
Bethesda, Maryland
F-1
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
----------------
December 31, 1999
---------------------
ASSETS
Current assets
Cash and cash equivalents $ 133,468
Accounts receivable, net of allowance of $466,890 1,902,244
Employee advances 6,230
Prepaid expenses 129,995
Other receivables 97,299
------------
Total current assets 2,269,236
Fixed assets, net of accumulated depreciation and amortization
of $1,940,295 279,787
Equipment under capital leases, net of accumulated amortization
of $63,649 11,553
Capitalized software, net of accumulated amortization of $2,430,737 463,653
Other receivables 28,992
Other assets 58,275
------------
Total assets $ 3,111,496
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,491,179
Accrued payroll and related liabilities 276,871
Other accrued liabilities 727,904
Revolving line of credit 501,500
Current maturities of capital lease obligations 6,936
------------
Total current liabilities 3,004,390
------------
Common stock, par value $0.01, 15,000,000 shares authorized,
10,723,284 shares issued, 9,218,673 shares outstanding 107,233
Additional paid-in capital 13,763,904
Accumulated deficit (12,909,718)
Less treasury stock, 1,504,611 shares, at cost (854,313)
------------
Total stockholders' equity 107,106
------------
Total liabilities and stockholders' equity $ 3,111,496
============
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
----------------
For the years ended December 31,
-----------------------------------------------
1999 1998
--------------------- ---------------------
Sales
Professional fees $ 8,259,492 $10,118,435
Software sales 1,326,280 5,213,923
----------- -----------
Total sales 9,585,772 15,332,358
----------- -----------
Cost of sales
Cost of professional fees 5,770,008 9,686,651
Cost of software sales 1,929,496 3,000,639
----------- -----------
Total cost of sales 7,699,504 12,687,290
----------- -----------
Gross profit 1,886,268 2,645,068
Selling, general and administrative expenses 3,842,212 6,974,211
Research and development 60,719 1,680,818
----------- -----------
Loss from operations (2,016,663) (6,009,961)
Other items:
Write-down of capitalized software costs (1,978,362) (3,083,642)
Other (expense) income (129,611) 69,658
----------- -----------
Loss before provision for income taxes (4,124,636) (9,023,945)
Provision for income taxes - -
----------- -----------
Net loss $(4,124,636) $(9,023,945)
=========== ===========
Loss per common share (basic and diluted) $(0.59) $(1.35)
Weighted average common shares outstanding
(basic and diluted) 6,988,336 6,665,321
The accompanying notes are an integral part of the
consolidated financial statements
F-3
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------
Shares of (Accumulated
Common Additional Deficit)
Stock Common Paid-in Retained Treasury
Issued Stock Capital Earnings Stock Total
--------- ------ ---------- ------------ -------- -----
Balances,
December 31, 1997 7,498,430 $ 74,984 $ 6,517,655 $ 238,863 $(854,313) $ 5,977,189
Exercise of stock
options and 456,148
warrants 217,684 2,177 453,971 - -
Stock issued for
private
placement 580,155 5,802 5,640,883 - - 5,646,685
Stock issued for ISSC
acquisition 62,515 625 27,157 - - 27,782
Net loss - - - (9,023,945) - (9,023,945)
---------- -------- ----------- ------------ ----------- -----------
Balances,
December 31, 1998 8,358,784 83,588 12,639,666 (8,785,082) (854,313) 3,083,859
Exercise of stock
options and
warrants 44,500 445 19,329 - - 19,774
Stock issued for
software
purchase 20,000 200 17,909 - - 18,109
Stock issued for
private
placement 2,300,000 23,000 1,087,000 - - 1,110,000
Net loss - - - (4,124,636) - (4,124,636)
---------- -------- ----------- ------------ ----------- -----------
Balances,
December 31, 1999 10,723,284 $107,233 $13,763,904 $(12,909,718) $(854,313) $ 107,106
========== ======== =========== ============ =========== ===========
The accompanying notes are an integral part of the
consolidated financial statements
F-4
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
----------------
For the years ended December 31,
-------------------------------------------------
1999 1998
---------------------- ----------------------
Net loss $(4,124,636) $(9,023,945)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 282,966 383,214
Amortization 20,325 38,786
Amortization of capitalized software 1,096,170 1,314,272
Loss on sale of fixed assets 24,923 6,886
Capitalized software write-down 1,978,362 2,902,152
Changes in operating assets and liabilities
Accounts receivable 2,517,551 (1,368,743)
Other receivables and prepaid expenses 3,076 (29,362)
Accounts payable and accrued expenses (1,611,793) 1,814,506
Refundable income taxes - 33,119
----------- -----------
Net cash provided (used) in operating activities 186,944 (3,929,115)
----------- -----------
Cash flows from investing activities
Acquisition of furniture and equipment - (266,036)
Increase in capitalized software (113,555) (3,191,574)
Proceeds from sale of fixed assets 56,665 3,670
----------- -----------
Net cash used in investing activities (56,890) (3,453,940)
----------- -----------
Cash flows from financing activities
Net (payments) borrowing under bank revolving line of credit (1,294,700) 1,196,600
Repayment of long-term debt - (83,346)
Principal payments on capital leases (8,059) (20,386)
Proceeds from private placement of common stock 1,110,000 5,646,685
Proceeds from exercise of stock options and warrants 19,774 456,148
----------- -----------
Net cash (used) provided by financing activities (172,985) 7,195,701
----------- -----------
Net decrease in cash and cash equivalents (42,931) (187,354)
Cash and cash equivalents at beginning of the year 176,399 363,753
----------- -----------
Cash and cash equivalents at end of the year $ 133,468 $ 176,399
=========== ===========
Supplemental cash flow information
Interest paid $ 137,988 $ 44,965
Income taxes paid $ - $ -
The accompanying notes are an integral part of the
consolidated financial statements
F-5
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), Allied Health & Information Systems, Inc. (AHISI) and
DHD Systems, Inc. Upon consolidation, all material intercompany accounts,
transactions and profits are eliminated.
Accounting Estimates
--------------------
The preparation of financial statements in conformity with generally
accepted accounting principles 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.
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 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 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 ICON
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 and warrants 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 and warrants 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 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 and 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, 1999, consist of the following:
Billed-federal government $ 353,859
Billed-commercial 1,699,426
----------
Total billed 2,053,285
Unbilled 315,849
Less: allowance of doubtful accounts (466,890)
----------
Total accounts receivable $1,902,244
==========
Unbilled receivables are for services provided through the balance sheet
date which are expected to be billed and collected within one year.
3. Fixed Assets
A summary of fixed assets and equipment at December 31, 1999, consist of
the following:
Furniture and equipment $ 294,333
Leasehold improvements and other 204,634
Computer equipment and software 1,721,115
-----------
2,220,082
Less: accumulated depreciation and amortization (1,940,295)
-----------
Total $ 279,787
===========
Depreciation expense for the years ended December 31, 1999 and 1998, was
$282,966 and $385,448 respectively.
F-9
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
4. Software Development Costs
Software development costs as of December 31, 1999 consist of the
following:
Cumulative costs incurred $ 7,956,394
Accumulated amortization (2,430,737)
Cumulative write-down of capitalized costs (5,062,004)
-----------
Net software development costs $ 463,653
===========
Amortization expense for the years ended December 31, 1999 and 1998, was
$1,096,170 and $1,314,272, respectively. During 1999 and 1998, there was a
$1,978,362 and $2,902,152 write-down of capitalized costs to estimated net
realizable value, which is included separately in the statement of
operations.
At December 31, 1999, capitalized software development costs of $463,653,
net of accumulated amortization of $118,010, are for a new software tool
being amortized over four years. All costs related to other products have
been amortized or written off. Additions totaling $131,664 for 1999
include $18,109 recorded for 20,000 shares of stock issued for certain
software rights.
5. Other Assets
Other assets at December 31, 1999, 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, 1999, consist of the following:
Royalties payable $343,191
Accrued related Jetform costs 248,971
Accrued payables 50,000
Other 85,742
--------
Total other accrued liabilities $727,904
========
F-10
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
7. Revolving Line of Credit
At December 31, 1999, the Company had a revolving line of credit with a
bank providing for demand or short-term borrowings up to $1,000,000. The
Company's line of credit of $2,000,000 with the bank expired on June 19,
1999. The bank has executed forbearance agreements with the Company, which
effectively extends the line of credit until April 20, 2000. 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 0.5% (9.00% at December
31, 1999). 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, 1999, when
there was an outstanding balance of $501,500 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
Capital Leases
--------------
The future minimum lease payments under capital leases for equipment and
the present value of the minimum lease payments are as follows:
Year ending December 31, 2000 $7,121
Less amount representing interest (185)
------
Total obligation representing principal $6,936
======
F-11
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
8. Commitments and Contingencies (continued)
Operating Leases
----------------
The Company leases facilities and equipment under long-term operating lease
agreements extending through 2004. Rent expense was $439,312 and $766,314
for the years ended December 31, 1999 and 1998, respectively. The future
minimum rental payments to be made under non-cancelable operating leases,
principally for facilities, are as follows:
Year ending December 31, 2000 $ 595,000
2001 586,500
2002 519,100
2003 494,800
2004 105,600
----------
Total minimum rent payments $2,301,000
==========
The above minimum lease payments reflect the base rent under the lease
agreements. However, these base rents shall 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, 1999, is $215,100, of which $110,300 is
payable in 2000, $32,000 is payable in 2001, $33,000 is payable in 2002,
and $39,800 is payable in 2003 through 2004.
Royalties
---------
In August 1996, the Company entered into an agreement to purchase the
software product UNICAST. As part of the agreement, royalties are paid to
the seller on sales of the UNICAST licensing fees collected by the Company.
The aggregate amount of the royalties pursuant to this agreement will not
exceed $1,000,000. No royalties were paid in 1999 and $640 in royalties
were paid in 1998.
In September 1996, the Company entered into an agreement whereby, in
consideration of an expense sharing arrangement, the Company will pay
royalties on sales of the UNICAST licensing fees collected by the Company.
The royalties will not exceed $245,831. As of December 31, 1999, total
royalties expenses to date were $34,779 and total royalties paid to date
were $7,667.
F-12
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
8. Commitments and Contingencies (continued)
In March 1997, the Company entered into an agreement with Computer
Associates International, Inc. (CA). As part of the agreement, royalties
are paid to CA based upon sales of the UNICAST licensing fees collected by
the Company. As of December 31, 1999 total royalties expenses to date were
$667,635 and total royalties paid to date were $403,370.
In February 1998, the Company entered into an agreement to acquire all
rights, title and interest for the development of a software application
which runs on a personal computer to remedy software which is not Year 2000
compliant (the "Tool"). As part of the agreement, royalties are paid on
all professional service fees in which the Tool is utilized for assessment
and/or remediation services. The aggregate amount of the royalties
pursuant to this agreement will not exceed $4,000,000. As of December 31,
1999, total royalties expenses to date were $123,772 and total royalties
paid to date were $71,958.
9. Income Taxes
The tax effect of significant temporary differences representing deferred
tax assets and deferred tax liabilities at December 31, 1999, are as
follows:
Deferred tax assets
Net operating loss carryforward $ 6,096,142
Accrued vacation 50,056
Allowance for bad debts 117,378
Intangibles 22,741
Fixed assets 79,513
Other 2,464
-----------
Subtotal 6,368,294
Valuation allowance (6,368,294)
-----------
Subtotal -
-----------
Deferred tax liabilities
Intangibles $ -
Fixed assets -
-----------
Subtotal -
-----------
Total $ -
===========
F-13
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
9. Income Taxes (continue)
The provision for income taxes is at an effective rate different from the
federal statutory rate due principally to the following:
December 31,
1999 1998
---- ----
Loss before taxes $ 4,124,636 $(9,023,945)
=========== ===========
Income taxes (benefit) on above amount at federal
statutory rate (1,402,400) (3,068,100)
State income taxes net of federal benefit (165,000) (361,000)
Increase in valuation allowance 1,606,200 3,230,500
Effect of change in estimates and non deductible items (38,800) 198,600
----------- -----------
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
million, which expire, if unused, in the year 2018. 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, IAI's clients have spanned a wide range of enterprises in
the private sector along with government agencies. The Company's revenue
derived from a single commercial software company constituted 9% of the
Company's 1999 revenue and 24% of the 1998 revenue. The Company's revenue
derived from a single commercial technology company accounted for 6% of the
Company's 1999 revenue and 10% of the 1998 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. Amounts expensed under the plan for the years ended December
31, 1999 and 1998, were $44,170 and $106,418, respectively.
F-14
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 1999 was one year. 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:
- -------------------------------------------------------------------------------------------------------------------------
1999 1998
---- ----
Net loss As reported $(4,124,636) $(9,023,945)
Pro forma $(4,175,800) $(9,251,100)
Loss per share As reported $ (0.59) $ (1.35)
Pro forma $ (0.60) $ (1.39)
- -------------------------------------------------------------------------------------------------------------------------
The fair value of the options granted in 1999 and 1998 is estimated on the
date of the grant using the Black-Scholes options-pricing model assuming
the following:
1999 1998
---- ----
Dividend yield None None
Risk-free interest rate 5.5% 5.5%
Expected volatility 102.8% 102.8%
Expected term of options 3 years 3 years
The effects on 1999 and 1998 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 1999 and 1998, was $0.33 and
$3.74, respectively.
F-15
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, 1999:
Options Outstanding Options Exercisable
--------------------------------------------- -----------------------------------
Weighted
Weighted Average
Number Average Remaining Weighted
Range of Exercise of Exercise Contractual Number of Average
Prices Options Price Life Options Exercised Price
------- --------- ----------- --------- ---------------
Less than $1.00 1,303,450 $0.43 7.1 years 1,153,450 $0.42
$1.00 and more 202,100 $5.55 7.7 years 196,100 $5.68
--------- ---------
Total 1,505,550 $1.11 7.2 years 1,349,550 $1.19
========= =========
Unexercisable options are as follows: 1,000 at $0.688 per share, 1,500
options at $0.444 per share, 2,000 options at $0.720 per share, 60,000
options at $0.590 per share, 11,500 options at $0.620 per share, 21,000
options at $0.500 per share, 9,000 options at $0.190 per share, 40,000
options at $0.160 per share, 4,000 options at $0.600 per share, 5,000
options at $1.31 per share, and 1,000 options at $1.25 per share.
Transactions involving the plan were as follows:
December 31,
1999 1998
------------------------------- --------------------------------
Weighted Weighted
Average Average
Shares Price Shares Price
------ -------- ------ --------
Outstanding, beginning of year 1,626,400 $ 5.42 1,855,550 $ 4.76
Granted 187,300 0.50 78,800 5.87
Exercised (44,500) 0.44 (183,400) 1.29
Canceled (263,650) 11.39 (124,550) 15.50
--------- ------ --------- ------
Outstanding, end of year 1,505,550 $ 1.11 1,626,400 $ 5.42
========= ====== ========= ======
On January 5, 1999, the Board of Directors authorized the Company to
reprice 122,600 employee stock options at a price range of $9.333 to $14.50
per share, to $1.31 per share which was the fair market value of the common
stock at the close on that date. On October 1, 1999, the Board of
Directors authorized the Company to reprice 100,000 stock options to
executive officers at a price range of $0.62 to $14.50 per share, to a
price of $0.26 per share which was not less than the current closing price
of the Company's common stock as of October 1, 1999.
F-16
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 1999 and
1998. In connection with its March 1997 private placement, the Company
issued 97,827 warrants exercisable at $6.42 per share to an investment
banking entity. In connection with it's December 1999 private placement,
the Company issued 1,400,000 five-year warrants exercisable at $1.00 per
share to individual investors. There were no warrants exercised in 1999
and 58,374 warrants were exercised in 1998. As of December 31, 1999,
outstanding warrants are 1,535,339, of which 135,339 expire in 3 years and
1,400,000 expire in 5 years. The purchase price for shares issued upon
exercise of these warrants range from $0.56 to $6.42 per share. These
warrants are exercisable immediately.
13. Computation Of Earnings (Loss) Per Share
For the years ended December 31,
----------------------------------
1999 1998
---- ----
Numerator for basic and diluted earnings
(loss) per share - net loss $(4,124,636) $(9,023,945)
Denominator for basic earnings per
share - weighted average shares 6,988,336 6,665,321
Effect of dilutive securities:
Stock options - -
Dilutive potential common shares - -
Denominator for diluted earnings per
Share - adjusted weighted average
Shares and assumed conversions 6,988,336 6,665,321
Basic earnings (loss) per share $ (0.59) $ (1.35)
Diluted earnings (loss) per share $ (0.59) $ (1.35)
Options and warrants to purchase shares of common stock were outstanding
during 1999 and 1998 (See Note 12), but were not included in the
computation of diluted earnings per share as the effect would be
antidilutive.
F-17
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
14. Subsequent Events Private Placement Memorandum
In January 2000, the Company completed the second phase of its December
1999, private placement memorandum which raised an additional $125,000 in
exchange for 250,000 shares of common stock and 150,000 five-year warrants,
exercisable at $1.00 per share. The shares and warrants were sold to
individual investors. The funds will be utilized to finance the operations
of the Company. These warrants are exercisable immediately.
F-18