U.S. Securities and Exchange Commission
Washington, D.C. 20549
AMENDMENT NO. 1
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
INFORMATION ANALYSIS INCORPORATED
(Name of Small Business Issuer in its charter)
Virginia 54-1167364
(State of incorporation) (I.R.S. Employer Identification No.)
11240 Waples Mill Road
Suite 400
Fairfax, VA 22030
(Address of principal executive offices)
(703) 383-3000
(Issuer's telephone number)
Securities to be registered under Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of class)
PART I
Item 1. Description of Business.
Information Analysis Incorporated ("IAI" or the "Company")
incorporates by reference Item 1 of Part I to the Company's Form 10-KSB for the
fiscal year ending on December 31, 1996 which was filed with the Securities and
Exchange Commission ("SEC") on April 14, 1997.
Item 2. Management's Discussion and Analysis or Plan of Operation
The Company incorporates by reference Item 6 to Part II to the
Company's Form 10-KSB for the fiscal year ending on December 31, 1996 which was
filed with the SEC on April 14, 1997 and Item 1 of Part 1 to its Form 10-QSB for
the quarter ended March 31, 1997 which was filed with the SEC on May 7, 1997.
Item 3. Description of Property
The Company's offices are located at 11240 Waples Mill Road, Suite 400,
Fairfax, VA 22030. These offices comprise 18,280 square feet of space. The
Company's lease at this location expires on February 28, 2004.
Item 4. Security Ownership of Certain Beneficial Owners and Management.
Set forth below is information as of March 31, 1997 concerning
beneficial ownership by any person known to the Company to be the owner of more
than five percent of the Company's Common Stock, by each director and executive
officer and by all directors and executive officers as a group. All information
presented below reflects the two three for one stock splits which were declared
to shareholders of record on January 15, 1997 and April 7, 1997, the latter of
which resulted from a stock dividend of two shares of Common Stock for each
share of Common Stock outstanding.
Name and Amount and Nature of
Address of Beneficials Beneficial Owner (2) Percentage Class
- ---------------------- -------------------- ----------------
Sandor Rosenberg (1) 1,918,200 33.9%
Chairman and President
Richard S. DeRose (1) 195,900(3) 3.4%
Executive Vice President
James D. Wester, Director (1) 391,500(4) 6.5%
John D. Sanders, Director 44,700 *
4600 N. 26th Street
Arlington, VA 22207
Bonnie K. Wachtel, Director 107,700 1.8%
1101 14th Street, N.W.
Washington, D.C. 20001
2
George T. DeBakey, Director 9,000(5) *
5303 Marlyn Drive
Bethesda, MD 20832
Kenneth Parsons(1) 342,600(6) 5.7%
All directors and executive officers as 2,667,000 43.3%
a group
* Less than one percent
(1) Unless otherwise noted, all addresses are c/o the Company at 11240 Waples
Mill Road, Fairfax, VA 22030.
(2) All shares are held outright by the individual listed below.
(3) Includes 106,500 options, 16,500 of which are exercisable at $.50 per share
and expire on January 4, 2003 and 90,000 of which are exercisable at $.444
per share and expire on June 17, 2006. All expiration dates are subject to
continuation of Mr. DeRose's employment.
(4) Includes a warrant exercisable for 108,000 shares at $.555 per share which
expires on February 24, 2003 and 270,000 stock options exercisable at $.444
per share which expire on June 19, 2006.
(5) Represents a warrant exercisable for 9,000 shares at a price of $.8333 per
share which expires on June 30, 1999.
Includes 342,000 options. Mr. Parson also holds 450,000 options, 250,000 of
which become exercisable on January 1, 1998 and 250,000 of which become
exercisable on January 1, 1999. All options are exercisable at $.444 per share
of the total options, 225,000 expire on June 7, 2006 and 567,000 expire on
August 15, 2006. Of the total options Mr. Parsons holds, the 117,000 are subject
to the continuation of Mr. Parson's employment.
Item 5. Directors, Executive Officers, Promoters and Control Persons.
The Company incorporates by reference Item 9 of Part III to the
Company's Form 10-KSB for the fiscal year ending on December 31, 1996 which was
filed with the SEC on April 14, 1997.
Item 6. Executive Compensation.
The following table sets forth the compensation paid over the last
three fiscal years to the Company's chief executive officer and other
individuals serving as executive officers as of December 31, 1996:
Summary Compensation Table
- --------------------------------------------------------------------------------
Name and Number of
Principal Stock Options
Position Year Salary Bonus Granted
- --------------------------------------------------------------------------------
Sandor Rosenberg 1996 $100,000 $15,000 -
President 1995 $100,007 $25,900 -
1994 $ 99,910 $30,000 -
- --------------------------------------------------------------------------------
Richard S. DeRose 1996 $110,730 $27,500 90,000*
Exec Vice President and 1995 $109,730 $30,900 -
Treasurer 1994 $ 99,622 $30,000 -
- --------------------------------------------------------------------------------
3
No executive officer has received any perquisite and other personal
benefits, securities or property which exceed 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 in 1996 to all executive
officers:
Option Grants in Last Fiscal Year
- ---------------------------------------------------------------------------------------------------
% Of Total Options Granted
Name Granted To Employees In Fiscal Year Exercise Price Expiration Date
- ---------------------------------------------------------------------------------------------------
Richard S. DeRose 90,000* 4.6% $.444 June 17, 2006
- ---------------------------------------------------------------------------------------------------
The following table sets forth information concurring each exercise of
stock options during 1996 by all executive officers:
Aggregated Option Exercises in Last Fiscal Year
and FY End Option Values
- -----------------------------------------------------------------------------------------------------------
Number of Securities Value of Unexercised
Shares Acquired on Value Realized Underlying Unexercised In-The Money Options
Name Exercise Options At FY End (#) At FY End ($)
- -----------------------------------------------------------------------------------------------------------
Richard S. DeRose 13,500* $78,075 211,500 $1,331,000
- -----------------------------------------------------------------------------------------------------------
*All option grants and option exercises have been adjusted to account for all
stock splits declared and payable through April 21, 1997.
In 1996, the Company compensated each of its outside directors at the
rate of $500 per quarter or $2,000 per year. No director received any grants of
options or other securities in their capacity as a director.
Item 7. Certain Relationships and Related Transactions.
In 1996, the Company repurchased from Sandor Rosenberg, its president
and a director, 13,000 shares (or 117,000 after accounting for all stock splits)
of its Common Stock at an aggregate purchase price of $53,250. In 1995, 17,200
shares (or 154,800 after accounting for all stock splits) were repurchased from
Mr. Rosenberg at an aggregate purchase price of $72,663. All shares were
repurchased at their current trading value at the date of repurchase. The shares
were repurchased to allow the shareholders to obtain a benefit through a
reduction in the number of issued and outstanding shares of the Company's Common
Stock from funds which would have otherwise been used to pay Mr. Rosenberg a
bonus.
In September 1996, in order to provide the Company with additional
working capital
4
for development of the CAST product, James C. Wester, a director, agreed to
advance up to $300,000 to the Company. In exchange for these advances, the
Company agreed to pay Mr. Wester 20% of all CAST license revenues the Company
receives up to 150% of the advances Mr. Wester has extended. Through June 25,
1997, Mr. Wester has advanced $163,887. The Company does not anticipate the
necessity to require any further advances from Mr. Wester.
In order to compensate Mr. Wester for various consulting services he
has rendered to the Company for which he has received minimal cash remuneration,
in June 1996, the Company granted Mr. Wester 30,000 ten year stock options (now
270,000 to account for all stock splits) exercisable at $4.00 per share (now
$.444 as a result of all stock splits), the then current value of the Company's
Common Stock. These consulting services have consisted of identifying and
developing sales leads, identifying and assessing certain business
opportunities, including potential product acquisitions, and identifying and
recruiting technical personnel for employment by the Company.
In November 1996, the Company agreed to reduce the exercise price from
$5.50 to $4.75 per share under 10,000 warrants of which John D. Sanders, a
director, was the holder of 3,000 and Bonnie K. Wachtel, a director, was the
holder of 2,500. These 10,000 warrants were issued in 1986 as partial
compensation for underwriting and other investment banking services which were
provided by Wachtel & Co., Inc. The reduction was in consideration of the
holders of the warrants agreeing to forgo registration rights for the shares
obtained upon exercise of the warrants for a period of one year from exercise.
The warrants were exercised at the lower price and the holders thereof received
10,000 shares (now increased to 90,000 shares to account for all stock splits).
Item 8. Description of Securities
IAI's capital stock consists of 10,000,000 shares of its $.10 par value
Common Stock. As of March 31, 1997, 5,660,271 shares were issued and
outstanding. These issued and outstanding shares reflect two three for one stock
splits declared on January 9, 1997 and April, 1997 to all shareholders of record
on January 15, 1997 and April 7, 1997, respectively, the latter of which
resulted from a stock dividend of two shares of Common Stock for each share of
Common Stock outstanding.
Holders of the Common Stock are entitled to one vote per share on all
matters to be voted on by the shareholders and are not entitled to cumulative
voting. Accordingly, the holders of a majority of the outstanding shares have
the power to elect all directors and to control the resolution of all issues put
to a vote of the shareholders. The Company's Articles of Incorporation were also
amended and restated effective March 18, 1997. As a result of this amendment and
restatement, whenever under the Virginia Stock Corporation Act, in the absence
of a provision to the contrary in the Articles of Incorporation, a majority of
more than two-thirds would be required to undertake any corporate action, by
virtue of the Company's Amended and Restated Articles of Incorporation, such
majority otherwise required by law has been amended so as only to require a
simple majority. The shares of Common Stock have the following rights: (a) to
receive dividends, if any, as may be declared and paid from time to time by the
board of directors, in its discretion, from funds legally available therefor,
and (b) upon liquidation, dissolution or winding up of the Company, to receive
pro rata all assets remaining available for distribution. There are no
preemptive rights with respect to outstanding shares of Common Stock.
All outstanding shares of Common Stock are
5
fully paid and non-assessable.
PART II
Item 1. Market Price of and Dividends on the Registrant's Common Equity and
Other Shareholder Matters.
The Company's Common Stock is traded in the over-the-counter market.
The range of bid price quotations for the last two fiscal years on a
quarter-by-quarter basis and for the first quarter of 1997 (all as adjusted to
reflect the two three for one stock splits declared in January and April, 1997)
is as follows:
1995 1996 1997
--------------------------- ---------------------------- ------
Qtr. 1st 2nd 3rd 4th 1st 2nd 3rd 4th 1st
Low Bid .44 .44 .44 .44 .44 .44 .44 .44 $ 6.78
High Bid .44 .44 .44 .44 .44 .44 .44 $6.78 $24.00
The quotations on which these data are based reflect inter-dealer
prices without adjustment for retail markup, markdown or commission, and may not
necessarily represent actual transactions.
As of March 31, 1997 the Company had 91 shareholders of record and
approximately 599 beneficial holders of shares. The Company has never paid a
cash dividend on its Common Stock, and intends to follow a policy of retaining
earnings to finance future growth and possible acquisitions. Accordingly, the
Company does not anticipate the payment of cash dividends to the holders of
Common Stock in the foreseeable future.
Sales of Restricted Shares.
As of June 25, 1997, the Company had 5,838,871 shares of Common Stock
outstanding. Of these shares, 3,031,642 are deemed "Restricted Shares" under
Rule 144 under the Securities Act of 1933, as amended. Of the Restricted Shares,
none are eligible for immediate sale in the public market under Rule 144(k).
947,142 of the Restricted Shares will not be eligible for sale under Rule 144
until the expiration of a one year holding period from the date of their
acquisition. All but 90,000 of these Restricted Shares will be eligible for
immediate resale under Rule 144(k) after two years from their acquisition.
2,084,500 Restricted Shares held by affiliates are currently eligible for sale
subject, however, to limitations on the number of shares which can be sold
within any three-month period in reliance on Rule 144.
Options
As of June 25, 1997, the Company had 1,509,150 options and 193,713
warrants outstanding. Shares acquired upon exercise of the warrants must be held
for at least one year prior to being eligible for sale unless the cashless
exercise conversion right which applies to 85,713 of the Warrants is utilized,
in which event, shares obtained
6
upon such exercise can be resold within one year from the acquisition of the
warrants. The shares of Common Stock issuable upon exercise of the options have
been registered to permit their resale.
Registration Rights
In connection with a private placement which occurred in the first
quarter of 1997, the Company sold 857,142 shares of its Common Stock. Pursuant
to a Registration Rights Agreement executed in connection with these shares,
commencing on January 1, 1998, the holders thereof can demand that the Company
register these shares under the Securities Act of 1933, as amended. The holders
of these shares have also been granted "piggy-back" registration rights if the
Company should register any shares of its Common Stock. In addition,
"Piggy-back" registration rights have been granted to the placement agents in
connection with the shares issuable upon exercise of the 85,713 warrants which
these agents received as compensation for their efforts in assisting the Company
to complete the private placement.
Item 2. Legal Proceedings
The Company incorporates by reference Item 3 of Part I to the Company's
Form 10-KSB for the fiscal year ending on December 31, 1996 which was filed with
the SEC on April 14, 1997 except, however, the Company notes that the
malpractice litigation referenced in the Form 10-KSB has been settled within the
limits of the Company's liability insurance.
Item 3. Changes in and Disagreements with Accountants.
None.
Item 4. Recent Sales of Unregistered Securities.
Between February 27, 1997 and March 5, 1997, IAI sold 857,142 shares of
its Common Stock at a price of $5.833 per share. (The number of shares and price
per share have been adjusted to reflect the three for one stock split
accomplished by a stock dividend of two shares of Common Stock for each
outstanding share of Common Stock held by each record holder on April 7, 1997
and payable on April 21, 1997.) The shares were sold only to accredited
investors within the meaning of Regulation D promulgated under the Securities
Act of 1933, as amended. The shares were sold to several institutional investors
along with individuals. The Company relied on Rules 505 and 506 of Regulation D
in claiming exemption from registration. All purchasers were required to certify
to their assets, net worth or income to substantiate their qualification to
purchase shares in this offering.
For this offering, the Company used the services of Newby & Company of
Rockville, Maryland ("Newby") and First Colonial Securities Group, Inc. of Boca
Raton, Florida ("FCSG") to assist in the placement of shares. Commissions were
paid in the form of ten year warrants equal to ten percent of the shares placed
through each company. The warrants are exercisable at $6.4167 per share. Of the
total warrants, Newby received 51,429 and FCGS received 34,284.
7
Item 5. Indemnification of Directors and Officers
The Virginia Stock Corporation Act provides for the indemnification of
directors and officers from liability and expenses they may incur in that
capacity. A director is only entitled to indemnification if he conducted himself
in good faith, he believed that his conduct was in the best interests of the
Company, or not opposed to its best interests, and, in the case of a criminal
proceeding, he had no reasonable causes to believe his conduct was unlawful. As
a condition precedent to indemnification, the Board of Directors, special
counsel or the shareholders must determine that the standard of conduct has been
met to authorize indemnification. In no event can an officer or director be
indemnified if adjudged liable to the Company, or if in any proceeding charging
improper personal benefit, he was adjudged liable on the basis that personal
benefit was improperly received by him.
PART F/S
The following Financial Statements are filed as part of this report:
Page(s)
-------
(i) Report of Independent Certified Public 12
Accountants
(ii) Consolidated Balance Sheet as of December 31, 1996 13-14
(iii) Consolidated Statements of Operations 15
for the Years Ended
December 31, 1996 and 1995
(iv) Consolidated Statements of Changes in Stockholders' Equity 16
for the Years Ended
December 31, 1996 and 1995
(v) Consolidated Statements of Cash Flows for the Years 17
Ended December 31, 1996 and 1995
(vi) Notes to Consolidated Financial Statements 18-30
[Remainder of Page Intentionally Left Blank]
8
PART III
Item 1. Index to Exhibits
Exhibit No. Description Pages
- ----------- ----------- -----
2.1 Amended and Restated Articles of
Incorporation of the Company incorpor-
ated by reference from Exhibit No. 3.1
to the Company's Form 10-KSB for the
fiscal year ending December 31, 1996
as filed with the Securities and
Exchange Commission ("SEC") on April 14,
1997.
2.2 Amended By-Laws of the Company incor-
porated by reference from the Company's
Form S-18 filed with the SEC on
November 20, 1988.
6.1 Office lease for 18,280 square feet at
11240 Waples Mill Road, Fairfax, VA
22030 incorporated by reference from
Exhibit No. 10.1 to the Company's Form
10-KSB for the fiscal year ending
December 31, 1996 as filed with the SEC
on April 14, 1997.
6.2 The Company's 401(k) profit sharing plan
through Aetna Life Insurance and Annuity
Company incorporated by reference from
Exhibit No. 10.2 to the Company's Form
10-KSB for the fiscal year ending
December 31, 1996 as filed with the SEC
on April 14, 1997.
6.3 1986 Stock Option Plan incorporated by
reference from the Company's Form S-8
filed with the SEC on December 20, 1988.
6.4 1996 Stock Option Plan incorporated by
reference from the Company's Form S-8
filed with the SEC on June 25, 1996.
6.5 Line of Credit Agreement with First
Virginia Bank incorporated by reference
from the Company's Form 10-KSB for the
fiscal year ending December 31, 1995
filed with the SEC on April 15, 1996.
6.6 Warrant Agreement between George
DeBakey, a director, and the Company
incorporated by reference from Exhibit
10.6
9
to the Company's Form 10-KSB for the
fiscal year ending December 31, 1996
filed with the SEC on April 14, 1997.
6.7 Warrant Agreement between James C.
Wester, a director, and the Company
incorporated by reference from Exhibit
10.7 to the Company's Form 10-KSB for
the fiscal year ending December 31, 1996
as filed with the SEC on April 14, 1997.
6.8 Software Purchase Agreement between
Kenneth K. Parsons and the Company for
the purchase of CAST software
incorporated by reference from Exhibit
10.8 to the Company's Form 10-KSB for
the fiscal year ending December 31, 1996
as filed with the SEC on April 14, 1997.
6.9 Royalty Agreement between James C.
Wester and the Company in exchange for
development expense advances
incorporated by reference from Exhibit
10.9 to the Company's Form 10-KSB for
the fiscal year ending December 31, 1996
as filed with the SEC on April 14, 1997.
6.10 Common Stock Purchase Agreement dated
June 5, 1996 between the Company and
Stephen E. Petruzzo for the purchase of
International Software Services
Corporation, incorporated by reference
from the Company's Form 8-K filed with
the SEC on July 16, 1996.
6.11 Registration Rights Agreement dated
February 27, 1997 between the Company
and certain purchasers of its Common
Stock incorporated by reference from
Exhibit 10.11 to the Company's Form
10-KSB for the fiscal year ending
December 31, 1996 as filed with the SEC
on April 14, 1997.
12.1 The Company's Form 10-KSB for the fiscal
year ending December 31, 1996 which was
filed with the SEC on April 14, 1997.
10
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
INFORMATION ANALYSIS INCORPORATED
By: /s/ Sandor Rosenberg
-----------------------------------
Sandor Rosenberg, Chairman of
the Board and President
Date: June 30, 1997
-----------------------------------
By: /s/ Richard S. DeRose
-----------------------------------
Richard S. DeRose, Executive Vice
President and Treasurer
Date: June 30, 1997
-----------------------------------
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, 1996, and
the related consolidated statements of operations, changes in stockholders'
equity and cash flows for each of the two years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 audits 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 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, 1996, and
the consolidated results of operations and cash flows for each of the two years
then ended in conformity with generally accepted accounting principles.
March 7, 1997
Bethesda, Maryland Rubino & McGeehin, Chartered
12
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1996
ASSETS
Current assets
Cash and cash equivalents ............................... $ 323,886
Accounts receivable ..................................... 1,355,284
Employee advances ....................................... 34,323
Income taxes receivable ................................. 201,554
Deferred income taxes ................................... 98,662
Prepaid expenses ........................................ 104,554
Other receivables ....................................... 192,686
----------
Total current assets ................................ 2,310,949
Fixed assets
At cost, net of accumulated depreciation
and amortization of $1,205,486 .......................... 241,311
Equipment under capital leases
Net of accumulated amortization of $56,053 .............. 49,768
Capitalized software ......................................... 186,964
Investments .................................................. 10,000
Goodwill ..................................................... 70,554
Other receivables ............................................ 226,694
Other assets ................................................. 24,980
----------
Total assets ................................................. $3,121,220
==========
The accompanying notes are an integral part of the
consolidated financial statements
13
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1996
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable ...................................... $ 413,942
Accrued payroll ....................................... 262,754
Other accrued liabilities ............................. 58,896
Current portion of long-term debt ..................... 120,300
Current maturities of capital
lease obligations ................................. 18,229
Deferred rent ......................................... 852
-----------
Total current liabilities ......................... 874,973
Long-term debt ............................................. 90,380
Capital lease obligations, net of
current portion ....................................... 41,334
Deferred income taxes ...................................... 27,020
-----------
Total liabilities ................................. 1,033,707
-----------
Common stock, par value $0.01
1,000,000 shares authorized; 677,178
shares issued ......................................... 6,772
Paid in capital in excess of par value ..................... 1,139,240
Retained earnings .......................................... 1,795,814
Less treasury stock; 167,179 shares at cost ................ (854,313)
-----------
Total stockholders' equity ........................ 2,087,513
-----------
Total liabilities and stockholders' equity ................. $ 3,121,220
===========
The accompanying notes are an integral part of the
consolidated financial statements
14
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31,
--------------------------------
1996 1995
------------ ------------
Sales
Professional fees ....................... $ 10,803,341 $ 15,436,643
Software sales .......................... 415,504 260,253
------------ ------------
Total sales ........................ 11,218,845 15,696,896
------------ ------------
Cost of sales
Cost of professional fees ............... 8,675,377 12,511,118
Cost of software sales .................. 260,245 224,477
------------ ------------
Total cost of sales ................ 8,935,622 12,735,595
------------ ------------
Gross profit ................................. 2,283,223 2,961,301
Selling, general and administrative expenses . 2,496,591 2,958,722
------------ ------------
(Loss) income from operations ................ (213,368) 2,579
Other income and (expenses)
Interest income ......................... 12,716 7,554
Interest expense ........................ (35,644) (110,748)
------------ ------------
Loss before provision for income taxes ....... (236,296) (100,615)
Benefit for income taxes ..................... (76,622) (25,982)
------------ ------------
Net loss ..................................... $ (159,674) $ (74,633)
============ ============
Loss per common and common
equivalent share ........................ $ (0.26) $ (0.15)
Weighted average common and common
equivalent shares outstanding ........... 624,139 478,561
The accompanying notes are an integral part of the
consolidated financial statements
15
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1996 and 1995
Shares of
Common Additional
Stock Common Paid in Retained Treasury
Outstanding Stock Capital Earnings Stock Total
-------- --------- ---------- ---------- --------- ----------
Balances, December 31, 1994 ................. 621,178 $ 6,212 $ 771,923 $2,030,121 $(720,150) $2,088,106
Exercise of stock options .............. 54 296 296
Purchase of treasury stock ............. (80,913) (80,913)
Net loss ............................... (74,633) (74,633)
-------- --------- ---------- ---------- --------- ----------
Balances, December 31, 1995 ................. 621,232 6,212 772,219 1,955,488 (801,063) 1,932,856
Exercise of stock options and warrants . 49,696 497 209,580 210,077
Tax benefit of stock option compensation 132,504 132,504
Stock issued for ISSC acquisition ...... 6,250 63 24,937 25,000
Purchase of treasury stock ............. (53,250) (53,250)
Net loss ............................... (159,674) (159,674)
-------- --------- ---------- ---------- --------- ----------
Balances, December 31, 1996 ................. 677,178 $ 6,772 $1,139,240 $1,795,814 $(854,313) $2,087,513
======== ========= ========== ========== ========= ==========
The accompanying notes are an integral part of the
consolidated financial statements
16
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
--------------------------------
1996 1995
------------ ------------
Cash flows from operating activities
Cash received from customers ................................ $ 13,389,621 $ 16,345,476
Cash paid to suppliers and employees ........................ (12,336,956) (15,279,871)
Interest received ........................................... 12,716 7,554
Interest paid ............................................... (35,644) (110,748)
Income taxes received (paid) (net) .......................... -- 57,293
------------ ------------
Net cash provided by operating expenses ................. 1,029,737 1,019,704
------------ ------------
Cash flows from investing activities
Purchase of ISSC, net of cash received ...................... (47,422) --
Acquisition of furniture and equipment ...................... (91,471) (79,983)
Proceeds from sale of equipment ............................. -- 25,687
Increase in capitalized software ............................ (186,964) --
------------ ------------
Net cash used in investing activities .................... (325,857) (54,296)
------------ ------------
Cash flows from financing activities
Net payments under bank revolving line of credit ............ (550,000) (842,000)
Reduction of debt related to acquisition of ISSC ............ (26,276) --
Principal payments on debt and capital leases ............... (17,561) (20,986)
Repurchase of common stock .................................. (53,250) (80,913)
Proceeds from exercise of incentive stock options ........... 210,077 296
------------ ------------
Net cash used by financing activities .................... (437,010) (943,603)
------------ ------------
Net increase in cash and cash equivalents ......................... 266,870 21,805
Cash and cash equivalents at beginning of the period .............. 57,016 35,211
------------ ------------
Cash and cash equivalents at end of the period .................... $ 323,886 $ 57,016
------------ ------------
Reconciliation of net loss to cash provided by operating activities
Net loss .......................................................... $ (159,674) $ (74,633)
Adjustments to reconcile net loss to net cash provided
by operating activities
Depreciation and amortization ............................... 192,035 173,530
Tax benefit of stock option compensation .................... 132,504 --
Gain/loss on sale of fixed assets and investments ........... (231) (1,113)
Changes in operating assets and liabilities
Accounts receivable ..................................... 2,170,776 648,580
Other receivables and prepaid expenses .................. (180,483) (40,275)
Accounts payable and accrued expenses ................... (939,352) 292,528
Deferred rent ........................................... (10,224) (10,224)
Income tax receivable/liability ......................... (175,614) 31,311
------------ ------------
Net cash provided (used) by operating activities .................. $ 1,029,737 $ 1,019,704
============ ============
The accompanying notes are an integral part of the
consolidated financial statements
17
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, Allied Health & Information Systems, Inc. (AHISI)
and International Software System Corporation (ISSC). Upon consolidation, all
material intercompany accounts, transactions and profits are eliminated. AHISI
commenced operations in 1991; ISSC was acquired in 1996. Goodwill, resulting
from the Company's acquisition of ISSC is being amortized over a two-year period
which is the expected term of ISSC's contracts.
Investments in companies less than 20% owned are reported at cost less
allowances for permanent decline in value. Income is recognized when dividends
are declared. No dividends were declared in 1996 or 1995.
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
Revenue from cost-plus-fixed-fee contracts is recognized on the basis of direct
costs plus indirect costs incurred and an allocable portion of the fixed fee.
Revenue from fixed-price contracts is recognized on the percentage-of-completion
method, measured by the cost-to-cost method for each contract, with costs and
estimated profits recorded as work is performed. Revenue from time and material
contracts is recognized based on fixed hourly rates for direct hours expended.
The fixed hourly rate includes direct labor, indirect expenses and profit.
Material and other specified direct costs are recorded at actual cost.
Contract costs include all direct material and labor costs and those indirect
costs related to contract performance. Provisions for estimated losses on
uncompleted contracts are made in the period in which losses are determined.
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.
18
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly
liquid investments with maturities of sixty 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.
Software Development Costs
The Company has capitalized costs related to the development of a software
product, Computer Aided Software Translator (CAST). 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 will be computed and
recognized for the product when available for market based on the product's
estimated total sales or economic life. Capitalized costs and amortization
periods are management's estimates and may have to be modified due to inherent
technological changes in software development.
Deferred Rent
Rental expense on operating leases is charged to operations over the life of the
lease using the straight-line method. Differences between the amounts charged
and the amounts paid are recorded as deferred rent.
Earnings Per Share
Earnings per common equivalent share is based on the weighted average number of
common shares and common share equivalents outstanding during the year. When
dilutive, stock options are included as share equivalents using the modified
treasury stock method. Under that method, earnings per share data are computed
as if the options and warrants were exercised at the beginning of the period (or
at the time of issuance, if later) and as if the funds obtained thereby were
used to purchase common stock during the period. Fully diluted earnings per
share amounts have not been presented because they are not materially dilutive.
19
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes
Deferred income tax assets and liabilities are recognized for the estimated
future tax effects of the differences between the financial statement and tax
bases of assets and liabilities given the provisions of enacted tax laws. The
provision for income taxes consists of the income tax for the year and the
change in the deferred tax liability or asset.
Fair Market Value of Financial Instruments
The Company's financial instruments include trade receivables and payables,
other receivables and notes payable. Management believes the carrying value of
financial instruments approximates their fair market value, unless disclosed
otherwise in the accompanying notes.
Reclassification
Certain accounts in the prior year financial statements have been reclassified
for comparative purposes to conform with the presentation in the current year
financial statements.
2. INDUSTRY SEGMENT AND CREDIT CONCENTRATION
During 1996 and 1995, the Company's operations included two reportable segments:
computer applications and healthcare. The computer applications segment includes
those operations involved in developing and marketing computer application
software systems and providing programming services. The Company and its
subsidiary, ISSC, operate in this segment. Approximately 92% of this segment's
revenue in 1996, and 82% in 1995, came from contracts and subcontracts with
departments and agencies of the federal government. In 1996, the Company was
informed that it was unsuccessful in obtaining the renewal of a contract with
the United States Customs Service. Approximately 58% of this segment's revenue
in 1996 and 65% in 1995, came from the contract with the United States Customs
Service.
The healthcare segment, operated by AHISI, is involved in providing the services
of certified physician assistants, nurses and medical doctors to healthcare
facilities operated by third parties in conjunction with state and local
governments, and the federal government. The Company has phased out the
activities of this business segment and anticipates that no future revenue will
be generated from this business segment after 1996.
20
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INDUSTRY SEGMENT AND CREDIT CONCENTRATION (CONTINUED)
Summarized financial information by business segment for 1996 and 1995 is as
follows:
1996 1995
---- ----
Net Sales
Computer Applications $11,172,702 $14,012,017
Healthcare 46,143 1,684,879
Income (loss) from operations (pre-tax)
Computer Application (95,594) 333,198
Healthcare (117,774) (330,619)
Identifiable assets
Computer Applications 2,007,393 3,361,013
Healthcare 315,868 494,616
Capital Expenditures
Computer Applications 91,471 79,354
Healthcare - 629
Depreciation and Amortization
Computer Applications 180,569 155,289
Healthcare 11,466 18,241
Operating income by business segment excludes interest income, interest expense
and miscellaneous income and expense items that could not be identified with
either segment. Other than those acquired by AHISI, all furniture, equipment,
and capital leases and their related depreciation and amortization are
considered the assets and expenses, respectively, of the computer application
segment. Capitalized software costs and goodwill and their related amortization
are also considered assets and expenses of the computer application segment. In
addition, accounts receivable are considered identifiable assets of the
respective segment. Cash and cash equivalents, and the remaining other assets
are considered corporate assets. There were no significant intersegment sales or
transfers during 1996 and 1995.
21
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITION
On June 5, 1996, the Company completed an acquisition of the outstanding common
stock of International Software Services, Inc. (the predecessor to ISSC) for
$370,289, of which $133,333 was paid (in cash and stock) at closing and $236,956
of which is payable by June 1998 to the former owner (see Note 6). The business
acquisition was accounted for as a purchase. The operations of ISSC since the
date of acquisition are included in the consolidated statement of operations of
the Company for the year ended December 31, 1996. The cost of the acquisition
exceeded the fair value of the net assets acquired by $99,605. The excess is
being amortized as goodwill on a straight-line basis over a two-year period
which is the expected term of ISSC's contracts.
The following summarized pro forma (unaudited) information assumes the
acquisition had occurred on January 1, 1995.
1996 1995
---- ----
Net sales As reported $11,218,845 $15,696,896
Pro forma $11,680,000 $16,460,000
Net Income As reported $ (159,674) $ (74,633)
Pro forma $ (75,000) $ (73,000)
Primary loss As reported $ (0.26) $ (0.15)
per share Pro forma $ (0.12) $ (0.15)
4. RECEIVABLES
Accounts receivable at December 31, 1996, consist of the following:
Billed - Federal government $124,598
Billed - prime contractors 848,245
Billed - commercial 236,941
----------
Total billed 1,209,784
----------
Unbilled - Federal government 2,482
Unbilled - prime contractors 110,726
Unbilled - commercial 32,292
----------
Total unbilled 145,500
----------
Total accounts receivable $1,355,284
==========
22
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. RECEIVABLES (CONTINUED)
Unbilled receivables are for services provided through the balance sheet date
which are expected to be billed and collected within one year.
Included in other receivables at December 31, 1996, are the following:
Receivables from former customers net of
present value discount and allowance for
uncollectibility totaling $274,880 $ 258,809
Receivable from employee, due in monthly
payments of $386 plus interest at 8.75%.
Final payment due in 2001. 27,885
Other non-trade receivables expected to be
collected by December 31, 1997 132,686
--------
Total 419,380
Less current portion (192,686)
--------
Non current portion $ 226,694
========
5. FIXED ASSETS
A summary of fixed assets and equipment under capital leases at December 31,
1996, is as follows:
Furniture and equipment $ 1,474,939
Leasehold improvements 40,666
Motor vehicles 37,013
-----------
1,552,618
Accumulated depreciation and
amortization (1,261,539)
-----------
Total $ 291,079
===========
23
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. FINANCING
At December 31, 1996, the Company had a revolving line of credit with a bank
providing for demand or short-term borrowings of up to $1,500,000. This line
expires on June 19, 1997. Drawings against this line are based on varying
percentages of the Company's accounts receivable balances depending on the
source of the receivables and their age. Interest on outstanding amounts is
payable monthly at the bank's prime rate (8.75% at December 31, 1996) plus 1/2%.
The lender has a first priority security interest in the Company's receivables
and a direct assignment of its major U.S. Government contracts. The line of
credit, among other covenants, requires the Company to comply with certain
financial ratios. At December 31, 1996, there was no outstanding balance on the
line.
Additionally, at December 31, 1996, the Company is liable to the former owner of
ISSC (see Note 3) in the amount of $210,680. This liability is payable as
follows: 1997 - $120,300; 1998 - $90,380.
7. COMMITMENTS AND CONTINGENCIES
Capital Leases
The future minimum payments under capital leases for equipment and the present
value of the minimum lease payments are as follows:
Year ending December 31
-----------------------
1997 $ 24,318
1998 27,367
1999 15,132
--------
Total minimum lease payments 66,817
Less amount representing interest (7,254)
--------
Total obligation representing principal 59,563
Less current portions of capital lease obligations (18,229)
--------
Long-term portion of capital lease obligations $ 41,334
========
24
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Operating Leases
Rent expense was $236,466, and $263,031 for the years ended December 31, 1996
and 1995, respectively.
The future minimum rental payments to be made under noncancelable operating
leases, principally for facilities, are as follows:
Year ending December 31
-----------------------
1997 $284,512
1998 295,709
1999 304,580
2000 313,717
2001 323,129
2002 through 2004 675,630
----------
Total minimum rent payments $2,197,277
==========
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 Company entered into a new
lease in February 1997 with a seven-year term ending in 2004. The minimum lease
payments are included in the above amounts.
The leases are secured by irrevocable letters of credit for $26,982. As of
December 31, 1996, none of the letters of credit have been used.
Royalties
In August 1996, the Company entered into an agreement to purchase the software
product CAST (see Note 1). As part of the agreement, royalties of 10% of the
CAST licensing fees collected by the Company will be paid to the seller. The
aggregate amount of the royalties pursuant to this agreement will not exceed
$1,000,000.
Also in August 1996, the Company entered into an agreement whereby, in
consideration of an expense sharing arrangement, the Company will pay royalties
of 20% of the CAST licensing fees collected by the Company.
The royalties will not exceed $150,000.
25
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In October 1993, the Company purchased ownership rights to a software product
called Migrator. Included in the purchase price is an obligation for royalty
payments of 10% on all Migrator licensing fees collected during the four year
period following the sale. As of December 31, 1996, no license fees have been
collected.
Government Contracts
Company sales to departments or agencies of the United States Government are
subject to audit by the Defense Contract Audit Agency (DCAA). Audits by DCAA
have not been performed for any years. Management is of the opinion that
disallowances, if any, by DCAA for unaudited years will not result in any
material adjustments to the financial statements.
8. INCOME TAXES
The provision for income taxes consists of the following:
December 31
-----------
1996 1995
---- ----
Current (benefit) expense
Federal ................................. $(67,021) $ 9,996
State ................................... (14,846) 2,216
------- -------
(81,867) 12,212
------- -------
Deferred expense (benefit)
Federal ................................. 4,294 (31,268)
State ................................... 951 (6,926)
------- -------
5,245 (38,194)
------- -------
Benefit for income taxes ..................... $(76,622) $(25,982)
======= =======
26
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
The items that give rise to the deferred tax expense (benefit) shown above are
as follows:
December 31
-----------
1996 1995
---- ----
Depreciation .................................... $ 8,020 $ 9,500
Vacation expense ................................ (2,775) 13,106
Bad debt expense ................................ -- (60,800)
------- --------
Tax effects of temporary differences .......... $ 5,245 $(38,194)
======= ========
The tax effect of significant temporary differences representing deferred tax
assets and liabilities at December 31, 1996, are as follows:
Vacation ................................................. $37,862
Bad debt expense ......................................... 60,800
-------
Deferred tax asset ..................................... $98,662
=======
Depreciation - deferred tax liability ........................ $27,020
=======
The provision for income taxes is at an effective rate different from the
federal statutory rate due principally to the following:
December 31
-----------
1996 1995
---- ----
Loss before taxes .................................. $(236,296) $(100,615)
======= =======
Income taxes (benefit) on above amount
at federal statutory rate ...................... (80,341) (34,209)
State income taxes net of federal benefit .......... (10,870) (4,648)
Effect of graduated tax brackets, change
in estimates, and other non deductible
items .......................................... 14,589 12,875
------- -------
Benefit for income taxes ........................... $ (76,622) $ (25,982)
======= =======
27
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCK OPTIONS AND WARRANTS
The Company has two stock option plans, the second plan becoming effective June
25, 1996. The combined plans provide for the granting of stock options to
certain employees, directors and consultants. The maximum number of shares for
which options may be granted under the plans is 200,000 (increased to 250,000 in
January 1997). 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 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 dates consistent with the method of Statement
of Financial Accounting Standards (SFAS) No. 123, the Company's net income and
earnings per share would have been:
1996 1995
---- ----
Net loss As reported $ (159,674) $ (74,633)
Pro forma $ (424,000) Not applicable
Loss per share As reported $ (0.26) $ (0.15)
Pro forma $ (0.68) Not applicable
The fair value of the options granted in 1996 is estimated on the date of the
grant using the Black-Scholes options - pricing model assuming the following: no
dividend yield, risk-free interest rate of 6 %, expected volatility of 40
percent, and an expected term of the options of two years.
At December 31, 1996, options to purchase stock under this plan were outstanding
to employees as follows:
Number of shares Exercise price per share
---------------- ------------------------
32 $ 3.00
168,200 4.00
10,200 4.50
4,500 5.00
200 5.50
1,500 11.75
10,000 14.50
28
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCK OPTIONS AND WARRANTS (CONTINUED)
Of these 194,632 options, 134,632 options are exercisable immediately, 50,000
options at $4 per share are exercisable over two years, and 10,000 options at $4
per share are exercisable when certain revenue amounts are realized.
Transactions involving the plan were as follows:
December 31
-----------
1996 1995
------------------- ------------------
Weighted Weighted
Average Average
Shares Price Shares Price
------ ----- ------ -----
Outstanding, beginning of year 37,828 $ 4.73 43,443 $ 4.77
Granted 215,500 $ 4.54 - -
Exercised (39,696) $ 4.10 (54) $ 5.50
Canceled (19,000) $ 4.74 (5,561) $ 5.01
------- -------
Outstanding, end of year 194,632 $4.65 37,828 $ 4.73
======= =======
The board of directors has also granted warrants to directors and employees.
During 1996, no warrants to acquire shares of common stock were granted to such
persons. The total warrants exercised in 1996 were 10,000 and warrants expired
were 5,000. As of December 31, 1996, outstanding warrants are 13,000. The
purchase price for shares issued upon exercise of these warrants range from
$5.00 to $7.50 per share. These warrants are exercisable immediately.
10. 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. Each participant can elect to have up to 6% of their salary
reduced and contributed to the plan. The Company is required to make a matching
contribution of 25% 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, 1996 and 1995, were $47,029 and $44,549,
respectively.
The Company does not provide post employment benefits and, as a result,
Statement of Financial Accounting Standards No. 106 does not have any impact on
these financial statements.
29
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. LITIGATION
At December 31, 1996, the Company is involved in litigation with a former inmate
at a correctional facility where the Company has provided medical services. The
case is a malpractice claim against the Company as well as other related
parties. The plaintive seeks $1,550,000 in damages. The Company has insurance to
cover claims of up to $1 million per occurrence, and there are other defendants
who will likely contribute to either a settlement or a judgment, if any. In the
opinion of management, there will be no material adverse effect on the Company's
financial statements as a result of this litigation. No amounts have been
accrued in the financial statements related to this matter.
12. SUBSEQUENT EVENTS
Common Stock
Subsequent to December 31, 1996, the board of directors increased the authorized
shares of the Company's common stock from 1,000,000 to 10,000,000 shares and
authorized a three for one split of its outstanding common stock.
Private Placement Memorandum
In March 1997, the Company completed a private placement memorandum which raised
$5,000,000 in exchange for 285,714 shares of the Company's common stock. The
funds will be utilized for the further development of the Company's CAST
software product (see Note 1) and the pursuit of CAST business opportunities
during 1997 and 1998.
30
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 Commission
December 31, 1996 File No. 33-9390
----------------- ----------------
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)
(Registrant's telephone number,
including area code) (703) 383-3000
--------------
Securities registered pursuant to Section 12(b) of the Act:
NONE
----
Securities registered pursuant to Section 12(g) of the Act:
NONE
----
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 $11,218,845.
The aggregate market value of the Registrant's Common Stock held by
nonaffiliates as of December 31, 1996 was approximately $16,567,539.
As of December 31, 1996 the Registrant had 509,999 shares of Common
Stock outstanding.
Item 1. Business
General
- -------
Since its incorporation in 1979, Information Analysis Incorporated
("IAI" or the "Company") has been engaged in various facets of the computer and
information field. IAI has continually adapted the nature of its services and
the types of its products it markets to the changing information technology
needs of its client and prospective client base. Today, IAI's activities are
primarily related to software conversions, information systems reengineering,
systems integration, application development, hardware and software consulting
services, software sales and support services. Software sales are limited to a
few types of products which IAI believes it can successfully sell based upon its
familiarity with a particular market niche and potential purchasers for those
products.
Over the last several years, in order to broaden its revenue base and
secure projects with more long range potential, the Company has sought to
acquire rights to software products or tools which can either be licensed to
others or which can provide substantial value-added benefits to IAI's client
base in connection with IAI's professional services. One such product which the
Company has recently acquired is Computer Aided Software Translator, commonly
referred to as CAST. CAST was initially developed to serve as a software
reengineering computer language translator which allows its users to migrate
from older types of computer languages to more modern day languages. Because of
the reengineering functionality inherent in CAST, this software program is also
able to remedy, primarily on an automated basis, the Year 2000 problem which
many computer systems now confront.
The Year 2000 problem encompasses a deficiency inherent in many
existing software applications whereby a two-digit date representation has been
used to depict the year with the century component undefined. This means that
many computer systems will not recognize or be able to process transactions in
which reference to years after 1999 is required. The end result of this
limitation is that any application software which must identify, manipulate, or
calculate date-related values outside of the 1900-1999 date range will fail.
This failure can play havoc with the most basic of programs such as post 1999
payrolls, invoicing, and insurance benefit claims. Because of the potential for
failure, numerous companies are, or will be, assessing the nature and extent of
their Year 2000 problem. Likewise, companies, such as IAI, are attempting to
access the Year 2000 marketplace through remedial products and services.
Because of the prospects associated with CAST, in 1996 the Company
commenced its transition from primarily a professional services orientation to
that of a product provider for the Year 2000 remediation market. This required
and is requiring a significant investment in marketing and technical resources
during the year which will continue through 1997. The anticipated returns from
this investment will not be realized until companies commence their Year 2000
remediation efforts, assuming CAST becomes a tool which is used within the Year
2
2000 arena. Notwithstanding this transition, the Company has continued to
maintain its traditional business base as a professional services provider. The
Company anticipates that information technology services of the nature it has
provided in the past will remain as part of the Company's business but if its
objectives related to CAST are achieved, the professional services component of
its business should diminish as an overall percentage of its revenues. This base
business helps support and cover the Company's general and administrative
expenses and provides a level of security should the Company's prospects related
to CAST not materialize.
CAST
CAST is a core tool which was primarily designed for software
reengineering. Remediation of the Year 2000 problem in and of itself is a
software reengineering effort. The capacities of CAST are ideal for application
in the Year 2000 remediation arena. CAST enables a computer user to determine
the technical complexity of computer code, such as that in which the Year 2000
problem is engrained, and then provides an automated and consistent tool which
can reengineer the software so as to correct the two digit reference to years.
The design and structure of CAST has evolved over 17 years based upon a
rigorous understanding of multiple languages, databases, platforms, operating
environments and unique system characteristics. CAST's genesis was to serve as
an automated software migration tool to enable software users to migrate from
one computer language to another. This application is best suited for software
reengineering efforts primarily associated with systems modernization and/or
downsizing from mainframe computers to file servers. For this reason, IAI
anticipates that CAST will serve as a revenue producing vehicle for IAI even
after most systems have met their Year 2000 challenge.
CAST itself is roughly 500,000 lines of modularized code which uses
highly sophisticated algorithms to translate the source environment into a
Meta-code which, if required, can be translated into a target environment. This
process involves a large, rigorous set of logic and decision rules which analyze
and account for each individual data element and logic structure in a dynamic,
virtual, logical construct before translation begins. The constraints and
migration rules which guide the conversion process are established and
controlled by a series of tables which define the relationships between the
variables, environments and the logical constructs in the starting versus target
environments. The design and use of these tables can also allow the user to
modify the target environment functionality in the translation.
Another benefit of CAST is that it also creates system documentation
and an audit trail of the conversion process. This can be generated in a variety
of formats based on user preference. The functionality of CAST results in a
significant reduction of the time required for system testing and re-integration
and mitigates operational and liability risks associated with manual approaches.
3
Overall, CAST provides its users with the following capabilities:
o To translate from one operating system to another, such as from a
closed mainframe to an open UNIX environment
o To translate from a programming language that no longer meets a
company's needs to a more modern language or newer version of a
current language
o To alter a database management system to a more versatile and
useful system without loosing any of the valuable data stored in
the database system
o To alter a teleprocessing monitor environment to a newer, more
supportable environment
o To perform any combination of the above options while providing
the information manager with the flexibility to leverage and
manage the risk profile present within all conversion
environments
As for the application of CAST within the Year 2000 remediation
environment, companies can undertake a varied approach towards remediation
coupled with migration. In this regard, Year 2000 remediation can occur absent
further reengineering. Alternatively, a two step strategy of remediating Year
2000 impacts can occur followed by a later full translation of the Year 2000
compliant software applications to a new language, database or platform of
choice. Lastly, remediation of Year 2000 can occur while simultaneously
translating software into a new language, database or platform.
IAI is developing a multiple pronged strategy for marketing CAST. As
part of this strategy, the Company anticipates licensing CAST to systems
organization which are in the process of developing Year 2000 remediation
solutions for use by their client bases. The Company believes that many of these
sellers will also use CAST as a service provider in a maintenance capacity to
their clients. The Company is also pursuing solution providers which will be
offering Year 2000 remediation services to their client bases both within and
outside of Year 2000 "factories" which the Company believes will be established
to address Year 2000 efforts from a single site with multiple employees
dedicated to assessing and remediating non- Year 2000 compliant code. It is
the Company's objective to receive fees from these licenses tied to the number
of lines of code which are processed. This part of the Company's strategy will
allow the Company to increase market penetration by utilizing the sales forces
of the companies to whom Cast is licensed.
The Company will also seek strategic relationships to undertake Year
2000 services in conjunction with others. The Company anticipates serving in a
subcontractor capacity to companies undertaking modernization and remediation
efforts to large system users such as federal agencies. The Company may from
time to time seek its own direct engagements with end-users, as well. The
Company believes such engagements will constitute a primary source of revenue
after Year 2000 remediation efforts are resolved as many companies direct their
attention to downsizing and language modernization, areas where CAST also
possesses functionality.
4
For the benefit of all CAST users, the Company is planning on
developing a seven day, 24 hour per day, help desk. Therefore, irrespective of
the manner in which CAST is channeled into the marketplace, the Company will
maintain primary responsibility for supporting the product. Under certain
circumstances, this product support may also develop into an additional source
of CAST derived revenue.
The Company believes that substantial competition will arise within the
Year 2000 marketplace. It is the Company's aim to distinguish itself from most
of the competition in two principal respects. First, many Year 2000 solutions,
once the non-compliant code is identified, will require manual remediation
undertaken in a work bench environment. CAST, on the other hand, will
substantially automate the remediation process. Second, CAST, because it has
been developed to translate multiples languages, can be used as a more extensive
remediation tool for a number of different platforms and database environments.
Many other tools will be narrowly focused, such as IBM COBOL, and will not
provide any reengineering capabilities outside this focus.
Computer Related Services
- -------------------------
In 1996, the Company continued to provide a broad range of consulting
services to its clients. These services included transition engineering,
feasibility and requirements analysis, systems planning analysis and design,
data base design and management, software development, and project management.
Primarily as a result of consulting services provided to its clients, the
Company has developed expertise for particular applications in areas such as
financial information, systems for the U.S. Customs Service, personnel systems,
and state-of-the-art applications utilizing artificial intelligence and expert
systems. The Company continues to maintain, through its personnel, proficiency
in a multiple number of computer languages, hardware and software products, and
software applications in both the local area network and mainframe environments.
Traditionally, IAI's clients have spanned a wide range of enterprises
in the private sector along with government agencies. This was also the case in
1996 as IAI provided services to companies such as The Arbitron Corporation,
Lockheed Martin, Commonwealth Aluminum, Computer Sciences Corporation, and Mass
Mutual. In 1996, governmental clients included the U.S. Army Personnel Command,
General Services Administration, U.S. Air Force, U.S. Customs Service ("USCS"),
Veterans Benefit Administration, Department of Energy, and the U.S. Navy. In
1996, IAI's largest client remained the USCS. Although the Company's contract
with USCS expired on April 30, 1996, the Company continued to provide services
throughout the year to USCS in the capacity as a subcontractor. The total
revenue derived in 1996 directly and indirectly from and through USCS
constituted 57.9% of the Company's revenues.
5
In 1996, approximately 91% of the Company's revenues was derived
through government contracts either in IAI's capacity as a prime contractor or
subcontractor. After expiration of the contact with USCS, all of the revenue
from government contracts was obtained in the Company's capacity as a
subcontractor to other government contractors.
Software Sales
- --------------
In 1996, IAI continued to maintain marketing rights to the proprietary
software product, Jetform. Jetform is an electronic forms solution which allows
users to electronically create and complete any form on multi-platform
environments. IAI serves as a reseller of Jetform, specifically in the Federal
government market where buyers can purchase the product through the General
Services Administration schedule.
Total Jetform related revenue in 1996 was $415,504. This represented both sales
of the product and accompanying services such as training and forms development.
The Company sold additional Jetform product to over one dozen Federal agencies.
Employees
- ---------
As of December 31, 1996, the Company employed 74 full-time and
part-time individuals. In addition, the Company maintained independent
contractor relationships with seven individuals for computer services.
Approximately 90% 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.
Marketing
- ---------
For its information technology services other than CAST, the Company
relies upon a marketing staff of one full time marketing executive combined with
program managers and other senior management to market its services. These
individuals principally concentrate on the marketing of professional services
and software products. In addition to these individuals, the Company's technical
staff is encouraged to assist in marketing the Company's various services.
Backlog
- -------
As of December 31, 1996, the Company estimated its backlog at
approximately $7,019,881. Of the entire backlog, the Company projects
approximately 95% will be completed by December 31, 1997. 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.
6
Competition
- -----------
The computer services industry is highly competitive. Many of the
Company's competitors are larger and have greater financial resources than the
Company. Smaller firms also present significant competition. The Company
competes for government and commercial contracts, either directly or as a
subcontractor, on the basis of competitive procurements. The Company believes
that its long-term success depends upon its ability to consistently offer
quality services at competitive prices. This approach is designed to satisfy
current client requirements and to attract new business opportunities.
Principal Clients
- -----------------
In 1996 the USCS, under its contract with IAI and under subcontracts to
IAI, remained the principal client of the Company. In this regard, the revenue
from USCS accounted for 57.9% of IAI revenue. The USCS contract expired
September 30, 1995, but was extended through April 30, 1996. IAI continues to
provide services to USCS as a subcontractor to several prime contractors. IAI
anticipates this revenue will continue indefinitely. The only other significant
client for IAI was the U.S. Army through IAI's subcontract with PRC Inc. which
accounted for 12.9% of revenue.
Item 2. Property
Through the end of 1996, the Company's offices were located at 2222
Gallows Road, Dunn Loring, Virginia. In March 1997, the Company moved its
offices to 11240 Waples Mill Road, Suite 400, Fairfax, VA. 22030. At its new
offices, IAI holds a lease for 18,280 square feet. This lease expires on
February 28, 2004.
Item 3. Legal Proceedings
The Company is currently engaged in three litigation cases of a
material nature. One case was filed in the fourth quarter of 1995 by the Company
through its subsidiary, Allied Health and Informations Systems, Inc. ("AHISI"),
in the United States District Court for the District of Delaware against Prison
Health Services, Inc. ("PHS"). In this case, the Company is seeking payment of
accounts receivable of approximately $185,000 and other damages emanating from
the subcontract PHS granted to the Company's subsidiary to provide certain
healthcare services in Maryland prisons. PHS has counterclaimed for
reimbursement of overpayments. The Company is currently of the opinion that it
will prevail in this litigation and that the amount due the Company far exceeds
any overpayments, if any, made to PHS.
7
In the fourth quarter, 1994, a medical malpractice claim was filed
against AHISI and others resulting from the failure to properly diagnose a
bulging disk that eventually left the plaintiff a quadriplegic. This case was
initially filed as a health claims arbitration case under Maryland's malpractice
law and was recently transferred to the Circuit Court of Washington County,
Maryland. Although the Company is of the opinion that the plaintiff may be in a
position to recover substantial damages, the extent of AHISI's liability should
be covered by malpractice insurance.
In April, 1995, a case was filed against AHISI and others in the United
States District Court of Maryland in which a woman is seeking unspecified
damages emanating from alleged sexually harassing conduct of a former AHISI
employee. The claimant was not an AHISI employee but was employed by another
contractor at the Maryland correctional institution at which AHISI was also a
contractor. Claims in this lawsuit against AHISI arising under federal law have
been dismissed. Common law claims and claims under Maryland law remain. Based
upon the law and the facts surrounding this case, the Company does not believe
it will have any liability of a material nature to the claimant.
Item 4. Submission of Matters to a Vote of Security Holders
In the fourth quarter of 1996, the Company had its annual meeting of
shareholders at which Sandor Rosenberg, George T. DeBakey, James C. Wester, John
D. Sanders and Bonnie K. Wachtel were elected as directors.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholders' Matters
The Company's Common Stock is traded in the over-the-counter market.
The range of bid price quotations for the last two years on a quarter-by-quarter
basis is as follows:
=========================================================== ============================================
1995 1996
=========================================================== ============================================
Qtr. 1st 2nd 3rd 4th 1st 2nd 3rd 4th
- ------------------- -------- --------- -------- ---------- ---------- ---------- ---------- ------------
Low Bid 4 4 4 4 4 4 4 4
- ------------------- -------- --------- -------- ---------- ---------- ---------- ---------- ------------
High Bid 4 4 4 4 4 4 4 61
========================================================================================================
The quotations on which these data are based reflect inter-dealer
prices without adjustment for retail markup, markdown or commission, and may not
necessarily represent actual transactions. The above bids have not been adjusted
to reflect a three for one stock split which was declared in January, 1997.
As of December 31, 1996, the Company had 575 stockholders of record.
The
8
Company has never paid a cash dividend on its Common Stock, and intends to
follow a policy of retaining earnings to finance future growth and possible
acquisitions. Accordingly, the Company does not anticipate the payment of cash
dividends to the holders of Common Stock in the foreseeable future.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations 1996 Compared to 1995
- -------------------------------------------
The Company's overall 1996 revenues declined by $4,478,051, or 28.5%,
to $11,218,845 from $15,696,896 in 1995. Of this decline, $2,839,315 was
attributed to computer and software related services and $1,638,736 was
attributed to AHISI. By the end of 1995, the Company had for the most part
phased out AHISI's business but for one small contract. In 1996, AHISI only
produced $46,143 of revenue.
In 1996, the Company's gross profit margin increased to 20.4% from
18.8% in 1995. This improvement resulted from the Company's ability to achieve
better margins on its contracts and the cessation of AHISI's contracts from
which lower margins were being realized. Selling, general and administrative
expenses as a percentage of revenue, however, increased to 22.3% in 1996 from
18.8% in 1995. The Company believes two factors account for this increase.
First, the Company began to incur significant expenses from its CAST-related
activities as it transitioned to a product dominated company. Second, the
Company incurred higher than usual legal fees from its unsuccessful protest of
the award to another bidder of the USCS contract the Company maintained through
April 30, 1996.
As a result of the above factors, after considering the effect of
interest and taxes, in 1996 the Company sustained a loss of $159,674. This loss
was $85,041 higher than 1995's loss of $74,633. Solely from operations without
giving any effect to interest and taxes, IAI's loss in 1996 was $213,368, a
reversal of $215,947 from 1995's $2,579 gain from operations.
In 1997 and thereafter, the Company does not foresee any material
changes in its revenue generation capacity from its non-CAST activities. Because
a majority of the Company's marketing efforts will be devoted to CAST, the
Company believes that its traditional revenue sources will remain static at
best. The Company remains optimistic, however, that the prospects are favorable
for a material increase in revenue primarily attributed to CAST licenses. Even
so, no assurances can be provided that the objectives the Company has
established for CAST will be realized. The Company recognizes that CAST is only
one of several competing products that have been, or will be, introduced to the
marketplace as a Year 2000 remediation tool. Moreover, to the Company's
knowledge, no product, including CAST, has been fully tested as a remediation
tool. It will not be until the Year 2000 market begins to mature that IAI will
be in a position to better assess its prospects. Against this backdrop, it
should be noted that nothing has yet come to the Company's attention that has
suggested to the Company that CAST will not be successfully deployed.
The revenue potential from CAST also depends upon the computer
languages, platforms
9
and databases which CAST is successfully developed to address. Through the end
of 1996, most development efforts were directed to languages, platforms and
databases upon which Computer Associates' software operates. Discussions of a
strategic nature between IAI and Computer Associates prompted these efforts
towards Computer Associates marketplace. Throughout 1997, IAI anticipates
expanding CAST's functionality so that CAST can be utilized in remediation
efforts on multiple platforms and for various languages.
IAI is not in a position to project with any reasonable certainty the
actual amount of revenue that CAST can generate. Estimates abound as to the
scope of the Year 2000 market and the lines of software code which must be
analyzed. Notwithstanding this uncertainty, IAI must gear its operations towards
a projected successful launch of CAST especially because of the time sensitive
window in which Year 2000 remediation efforts must occur. Therefore, IAI
anticipates increased levels of CAST related expenditures following 1996.
Liquidity and Capital Resources
- -------------------------------
In 1996, as in 1995, the Company financed its operations from current
collections and through advances under its line of credit with its bank. As of
December 31, 1996 the Company's outstanding balance on its line of credit was
$0, a $550,000 decrease over the prior year. Cash and cash equivalents at the
end of 1996 had increased by $266,870 in comparison to the end of the prior
year. The Company's line of credit was renewed on June 25, 1996 but the Company
reduced the amount available thereunder from $2,000,000 to $1,500,000. This line
of credit expires June 19, 1997 at which time it is subject to renewal.
In 1996, the Company realized that its internally generated funds
coupled with its line of credit would not provide it with sufficient working
capital to fund its CAST-related activities. Therefore, by the end of 1996, the
Company began to consider various alternatives to raise additional capital
including a private placement or venture capital with the aim of completing a
financing round in the first quarter of 1997.
Item 7. Financial Statements
The following Financial Statements are filed as part of this report:
Page(s)
-------
(i) Report of Independent Certified Public 19
Accountants
(ii) Consolidated Balance Sheet as of December 31, 1996 20-21
(iii) Consolidated Statements of Operations 22
10
for the Years Ended
December 31, 1996 and 1995
(iv) Consolidated Statements of Changes in Stockholders' Equity 23
for the Years Ended
December 31, 1996 and 1995
(v) Consolidated Statements of Cash Flows for the Years 24
Ended December 31, 1996 and 1995
(vi) Notes to Consolidated Financial Statements 25-37
Item 8. Disagreements of Accounting and Financial Disclosure
None.
PART III
Item 9. Directors and Executive Officers of the Registrant
The executive officers and directors of the Company are:
Name Position with the Company
---- -------------------------
Sandor Rosenberg Chairman of the Board, President
and Secretary
Richard S. DeRose Executive Vice President and Treasurer
George T. DeBakey Director
John D. Sanders Director
James D. Wester Director
Bonnie K. Wachtel 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, 50, has been President and Chairman of the Board
since 1979. Mr. Rosenberg holds a B.S. degree in Aerospace Engineering from
Rensselear Polytechnic Institute, and has done graduate studies in Operations
Research at George Washington University.
Richard S. DeRose, 58, has been Executive Vice President since 1991.
From 1979 to 1991 he served as the President and CEO for DHD, Inc. Mr. DeRose
holds a B.S. degree in Science from the U.S. Naval Academy and an M.S. degree in
Computer Systems Management from the U.S. Naval Post Graduate School, Monterey.
Mr. DeRose has been
11
involved in computer services sales, finance, and operations for the past 20
years.
George T. DeBakey, 47, has been a director since 1989. Since 1989, Mr.
DeBakey has been an international business and education consultant. Also,
starting in 1992, Mr. DeBakey became Director of the International and Business
Trade Program at American University. From 1987 to 1989, Mr. DeBakey was
Executive Director of the Information Technology Association of America. In
addition, he served as Deputy Assistant Secretary at the Department of Commerce
from 1985 to 1987 responsible for the high technology industries for trade
policy and trade promotion. He has a B.S. from Drake University, his Master's of
International Management from American Graduate School of International
Management, and his M.B.A. from Southern Methodist University.
John D. Sanders, 58, has been a Director since 1983. From 1986 to 1996
Mr. Sanders served as Chairman and CEO of TechNews, Inc., publisher of the
Washington Technology newspaper. Mr. Sanders obtained a B.E.E. degree from the
University of Louisville and M.S. and Ph.D. degrees in Electrical Engineering
from Carnegie-Mellon University. He is a member of the board of directors of:
Daedalus Enterprises, Inc., an electronics equipment manufacturer; Industrial
Training Corporation, a manufacturer of video-based training programs; and Tork,
Inc., an electrical equipment manufacturer.
James D. Wester, 58, has been a Director since 1985. He has been a
computer services marketing consultant for more than 15 years. Since 1984, he
has been president of Results, Inc. Mr. Wester obtained a B.M.E. degree from
Auburn University and an M.B.A. from George Washington University.
Bonnie K. Wachtel, 41, has been a Director since 1992. Since 1984, she
has served as vice president and general counsel of Wachtel & Co., Inc.,
investment bankers in Washington, D.C. Ms. Wachtel holds B.A. and M.B.A. degrees
from the University of Chicago and a J.D. 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; SSE Telecom, Inc., a satellite
equipment manufacturer; and VSE Corporation provider of technical services to
the federal government.
There are no family relationships between any directors or executive
officers of IAI.
Item 10. Executive Compensation
The following table sets forth the compensation paid over the last
three fiscal years to the Company's chief executive officer and other
individuals serving as executive officers as of December 31, 1996:
12
Summary Compensation Table
- ---------------------------------------------------------------------------------------------------------------------
Name and Number of
Principal Stock Options
Position Year Salary Bonus Granted
- ---------------------------------------------------------------------------------------------------------------------
Sandor Rosenberg 1996 $ 100,000 $ 15,000 -
President 1995 $ 100,007 $ 25,900 -
1994 $ 99,910 $ 30,000 -
- ------------------------------- ---------- ----------------------------- ----------------- --------------------------
Richard DeRose 1996 $ 110,730 $ 27,500 10,000
Exec Vice President and 1995 $ 109,730 $ 30,900 -
Treasurer 1994 $ 99,622 $ 30,000 -
- ---------------------------------------------------------------------------------------------------------------------
No executive officer has received any perquisite and other personal
benefits, securities or property which exceed 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 in 1996 to all
executive officers:
Option Grants in Last Fiscal Year
- -------------------------------------------------------------------------------------------------------------------
% Of Total Options Granted
Name Granted To Employees In Fiscal Year Exercise Price Expiration Date
- ------------------------- ------------- ------------------------------------- ------------------- -----------------
Richard S. DeRose 10,000 4.6% $4.00 June 17, 2006
- -------------------------------------------------------------------------------------------------------------------
The following table sets forth information concurring each exercise of
stock options during 1996 by all executive officers:
Aggregated Option Exercises in Last Fiscal Year
and FY End Option Values
- --------------------------------------------------------------------------------------------------------------------------
Value of
Unexercised
Number of Securities In-The Money
Shares Acquired on Value Underlying Unexercised Options At FY End
Name Exercise Realized Options At FY End (#) ($)
- ------------------------- ------------------------- ------------------- ------------------------------ -------------------
Richard DeRose 1500 $78,075 23,500 $1,331,000
- --------------------------------------------------------------------------------------------------------------------------
In 1996, the Company compensated each of its outside directors at the
rate of $500 per quarter or $2,000 per year. No director received any grants of
options or other securities in their capacity as a director.
13
Item 11. Security Ownership of Certain Beneficial Owners and Management
Set forth below is information concerning beneficial ownership by any
person known to the Company to be the owner of more than five percent of the
Company's Common Stock, by each directors and executive officer and by all
directors and executive officers as a group:
Name and Amount and Nature of Percentage Class
Address of Beneficial Beneficial Owner (2) ----------------
- --------------------- --------------------
Sandor Rosenberg (1) 215,500 42.3%
Chairman and President
Richard S. DeRose (1) 23,600(3) 4.4%
Executive Vice President
James D. Wester, Director (1) 43,500(4) 7.9%
John D. Sanders, Director 8,100 1.6%
4600 N. 26th Street
Arlington, VA 22207
Bonnie K. Watchel 13,200 2.6%
1101 14th Street, N.W.
Washington, D.C. 20001
George T. DeBakey 1,000(5) *
5303 Marlyn Drive
Bethesda, MD 20832
All directors and executive officers 304,900 52.9%
a group
* Less than one percent
(1) Unless otherwise noted, all addresses are c/o the Company at 11240 Waples
Mill Road, Fairfax, VA 22030.
(2) All shares are held outright by the individual listed below.
(3) Includes 23,500 options, 3,500 of which are exercisable at $5.00 per share
and expire on June 23,2002, 10,000 of which are exercisable at $4.50 per share
and expire on January 4, 2003 and 10,000 of which are exercisable at $4.00 per
share and expire on June 17, 2006. All expiration dates are subject to
continuation of Mr. DeRose's employment.
(4) Includes a warrant exercisable for 12,000 shares at $5.00 per share which
expires on February 24, 2003 and 30,000 stock options exercisable at $4.00 per
share which expire on June 19, 2006.
(5) Represents a warrant exercisable for 1,000 shares at a price of $7.50 per
share which expires on June 30, 1999.
Item 12. Certain Relationships and Related Transactions
In 1996, the Company repurchased from Sandor Rosenberg, its president
and a director, 13,000 shares of its Common Stock at an aggregate purchase price
of $53,250. In 1995, 17,200 shares were repurchased from Mr. Rosenberg at an
aggregate purchase price of $72,663.
In September 1996, in order to provide the Company with additional
working capital for
14
development of the CAST product, James C. Wester, a director, agreed to advance
up to $300,000 to the Company. In exchange for these advances, the Company
agreed to pay Mr. Wester 20% of all CAST license revenues the Company receives
up to 150% of the advances Mr. Wester has extended.
In order to compensate Mr. Wester for various consulting services he
has rendered to the Company for which he has received minimal cash remuneration,
in June 1996, the Company granted Mr. Wester 30,000 ten year stock options
exercisable at $4.00 per share, the then current value of the Company's Common
Stock.
In November 1996, the Company agreed to reduce the exercise price from $5.50 per
share to $4.75 per share under 10,000 warrants of which John D. Sanders, a
director, was the holder of 3,000 and Bonnie K. Wachtel, a director, was the
holder of 2,500. These 10,000 warrants were issued in 1986 as partial
compensation for underwriting and other investment banking services which were
provided by Wachtel & Co., Inc. The reduction was in consideration of the
holders of the warrants agreeing to forgo registration rights for the shares
obtained upon exercise of the warrants for a period of one year from exercise.
Item 13. Exhibits and Reports on Form 8-K
(a) See, exhibit index which index is incorporated herein by reference.
(b) No reports were filed on Form 8-K during the last quarter of this report.
15
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 ________, 1997
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
--------- ----- ----
___________________________ Chairman of the Board April ____, 1997
Sandor Rosenberg and President
___________________________ Director April ____, 1997
George T. DeBakey
___________________________ Director April ____, 1997
John D. Sanders
___________________________ Director April ____, 1997
Bonnie K. Wachtel
___________________________ Director April ____, 1997
James D. Wester
___________________________ Treasurer April ____, 1997
Richard S. DeRose
16
INFORMATION ANALYSIS INCORPORATED
-------------------
CONSOLIDATED FINANCIAL STATEMENTS
AND
INDEPENDENT AUDITORS' REPORT
DECEMBER 31, 1996 AND 1995
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
17
TABLE OF CONTENTS
Description Pages
- ----------- -----
Independent Auditors' Report 19
Consolidated Balance Sheet 20-21
Consolidated Statements of Operations 22
Consolidated Statements of Changes in Stockholder's Equity 23
Consolidated Statements of Cash Flows 24
Notes to Consolidated Financial Statements 25-37
18
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, 1996, and
the related consolidated statements of operations, changes in stockholders'
equity and cash flows for each of the two years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 audits 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 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, 1996, and
the consolidated results of operations and cash flows for each of the two years
then ended in conformity with generally accepted accounting principles.
March 7, 1997
Bethesda, Maryland Rubino & McGeehin, Chartered
19
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1996
ASSETS
Current assets
Cash and cash equivalents ............................... $ 323,886
Accounts receivable ..................................... 1,355,284
Employee advances ....................................... 34,323
Income taxes receivable ................................. 201,554
Deferred income taxes ................................... 98,662
Prepaid expenses ........................................ 104,554
Other receivables ....................................... 192,686
----------
Total current assets ................................ 2,310,949
Fixed assets
At cost, net of accumulated depreciation
and amortization of $1,205,486 .......................... 241,311
Equipment under capital leases
Net of accumulated amortization of $56,053 .............. 49,768
Capitalized software ......................................... 186,964
Investments .................................................. 10,000
Goodwill ..................................................... 70,554
Other receivables ............................................ 226,694
Other assets ................................................. 24,980
----------
Total assets ................................................. $3,121,220
==========
The accompanying notes are an integral part of the
consolidated financial statements
20
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1996
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable ...................................... $ 413,942
Accrued payroll ....................................... 262,754
Other accrued liabilities ............................. 58,896
Current portion of long-term debt ..................... 120,300
Current maturities of capital
lease obligations ................................. 18,229
Deferred rent ......................................... 852
-----------
Total current liabilities ......................... 874,973
Long-term debt ............................................. 90,380
Capital lease obligations, net of
current portion ....................................... 41,334
Deferred income taxes ...................................... 27,020
-----------
Total liabilities ................................. 1,033,707
-----------
Common stock, par value $0.01
1,000,000 shares authorized; 677,178
shares issued ......................................... 6,772
Paid in capital in excess of par value ..................... 1,139,240
Retained earnings .......................................... 1,795,814
Less treasury stock; 167,179 shares at cost ................ (854,313)
-----------
Total stockholders' equity ........................ 2,087,513
-----------
Total liabilities and stockholders' equity ................. $ 3,121,220
===========
The accompanying notes are an integral part of the
consolidated financial statements
21
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31,
--------------------------------
1996 1995
------------ ------------
Sales
Professional fees ....................... $ 10,803,341 $ 15,436,643
Software sales .......................... 415,504 260,253
------------ ------------
Total sales ........................ 11,218,845 15,696,896
------------ ------------
Cost of sales
Cost of professional fees ............... 8,675,377 12,511,118
Cost of software sales .................. 260,245 224,477
------------ ------------
Total cost of sales ................ 8,935,622 12,735,595
------------ ------------
Gross profit ................................. 2,283,223 2,961,301
Selling, general and administrative expenses . 2,496,591 2,958,722
------------ ------------
(Loss) income from operations ................ (213,368) 2,579
Other income and (expenses)
Interest income ......................... 12,716 7,554
Interest expense ........................ (35,644) (110,748)
------------ ------------
Loss before provision for income taxes ....... (236,296) (100,615)
Benefit for income taxes ..................... (76,622) (25,982)
------------ ------------
Net loss ..................................... $ (159,674) $ (74,633)
============ ============
Loss per common and common
equivalent share ........................ $ (0.26) $ (0.15)
Weighted average common and common
equivalent shares outstanding ........... 624,139 478,561
The accompanying notes are an integral part of the
consolidated financial statements
22
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1996 and 1995
Shares of
Common Additional
Stock Common Paid in Retained Treasury
Outstanding Stock Capital Earnings Stock Total
-------- --------- ---------- ---------- --------- ----------
Balances, December 31, 1994 ................. 621,178 $ 6,212 $ 771,923 $2,030,121 $(720,150) $2,088,106
Exercise of stock options .............. 54 296 296
Purchase of treasury stock ............. (80,913) (80,913)
Net loss ............................... (74,633) (74,633)
-------- --------- ---------- ---------- --------- ----------
Balances, December 31, 1995 ................. 621,232 6,212 772,219 1,955,488 (801,063) 1,932,856
Exercise of stock options and warrants . 49,696 497 209,580 210,077
Tax benefit of stock option compensation 132,504 132,504
Stock issued for ISSC acquisition ...... 6,250 63 24,937 25,000
Purchase of treasury stock ............. (53,250) (53,250)
Net loss ............................... (159,674) (159,674)
-------- --------- ---------- ---------- --------- ----------
Balances, December 31, 1996 ................. 677,178 $ 6,772 $1,139,240 $1,795,814 $(854,313) $2,087,513
======== ========= ========== ========== ========= ==========
The accompanying notes are an integral part of the
consolidated financial statements
23
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
--------------------------------
1996 1995
------------ ------------
Cash flows from operating activities
Cash received from customers ................................ $ 13,389,621 $ 16,345,476
Cash paid to suppliers and employees ........................ (12,336,956) (15,279,871)
Interest received ........................................... 12,716 7,554
Interest paid ............................................... (35,644) (110,748)
Income taxes received (paid) (net) .......................... -- 57,293
------------ ------------
Net cash provided by operating expenses ................. 1,029,737 1,019,704
------------ ------------
Cash flows from investing activities
Purchase of ISSC, net of cash received ...................... (47,422) --
Acquisition of furniture and equipment ...................... (91,471) (79,983)
Proceeds from sale of equipment ............................. -- 25,687
Increase in capitalized software ............................ (186,964) --
------------ ------------
Net cash used in investing activities .................... (325,857) (54,296)
------------ ------------
Cash flows from financing activities
Net payments under bank revolving line of credit ............ (550,000) (842,000)
Reduction of debt related to acquisition of ISSC ............ (26,276) --
Principal payments on debt and capital leases ............... (17,561) (20,986)
Repurchase of common stock .................................. (53,250) (80,913)
Proceeds from exercise of incentive stock options ........... 210,077 296
------------ ------------
Net cash used by financing activities .................... (437,010) (943,603)
------------ ------------
Net increase in cash and cash equivalents ......................... 266,870 21,805
Cash and cash equivalents at beginning of the period .............. 57,016 35,211
------------ ------------
Cash and cash equivalents at end of the period .................... $ 323,886 $ 57,016
------------ ------------
Reconciliation of net loss to cash provided by operating activities
Net loss .......................................................... $ (159,674) $ (74,633)
Adjustments to reconcile net loss to net cash provided
by operating activities
Depreciation and amortization ............................... 192,035 173,530
Tax benefit of stock option compensation .................... 132,504 --
Gain/loss on sale of fixed assets and investments ........... (231) (1,113)
Changes in operating assets and liabilities
Accounts receivable ..................................... 2,170,776 648,580
Other receivables and prepaid expenses .................. (180,483) (40,275)
Accounts payable and accrued expenses ................... (939,352) 292,528
Deferred rent ........................................... (10,224) (10,224)
Income tax receivable/liability ......................... (175,614) 31,311
------------ ------------
Net cash provided (used) by operating activities .................. $ 1,029,737 $ 1,019,704
============ ============
The accompanying notes are an integral part of the
consolidated financial statements
24
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, Allied Health & Information Systems, Inc. (AHISI)
and International Software System Corporation (ISSC). Upon consolidation, all
material intercompany accounts, transactions and profits are eliminated. AHISI
commenced operations in 1991; ISSC was acquired in 1996. Goodwill, resulting
from the Company's acquisition of ISSC is being amortized over a two-year period
which is the expected term of ISSC's contracts.
Investments in companies less than 20% owned are reported at cost less
allowances for permanent decline in value. Income is recognized when dividends
are declared. No dividends were declared in 1996 or 1995.
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
Revenue from cost-plus-fixed-fee contracts is recognized on the basis of direct
costs plus indirect costs incurred and an allocable portion of the fixed fee.
Revenue from fixed-price contracts is recognized on the percentage-of-completion
method, measured by the cost-to-cost method for each contract, with costs and
estimated profits recorded as work is performed. Revenue from time and material
contracts is recognized based on fixed hourly rates for direct hours expended.
The fixed hourly rate includes direct labor, indirect expenses and profit.
Material and other specified direct costs are recorded at actual cost.
Contract costs include all direct material and labor costs and those indirect
costs related to contract performance. Provisions for estimated losses on
uncompleted contracts are made in the period in which losses are determined.
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.
25
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly
liquid investments with maturities of sixty 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.
Software Development Costs
The Company has capitalized costs related to the development of a software
product, Computer Aided Software Translator (CAST). 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 will be computed and
recognized for the product when available for market based on the product's
estimated total sales or economic life. Capitalized costs and amortization
periods are management's estimates and may have to be modified due to inherent
technological changes in software development.
Deferred Rent
Rental expense on operating leases is charged to operations over the life of the
lease using the straight-line method. Differences between the amounts charged
and the amounts paid are recorded as deferred rent.
Earnings Per Share
Earnings per common equivalent share is based on the weighted average number of
common shares and common share equivalents outstanding during the year. When
dilutive, stock options are included as share equivalents using the modified
treasury stock method. Under that method, earnings per share data are computed
as if the options and warrants were exercised at the beginning of the period (or
at the time of issuance, if later) and as if the funds obtained thereby were
used to purchase common stock during the period. Fully diluted earnings per
share amounts have not been presented because they are not materially dilutive.
26
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes
Deferred income tax assets and liabilities are recognized for the estimated
future tax effects of the differences between the financial statement and tax
bases of assets and liabilities given the provisions of enacted tax laws. The
provision for income taxes consists of the income tax for the year and the
change in the deferred tax liability or asset.
Fair Market Value of Financial Instruments
The Company's financial instruments include trade receivables and payables,
other receivables and notes payable. Management believes the carrying value of
financial instruments approximates their fair market value, unless disclosed
otherwise in the accompanying notes.
Reclassification
Certain accounts in the prior year financial statements have been reclassified
for comparative purposes to conform with the presentation in the current year
financial statements.
2. INDUSTRY SEGMENT AND CREDIT CONCENTRATION
During 1996 and 1995, the Company's operations included two reportable segments:
computer applications and healthcare. The computer applications segment includes
those operations involved in developing and marketing computer application
software systems and providing programming services. The Company and its
subsidiary, ISSC, operate in this segment. Approximately 92% of this segment's
revenue in 1996, and 82% in 1995, came from contracts and subcontracts with
departments and agencies of the federal government. In 1996, the Company was
informed that it was unsuccessful in obtaining the renewal of a contract with
the United States Customs Service. Approximately 58% of this segment's revenue
in 1996 and 65% in 1995, came from the contract with the United States Customs
Service.
The healthcare segment, operated by AHISI, is involved in providing the services
of certified physician assistants, nurses and medical doctors to healthcare
facilities operated by third parties in conjunction with state and local
governments, and the federal government. The Company has phased out the
activities of this business segment and anticipates that no future revenue will
be generated from this business segment after 1996.
27
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INDUSTRY SEGMENT AND CREDIT CONCENTRATION (CONTINUED)
Summarized financial information by business segment for 1996 and 1995 is as
follows:
1996 1995
---- ----
Net Sales
Computer Applications $11,172,702 $14,012,017
Healthcare 46,143 1,684,879
Income (loss) from operations (pre-tax)
Computer Application (95,594) 333,198
Healthcare (117,774) (330,619)
Identifiable assets
Computer Applications 2,007,393 3,361,013
Healthcare 315,868 494,616
Capital Expenditures
Computer Applications 91,471 79,354
Healthcare - 629
Depreciation and Amortization
Computer Applications 180,569 155,289
Healthcare 11,466 18,241
Operating income by business segment excludes interest income, interest expense
and miscellaneous income and expense items that could not be identified with
either segment. Other than those acquired by AHISI, all furniture, equipment,
and capital leases and their related depreciation and amortization are
considered the assets and expenses, respectively, of the computer application
segment. Capitalized software costs and goodwill and their related amortization
are also considered assets and expenses of the computer application segment. In
addition, accounts receivable are considered identifiable assets of the
respective segment. Cash and cash equivalents, and the remaining other assets
are considered corporate assets. There were no significant intersegment sales or
transfers during 1996 and 1995.
28
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITION
On June 5, 1996, the Company completed an acquisition of the outstanding common
stock of International Software Services, Inc. (the predecessor to ISSC) for
$370,289, of which $133,333 was paid (in cash and stock) at closing and $236,956
of which is payable by June 1998 to the former owner (see Note 6). The business
acquisition was accounted for as a purchase. The operations of ISSC since the
date of acquisition are included in the consolidated statement of operations of
the Company for the year ended December 31, 1996. The cost of the acquisition
exceeded the fair value of the net assets acquired by $99,605. The excess is
being amortized as goodwill on a straight-line basis over a two-year period
which is the expected term of ISSC's contracts.
The following summarized pro forma (unaudited) information assumes the
acquisition had occurred on January 1, 1995.
1996 1995
---- ----
Net sales As reported $11,218,845 $15,696,896
Pro forma $11,680,000 $16,460,000
Net Income As reported $ (159,674) $ (74,633)
Pro forma $ (75,000) $ (73,000)
Primary loss As reported $ (0.26) $ (0.15)
per share Pro forma $ (0.12) $ (0.15)
4. RECEIVABLES
Accounts receivable at December 31, 1996, consist of the following:
Billed - Federal government $124,598
Billed - prime contractors 848,245
Billed - commercial 236,941
----------
Total billed 1,209,784
----------
Unbilled - Federal government 2,482
Unbilled - prime contractors 110,726
Unbilled - commercial 32,292
----------
Total unbilled 145,500
----------
Total accounts receivable $1,355,284
==========
29
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. RECEIVABLES (CONTINUED)
Unbilled receivables are for services provided through the balance sheet date
which are expected to be billed and collected within one year.
Included in other receivables at December 31, 1996, are the following:
Receivables from former customers net of
present value discount and allowance for
uncollectibility totaling $274,880 $ 258,809
Receivable from employee, due in monthly
payments of $386 plus interest at 8.75%.
Final payment due in 2001. 27,885
Other non-trade receivables expected to be
collected by December 31, 1997 132,686
--------
Total 419,380
Less current portion (192,686)
--------
Non current portion $ 226,694
========
5. FIXED ASSETS
A summary of fixed assets and equipment under capital leases at December 31,
1996, is as follows:
Furniture and equipment $ 1,474,939
Leasehold improvements 40,666
Motor vehicles 37,013
-----------
1,552,618
Accumulated depreciation and
amortization (1,261,539)
-----------
Total $ 291,079
===========
30
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. FINANCING
At December 31, 1996, the Company had a revolving line of credit with a bank
providing for demand or short-term borrowings of up to $1,500,000. This line
expires on June 19, 1997. Drawings against this line are based on varying
percentages of the Company's accounts receivable balances depending on the
source of the receivables and their age. Interest on outstanding amounts is
payable monthly at the bank's prime rate (8.75% at December 31, 1996) plus 1/2%.
The lender has a first priority security interest in the Company's receivables
and a direct assignment of its major U.S. Government contracts. The line of
credit, among other covenants, requires the Company to comply with certain
financial ratios. At December 31, 1996, there was no outstanding balance on the
line.
Additionally, at December 31, 1996, the Company is liable to the former owner of
ISSC (see Note 3) in the amount of $210,680. This liability is payable as
follows: 1997 - $120,300; 1998 - $90,380.
7. COMMITMENTS AND CONTINGENCIES
Capital Leases
The future minimum payments under capital leases for equipment and the present
value of the minimum lease payments are as follows:
Year ending December 31
-----------------------
1997 $ 24,318
1998 27,367
1999 15,132
--------
Total minimum lease payments 66,817
Less amount representing interest (7,254)
--------
Total obligation representing principal 59,563
Less current portions of capital lease obligations (18,229)
--------
Long-term portion of capital lease obligations $ 41,334
========
31
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Operating Leases
Rent expense was $236,466, and $263,031 for the years ended December 31, 1996
and 1995, respectively.
The future minimum rental payments to be made under noncancelable operating
leases, principally for facilities, are as follows:
Year ending December 31
-----------------------
1997 $284,512
1998 295,709
1999 304,580
2000 313,717
2001 323,129
2002 through 2004 675,630
----------
Total minimum rent payments $2,197,277
==========
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 Company entered into a new
lease in February 1997 with a seven-year term ending in 2004. The minimum lease
payments are included in the above amounts.
The leases are secured by irrevocable letters of credit for $26,982. As of
December 31, 1996, none of the letters of credit have been used.
Royalties
In August 1996, the Company entered into an agreement to purchase the software
product CAST (see Note 1). As part of the agreement, royalties of 10% of the
CAST licensing fees collected by the Company will be paid to the seller. The
aggregate amount of the royalties pursuant to this agreement will not exceed
$1,000,000.
Also in August 1996, the Company entered into an agreement whereby, in
consideration of an expense sharing arrangement, the Company will pay royalties
of 20% of the CAST licensing fees collected by the Company.
The royalties will not exceed $150,000.
32
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In October 1993, the Company purchased ownership rights to a software product
called Migrator. Included in the purchase price is an obligation for royalty
payments of 10% on all Migrator licensing fees collected during the four year
period following the sale. As of December 31, 1996, no license fees have been
collected.
Government Contracts
Company sales to departments or agencies of the United States Government are
subject to audit by the Defense Contract Audit Agency (DCAA). Audits by DCAA
have not been performed for any years. Management is of the opinion that
disallowances, if any, by DCAA for unaudited years will not result in any
material adjustments to the financial statements.
8. INCOME TAXES
The provision for income taxes consists of the following:
December 31
-----------
1996 1995
---- ----
Current (benefit) expense
Federal ................................. $(67,021) $ 9,996
State ................................... (14,846) 2,216
------- -------
(81,867) 12,212
------- -------
Deferred expense (benefit)
Federal ................................. 4,294 (31,268)
State ................................... 951 (6,926)
------- -------
5,245 (38,194)
------- -------
Benefit for income taxes ..................... $(76,622) $(25,982)
======= =======
33
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
The items that give rise to the deferred tax expense (benefit) shown above are
as follows:
December 31
-----------
1996 1995
---- ----
Depreciation .................................... $ 8,020 $ 9,500
Vacation expense ................................ (2,775) 13,106
Bad debt expense ................................ -- (60,800)
------- --------
Tax effects of temporary differences .......... $ 5,245 $(38,194)
======= ========
The tax effect of significant temporary differences representing deferred tax
assets and liabilities at December 31, 1996, are as follows:
Vacation ................................................. $37,862
Bad debt expense ......................................... 60,800
-------
Deferred tax asset ..................................... $98,662
=======
Depreciation - deferred tax liability ........................ $27,020
=======
The provision for income taxes is at an effective rate different from the
federal statutory rate due principally to the following:
December 31
-----------
1996 1995
---- ----
Loss before taxes .................................. $(236,296) $(100,615)
======= =======
Income taxes (benefit) on above amount
at federal statutory rate ...................... (80,341) (34,209)
State income taxes net of federal benefit .......... (10,870) (4,648)
Effect of graduated tax brackets, change
in estimates, and other non deductible
items .......................................... 14,589 12,875
------- -------
Benefit for income taxes ........................... $ (76,622) $ (25,982)
======= =======
34
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCK OPTIONS AND WARRANTS
The Company has two stock option plans, the second plan becoming effective June
25, 1996. The combined plans provide for the granting of stock options to
certain employees, directors and consultants. The maximum number of shares for
which options may be granted under the plans is 200,000 (increased to 250,000 in
January 1997). 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 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 dates consistent with the method of Statement
of Financial Accounting Standards (SFAS) No. 123, the Company's net income and
earnings per share would have been:
1996 1995
---- ----
Net loss As reported $ (159,674) $ (74,633)
Pro forma $ (424,000) Not applicable
Loss per share As reported $ (0.26) $ (0.15)
Pro forma $ (0.68) Not applicable
The fair value of the options granted in 1996 is estimated on the date of the
grant using the Black-Scholes options - pricing model assuming the following: no
dividend yield, risk-free interest rate of 6 %, expected volatility of 40
percent, and an expected term of the options of two years.
At December 31, 1996, options to purchase stock under this plan were outstanding
to employees as follows:
Number of shares Exercise price per share
---------------- ------------------------
32 $ 3.00
168,200 4.00
10,200 4.50
4,500 5.00
200 5.50
1,500 11.75
10,000 14.50
35
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCK OPTIONS AND WARRANTS (CONTINUED)
Of these 194,632 options, 134,632 options are exercisable immediately, 50,000
options at $4 per share are exercisable over two years, and 10,000 options at $4
per share are exercisable when certain revenue amounts are realized.
Transactions involving the plan were as follows:
December 31
-----------
1996 1995
------------------- ------------------
Weighted Weighted
Average Average
Shares Price Shares Price
------ ----- ------ -----
Outstanding, beginning of year 37,828 $ 4.73 43,443 $ 4.77
Granted 215,500 $ 4.54 - -
Exercised (39,696) $ 4.10 (54) $ 5.50
Canceled (19,000) $ 4.74 (5,561) $ 5.01
------- -------
Outstanding, end of year 194,632 $4.65 37,828 $ 4.73
======= =======
The board of directors has also granted warrants to directors and employees.
During 1996, no warrants to acquire shares of common stock were granted to such
persons. The total warrants exercised in 1996 were 10,000 and warrants expired
were 5,000. As of December 31, 1996, outstanding warrants are 13,000. The
purchase price for shares issued upon exercise of these warrants range from
$5.00 to $7.50 per share. These warrants are exercisable immediately.
10. 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. Each participant can elect to have up to 6% of their salary
reduced and contributed to the plan. The Company is required to make a matching
contribution of 25% 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, 1996 and 1995, were $47,029 and $44,549,
respectively.
The Company does not provide post employment benefits and, as a result,
Statement of Financial Accounting Standards No. 106 does not have any impact on
these financial statements.
36
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. LITIGATION
At December 31, 1996, the Company is involved in litigation with a former inmate
at a correctional facility where the Company has provided medical services. The
case is a malpractice claim against the Company as well as other related
parties. The plaintive seeks $1,550,000 in damages. The Company has insurance to
cover claims of up to $1 million per occurrence, and there are other defendants
who will likely contribute to either a settlement or a judgment, if any. In the
opinion of management, there will be no material adverse effect on the Company's
financial statements as a result of this litigation. No amounts have been
accrued in the financial statements related to this matter.
12. SUBSEQUENT EVENTS
Common Stock
Subsequent to December 31, 1996, the board of directors increased the authorized
shares of the Company's common stock from 1,000,000 to 10,000,000 shares and
authorized a three for one split of its outstanding common stock.
Private Placement Memorandum
In March 1997, the Company completed a private placement memorandum which raised
$5,000,000 in exchange for 285,714 shares of the Company's common stock. The
funds will be utilized for the further development of the Company's CAST
software product (see Note 1) and the pursuit of CAST business opportunities
during 1997 and 1998.
37