U.S. Securities and Exchange Commission
Washington, D.C. 20549
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)
<PAGE>
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.
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 Percentage Class
Address of Beneficial Beneficial Owner (2) ----------------
- --------------------- --------------------
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
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 a group 2,667,000 43.3%
<PAGE>
* 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.
(6) 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
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Name and Number of
Principal Stock Options
Position Year Salary Bonus Granted
- ------------------------------- ---------- ----------------------------- ----------------- ------------------------------
<S> <C>
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 -
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
2
<PAGE>
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
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
% Of Total Options Granted
Name Granted To Employees In Fiscal Year Exercise Price Expiration Date
- ------------------------- ------------- ------------------------------------- ------------------- ----------------------------
<S> <C>
Richard S. DeRose 90,000* 4.6% $.444 June 17, 2006
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table sets forth information concurring each exercise of
stock options during 1996 by all executive officers:
Aggregated Option Exercises in Last Fiscal Year
and FY End Option Values
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Value of
Unexercised
Number of Securities In-The Money
Shares Acquired on Value Underlying Unexercised Options At FY
Name Exercise Realized Options At FY End (#) End ($)
- ---------------------------- ------------------------ ------------------ ------------------------------ ----------------------
<S> <C>
Richard S. DeRose 13,500* $78,075 211,500 $1,331,000
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*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.
In September 1996, in order to provide the Company with additional
working capital 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.
3
<PAGE>
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.
In November 1996, the Company agreed to reduce the exercise price from
$5.50 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 fully paid and non-assessable.
PART II
Item 1. Market Price of and Dividends on the Registrant's Common Equity and
Other Shareholder Matters.
4
<PAGE>
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.
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.
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.
5
<PAGE>
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.
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:
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C>
(i) Report of Independent Certified Public 10
Accountants
(ii) Consolidated Balance Sheet as of December 31, 1996 11-12
(iii) Consolidated Statements of Operations 13
for the Years Ended
December 31, 1996 and 1995
(iv) Consolidated Statements of Changes in Stockholders' Equity 14
for the Years Ended
December 31, 1996 and 1995
(v) Consolidated Statements of Cash Flows for the Years 15
Ended December 31, 1996 and 1995
(vi) Notes to Consolidated Financial Statements 16-28
</TABLE>
[Remainder of Page Intentionally Left Blank]
6
<PAGE>
PART III
Item 1. Index to Exhibits
Exhibit No. Description Pages
2.1 Amended and Restated Articles of Incorporation of the
Company incorporated 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 incorporated 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.
7
<PAGE>
Exhibit No. Description Pages
6.6 Warrant Agreement between George
DeBakey, a director, and the Company
incorporated by reference from Exhibit
10.6 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.
8
<PAGE>
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: April 18, 1997
---------------------------------
By: /s/ Richard S. DeRose
----------------------------------
Richard S. DeRose, Executive Vice
President and Treasurer
Date: April 18, 1997
---------------------------------
9
<PAGE>
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
10
<PAGE>
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
11
<PAGE>
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
12
<PAGE>
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
13
<PAGE>
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
Shares of
Common Additional
Stock Common Paid in Retained Treasury
Outstanding Stock Capital Earnings Stock Total
-------- --------- ---------- ---------- --------- ----------
<S> <C>
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
======== ========= ========== ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements
14
<PAGE>
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------
1996 1995
------------ ------------
<S> <C>
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
============ ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements
15
<PAGE>
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.
16
<PAGE>
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.
17
<PAGE>
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.
18
<PAGE>
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.
19
<PAGE>
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
==========
20
<PAGE>
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
===========
21
<PAGE>
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
========
22
<PAGE>
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.
23
<PAGE>
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)
======= =======
24
<PAGE>
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)
======= =======
25
<PAGE>
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
26
<PAGE>
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.
27
<PAGE>
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.
28
