<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 31, 2000
REGISTRATION NO. 333-95775
--------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
PRE-EFFECTIVE AMENDMENT #2
TO FORM S-3
ON
FORM SB-2
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
INFORMATION ANALYSIS INCORPORATED
(Exact name of small business issuer in its charter)
<TABLE>
<S> <C> <C>
VIRGINIA 7372 54-1167364
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
11240 WAPLES MILL ROAD, SUITE 400, FAIRFAX, VIRGINIA 22030
(703) 383-3000
(Address and telephone number of principal executive offices)
-------------------------------------------------------------
MR. RICHARD S. DEROSE
11240 WAPLES MILL ROAD, SUITE 400, FAIRFAX, VIRGINIA 22030
(703) 383-3000
(Name, address and telephone number of agent for service)
---------------------------------------------------------
COPIES TO:
MARK J. WISHNER, ESQ.
MINTZ, LEVIN, COHN, FERRIS, GLOVSKY & POPEO, PC
ONE FOUNTAIN SQUARE, 11911 FREEDOM DRIVE, RESTON, VIRGINIA 20190
TELEPHONE: (703) 464-4808
FACSIMILE: (703) 464-4895
-------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the effective date of this Registration Statement
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [x]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
______________________________
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed Proposed
maximum maximum
offering aggregate
Securities to be Amount to be price per offering Registration
registered registered share (1) price (1) fee
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<S> <C> <C> <C> <C>
Common Stock 4,515,000 (2) $0.343 $1,548,645.00 $60.27 (3)
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</TABLE>
(1) The proposed maximum offering price per share is an estimate used only for
the purpose of calculating the proposed maximum offering price and for
determining the amount of the registration fee we must pay to the
Securities and Exchange Commission. The proposed maximum aggregate
offering price is the sum of the number of shares to be registered
multiplied by the proposed maximum offering price. The estimated price is
based upon the average of the high and low sales prices of our common stock
quoted on the OTC Bulletin Board on August 30, 2000.
(2) The total number of shares to be registered consists of 2,550,000 issued
and outstanding shares of common stock, 1,525,000 shares of common stock
issuable upon exercise of warrants to acquire common stock and 440,000
shares issuable upon exercise of options to acquire common stock.
(3) The amount of registration fee is calculated by multiplying the proposed
maximum aggregate offering price by $0.000264 and then taking the product
less $348.57, which represents the filing fee we previously paid when we
filed our Form S-3 on January 31, 2000.
<PAGE>
SUBJECT TO COMPLETION, DATED AUGUST 30, 2000
PROSPECTUS
---------------------------------
THE RESALE OF
4,515,000 SHARES OF COMMON STOCK
---------------------------------
This prospectus relates to the public offering, which is not being underwritten,
of up to 4,515,000 shares of our common stock by the selling shareholders
identified in this prospectus on pages 9 and 10. Of the 4,515,000 shares we are
registering, 2,550,000 of were issued in connection with a private placement
that took place in December of 1999 and 1,525,000 shares are issuable upon
exercise of warrants that were issued in connection with the December 1999
private placement. 1,277,000 of the warrants are exercisable at $1.00 per share.
250,000 of the warrants are exercisable at $0.73 per share. Of the remaining
440,000 shares, 100,000 shares are issuable to one of our employees as
compensation. The remaining 340,000 shares were issued to five of our creditors.
Those creditors have agreed to accept shares in partial satisfaction of the
obligations we have to them.
The prices at which the selling shareholders may sell the shares will be
determined by the prevailing market prices for the shares or in negotiated
transactions. We will not receive any of the proceeds from the sale of the
shares.
Our shares are traded on the OTC Bulletin Board under the symbol IAIC. On August
30, 2000, the last sale price for our common stock as reported by the OTC
Bulletin Board, was $0.343 per share.
The mailing address and telephone number of our principal executive offices is
11240 Waples Mill Road, Suite 400, Fairfax, Virginia 22030, (703) 383-3000.
Investing in the common stock involves risks. See "Risk Factors" beginning on
page 5
--------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined
if this prospectus is truthful or complete. It's illegal to tell
you otherwise.
--------------------------------------------------------------------------------
We will amend and complete the information in this prospectus. Our selling
shareholders may not sell these securities until the registration statement
filed with the Securities and Exchange Commission is effective. This prospectus
is not an offer to sell these securities and it is not soliciting an offer to
buy these securities in any state where the offer or sale is not permitted.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary.............................................................................. 1
Selected Financial Data......................................................................... 4
3 Item 3. Risk Factors.......................................................................... 5
Where You Can Find More Information About Us.................................................... 8
Item 4. Use of Proceeds........................................................................ 9
Item 5. Determination of Offering Price........................................................ 9
Item 6. Dilution............................................................................... 9
Item 7. Selling Shareholders................................................................... 9
Item 8. Plan of Distribution................................................................... 11
Item 9. Legal Proceedings...................................................................... 12
Item 10. Directors, Executive Officers, Promoters & Control Persons............................. 12
Item 11. Principal Shareholders................................................................. 14
Item 12. Description of Securities.............................................................. 15
Item 13. Interest of Named Experts and Counsel.................................................. 16
Item 14. Disclosure of Commission Position on Indemnification for Securities Act................ 16
Item 15. Organization with Last Five Years...................................................... 16
Item 16. Description of Business................................................................ 17
Item 17. Management's Discussion and Analysis................................................... 22
Item 18. Description of Property................................................................ 26
Item 19. Certain Relationships and Related Transactions......................................... 26
Item 20. Market for Our Common Stock............................................................ 26
Item 21. Executive Compensation................................................................. 27
Item 22. Financial Statements................................................................... 28
Item 23. Changes and Disagreements with Accountants on Accounting and Financial Disclosure...... 28
Index to Consolidated Financial Statements...................................................... 29
Part II
Item 24. Indemnification Provisions............................................................. 30
Item 25. Other Expenses of Issuance and Distribution............................................ 30
Item 26. Recent Sales of Unregistered Securities................................................ 31
Item 27. Exhibits............................................................................... 31
Item 28. Undertakings........................................................................... 31
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
INFORMATION ANALYSIS INCORPORATED
--------------------------------------------------------------------------------
This prospectus contains forward-looking statements, which involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements.
The following information is selective and qualified in its entirety by the
detailed information, including financial information and the accompanying
notes, appearing elsewhere in this prospectus.
You should read and carefully consider the entire prospectus before making a
decision to invest in our stock.
--------------------------------------------------------------------------------
Our Company
We are a Virginia corporation and were organized in 1979. We develop computer
system application software and offer related software support and assistance
services that help the people who use the software. One of our primary product
lines, known as conversion software, converts older versions of computer
software into newer, updated software programs. We redesign old computer and
software systems into newer more efficient and capable computer and software
systems. The redesigning process is called information system reengineering. Our
company helps our clients integrate their different computer systems into one
functional system that operates with greater efficiency and effectiveness. The
integrating of several models of computers and their software is known as
systems integration.
Our Business
In 1996, we began a concentrated effort to improve the system and services we
provided to our clients to fix their impending year 2000 software problems. The
year 2000 software problem is commonly called the Y2K computer software
conversion problem and deals with the potential computer system failure that
might have occurred due to a specific technical computer programming oversight
that occurred in pre-2000 software programs. Our software fixed problems that
exist in some of those outdated computer systems. Because of the extraordinary
anticipated demand associated with the Year 2000 problem, the majority of our
business resources were aimed at solving this problem for our clients. With the
passing of January 1, 2000, these services are no longer relevant to our
business future.
Recently, our business shifted away from Year 2000 computer solutions. We moved
our focus back to products and services that provide a full range of software
conversion updates, information system reengineering, and computer systems
integration of older systems into more advanced and up to date systems for both
commercial and government clients. We have successfully completed a variety of
projects including:
. developing or improving products that work to improve Internet based,
World Wide Web computer projects
. platform migration, which means to change the information in one
computer into a form that a newer computer can understand and use
. computer system re-engineering
. computer and software system conversions
. computer software application testing
We also design, create, and automate computer system products that process
information, collect data
1
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into databases, collate data, and distribute that data through the Internet. We
specialize in creating solutions that make profitable use of an organization's
investment in its currently existing legacy systems. Legacy systems are computer
systems which have been in place for an extended time and are considered to be
outdated and unable to function effectively with new software products and needs
of the computer system users. We modernize the tools that computers use to
connect to the Internet. Our personnel are able to create Internet computer
software applications that operate on stand-alone personal computers. Our
products help our clients legacy systems to communicate with more up to date
computers and software and to communicate with other computers on the internet.
Our Products
We have developed a set of computer software tools to meet our clients needs in
upgrading and updating their aging computers and software. These products are
called Integrated CONversion Solutions, or ICONS, and Automated Transition
Workbench, or ATW. These tools are used to assist a computer programmer to
convert old, outdated computer information into new computer systems or computer
languages. ICONS can be used effectively with a variety of older computer system
products and languages.
ICONS enhances our ability to provide hardware and software system updating
services to clients that seek to change older computer systems from legacy
systems to current computer systems. The products we offer can update current
computer languages. Computer languages are the very most basic form of how
computer software works. We update databases on several different sizes of
computers from the largest mainframe sized to smaller midrange power and size to
smaller client servers which are the smallest collections of individual
computers. We also update intranet systems. Intranet systems are a small
grouping of computers that are connected together. Our products also work well
with internet platforms. Internet platforms are computers that are hooked
together with other computers over a connection to the Internet.
Our products and services updates typically include software and hardware
updates, preparing clients to use the new systems, and software redeveloping
services. Apart from computer system services, we provide temporary employees on
a contract basis for companies who expect to have peak demand times where extra
staff will be needed. We can provide candidate screening and evaluation to
assist our clients in finding new computer knowledgeable employees.
The Offering
As of August 30, 2000, we had 9,581,473 shares of our common stock outstanding.
This offering is comprised of securities offered by selling shareholders only.
Although we have agreed to pay all offering expenses, which are estimated to be
approximately $21,008.84, we will not receive any proceeds from the sale of
these securities.
Other expenses, like selling commissions and fees for legal counsel, directly
related to the individual selling shareholders will be paid by the selling
shareholders. We are registering these shares as part the agreements we made in
connection with certain transactions. We have been advised that each selling
shareholder expects to offer his, her or its shares to or through brokers and
dealers to be selected by the selling shareholder. In addition, the shares may
be offered for sale through the over-the-counter market, through a market maker,
in one or more private transactions, or a combination of any methods of sale.
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. The selling
2
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shareholder listed in this prospectus on pages 9 and 10 are offering to sell,
and seeking offers to buy, shares of our common stock only in jurisdictions
where offers and sales are permitted. The information contained in this
prospectus is accurate only as of the date of this prospectus, regardless of the
time of delivery of this prospectus or of any sale of our common stock.
SELECTED FINANCIAL DATA
The selected financial data presented on the next page as of June 30, 2000 have
been derived from our financial statements, which have been audited by Rubino &
McGeehin, Chtd., our independent certified public accountants. Their report for
the two years ended December 31, 1999 is included elsewhere in this prospectus.
The statement of operations for the six months ended June 30, 2000 and the
balance sheet as of June 30, 2000, are unaudited and, in our opinion, include
all adjustments, consisting of only normal recurring adjustments, necessary for
a fair presentation of the information. The results of operations for the six
months ended June 30, 2000 are not necessarily indicative of results to be
expected for any future period.
You should read the selected financial data presented below with the financial
statements and related notes and with "Management's Discussion and Analysis,"
which are included elsewhere in this prospectus.
3
<PAGE>
Summary Consolidated Financial Data
(expressed in thousands of dollars, except per share data)
<TABLE>
<CAPTION>
Six Months
Ended
Year Ended December 31, June 30,
1995 1996 1997 1998 1999 1999 2000
---- ---- ---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statements
of Operation Data:
Total sales.......................... $ 15,697 $ 11,219 $ 8,081 $ 15,332 $ 9,586 $ 6,041 $ 3,236
Total operating expenses............. 15,694 11,432 9,680 21,342 11,602 6,726 3,227
-------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from operations........ 3 (213) (1,599) (6,010) (2,016) (685) 9
Write-downs of capitalized software
costs................................ - - - (3,084) (1,978) - -
Other income (expense), net.......... (103) (23) 116 70 (130) (72) (7)
-------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes.... (100) (236) (1,483) (9,024) (4,124) (757) 2
Provision for income taxes........... (26) (77) 74 - - - -
-------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss).................... $ (74) $ (159) $ (1,557) $ (9,024) $ (4,124) $ (757) $ 2
======== ========== ========== ========== ========== ========== ==========
Net income (loss) per common share:
Basic................................ $ (0.02) $ (0.04) $ (0.28) $ (1.35) $ (0.59) $ (0.11) -
Diluted.............................. $ (0.02) $ (0.04) $ (0.28) $ (1.35) $ (0.59) $ (0.11) -
Weighted average common shares
Outstanding:
Basic 4,203,477 4,214,034 5,649,668 6,665,321 6,988,336 6,906,667 9,508,508
Diluted 4,203,477 4,214,034 5,649,668 6,665,321 6,988,336 6,906,667 9,808,201
</TABLE>
<TABLE>
<CAPTION>
As of June 30,
2000
As
--
Actual Adjusted
------ --------
<S> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents............................................................ 96 1,533
Working capital...................................................................... (522) 915
Total assets......................................................................... 2,693 4,130
Total shareholders' equity........................................................... 266 1,703
</TABLE>
The difference between June 30, 2000 actual and adjusted figures reflects
the sale, as part of our 1999 private placement, of warrants for 1,275,000
shares of common stock at a price of $1.00 per share and, warrants for
250,000 shares of common stock at a price of $0.73 per share, after
deducting the underwriting discount and the estimated offering expenses
that we will pay.
4
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ITEM 3. RISK FACTORS
PLEASE CONSIDER THE FOLLOWING RISK FACTORS BEFORE DECIDING TO INVEST IN OUR
COMMON STOCK
An investment in our common stock offered by this prospectus involves a high
degree of risk. You should carefully consider the risks described below before
deciding to purchase the shares of common stock. The risks described below are
not the only ones that we face.
Additional risks that generally apply to publicly traded companies, that are not
yet identified or that we currently think are immaterial, may also adversely
affect our company. Any of the following factors could adversely affect our
business, financial condition or results of operations. The trading price of our
common stock could, in turn, decline and you could lose all or part of your
investment.
Our shift in business focus may not be successful and if not successful may have
a negative impact on our business. We have shifted our business focus back from
sales of our software conversion product to remedy the Year 2000 problem to the
development of application software and offering related services including
software conversion, information systems reengineering, and systems integration.
There can be no assurance that our products and services will re-establish
themselves in the market and grow. If we are unsuccessful in shifting our
business focus, it will have a negative impact on our business. Because we have
recently refocused our business strategy, our business projections may not be
accurate and our plans may not be successful. We expect to derive a substantial
majority of our total revenue and net income from sales of our refocused
products and services in the future. Continued growth of our business will
depend upon several factors, including demand for our services, our ability to
develop new technology to meet the changing requirements of our customers,
technological change and competitive pressures.
We have yet to realize any income from our new business direction, which may
have a negative impact on our business' ability to be profitable. If our sales
revenues remain at current levels, we believe that we may continue to incur
operating losses as our expenses increase. As a result, our future profitability
is likely to depend upon the successful implementation of our business strategy,
which relies significantly upon the growth of our business. Without income and
profitability, our business may fail and our common stock will be worthless.
We have a negative current net worth and may continue to incur future losses,
which may have a negative effect on our stock value. We have a negative current
net worth and have been incurring losses on our business operations for the past
several years. We are not currently able to satisfy our obligations and require
additional working capital. Operating results may be affected by factors beyond
our control. These factors include the state of the economy, business conditions
in general and the other factors discussed in this prospectus. It is possible
that our negative current net worth could continue into the foreseeable future
and have a negative effect on the value of our stock to our shareholders.
If our losses should continue, it will have a negative effect on our business.
For the fiscal year ended December 31, 1999, we incurred a loss of $4,124,636 on
revenues of $9,585,772. These losses are primarily the result of lower than
expected demand for our services and technology in the Year 2000 remediation
market combined with our making a large investment and commitment in that
market. We may continue to incur operating losses. If we do continue to incur
operating losses, our business may suffer and our stock may become worthless.
5
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We need to effectively manage our changing and expanding operations to be
successful. Our goal is to grow our business. If achieved, this growth may place
a significant strain on our business resources, which have been reduced as a
result of our recent losses. To manage this growth effectively, we may need to
implement additional management information systems capabilities, further
develop our operating, administrative, financial and accounting systems and
controls, improve coordination among accounting, finance, marketing and
operations and hire and train additional personnel. We may not successfully
implement our expansion program and may need to scale back our operations and
our projections. We cannot be certain that our management will be able to
successfully identify, manage and exploit existing and potential market
opportunities. If we are unable to manage changing and expanding operations, our
business may suffer and our stock may become worthless.
We have several large potential contracts that are being negotiated, but if we
do not finalize any of these contracts, it could have a negative effect on our
revenue, operations and business strategy. We may be forced to curtail
operations and revise our business projections and strategy if these contracts
do not become finalized.
The success of our business depends to a large extent upon the efforts of our
officers and management personnel. If we fail to attract, assimilate or retain
highly qualified managerial and technical personnel our business could be
negatively affected. Our performance is substantially dependent on the
performance of our executive officers and key employees who must be
knowledgeable and experienced. We are also dependent on our ability to retain
and motivate high quality personnel, especially management and highly skilled
technical teams. The loss of the services of any executive officers or key
employees could have a negative effect on our business. Our future success also
depends on the continuing ability to identify, hire, train and retain other
highly qualified managerial and technical personnel. Competition for competent
and talented personnel is intense. If we fail to identify, hire, train and
retain highly qualified managerial and technical personnel, our business may
suffer. A loss of any member of our management team would require us to seek a
replacement and reestablish the personal contacts lost.
We do business in a market that is highly competitive, and we expect competition
to intensify in the future. Increased competition is likely to result in price
reductions, reduced gross margins and loss of market share, any of which could
harm our net revenue and results of operations. We may not be able to compete
with current and potential competitors, many of whom have longer operating
histories, greater name recognition, larger, more established customer bases and
significantly greater financial, technical, and marketing resources. Also, some
of our competitors provide or have the ability to provide the same range of
services we offer. Also, competitors may compete directly with us by adopting a
similar business model or through the acquisition of companies which can provide
complementary products or services. Our failure to compete effectively in our
markets would have a negative effect on our business and ultimately the market
value of our stock.
The computer industry in general, and the market for our application software in
particular, is characterized by rapidly changing technology, frequent new
technology introductions, and significant competition. In order to keep pace
with this rapidly changing market environment, we must continually develop and
incorporate into our services new technological advances and features desired by
the marketplace at acceptable prices. The successful development and
commercialization of new services and technology involves many risks, including
the identification of new opportunities, timely completion of the development
process, the control and recovery of development and production costs and
acceptance by customers of our products. There can be no assurance that we will
be successful in identifying, developing and marketing new service and
6
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technology, or that these services and technology will be accepted in the
marketplace. If we are unsuccessful in adapting our business to rapid
technological change, our business will suffer.
The computer industry is highly cyclical and has historically experienced
periodic downturns. The cyclical nature of the computer industry is beyond our
control. As an example, we experienced a substantial reduction in demand for
Year 2000 computer solutions. A similar decrease in demand for our new
applications and related services could materially adversely affect our business
and products. If a downturn occurs, we may have to curtail our operations and
revise our business strategy, all of which may make our stock worthless.
Our success depends in part on our ability to obtain and maintain proprietary
protection for our technologies, products, and processes, and our ability to
operate without infringing the proprietary rights of other parties. We may not
be able to obtain copyright, patent or other protection for our proprietary
technologies or for the processes developed by our employees. Legal standards
relating to intellectual property rights in computer software are still
developing and this area of the law is evolving with new technologies. Any
copyrights, patents or other registrations may not sufficiently protect us
against competitors with similar technology. In addition, our intellectual
property rights may be challenged, narrowed, invalidated or circumvented. Our
intellectual property rights do not guarantee any competitive advantage. Because
our success in part relies upon our technologies, if proper protection is not
available or can be circumvented, our business will suffer.
We may have to initiate litigation to enforce our intellectual property rights,
which may have a negative effect on our ability to compete in the marketplace.
If our competitors file patent applications covering technology that we employ,
we may have to participate in interference or opposition proceedings to
determine the priority of invention. An adverse outcome could subject us to
significant liabilities to third parties and require us to cease using the
technology or to license the disputed rights from third parties. We may not be
able to obtain any required licenses on commercially acceptable terms or at all.
The cost to us of any litigation or proceeding relating to intellectual property
rights, even if resolved in our favor, could be substantial. Some of our
competitors may be able to sustain the costs of litigation more effectively than
we can because of their substantially greater resources. Uncertainties resulting
from the initiation and continuation of any intellectual property litigation
could have a negative effect on our ability to compete in the marketplace.
Since there is a limited market for our common stock, the resale of the common
stock covered by this prospectus may depress the price of our stock. There can
be no assurance that a broader market for our common stock will develop
subsequent to this offering. Failure of such a market to develop could have a
negative effect on the liquidity of the common stock and, therefore, on an
investment in the shares. This would significantly increase the risks of an
investment in us. Our common stock is quoted on the OTC Bulletin Board. In view
of the relatively small supply of shares eligible for public resale, trading has
been limited. Selling our shares is more difficult because smaller quantities of
shares are bought and sold and security analysts' and news media's coverage of
our company is limited. These factors could result in lower prices and larger
spreads in the bid and ask prices for our shares.
Approximately 47% of our common stock will be available for resale which could
depress the market price. As of the date of this prospectus, there are 9,581,473
outstanding shares of common stock. The trading market for our common stock may
be adversely affected by the subsequent influx into the market of the 4,515,000,
shares of common stock being registered for resale in this prospectus, as well
as additional shares issuable upon the exercise of other outstanding options and
7
<PAGE>
warrants which we may in the future register for resale under the Securities Act
of 1933. This increase in the number of shares available for public sale could
have a depressive effect on the market. In addition, sales of substantial
numbers of the common stock covered by this Prospectus into the existing inter-
dealer market could have a depressive effect on the market price of our common
stock. While we cannot predict the impact of the public resale into the market
of any of these shares on the public trading price of our common stock, sales of
substantial amounts of our shares or the availability of substantial amounts of
our common stock for sale could lower market prices.
Since we are not currently a profitable business, we will have a need for
additional financing; our failure to raise additional money may have a negative
effect on our business plans. Our failure to obtain additional financing could
materially slow or prevent our development of products and services to meet our
clients needs and our ability to increase sales or achieve and sustain
profitability. While we have been successful to date in raising sufficient money
to support our business, there can be no assurance that additional financing
will be available on satisfactory terms or at all. If we are unable to increase
revenues significantly and/or secure additional financing, we could be forced to
curtail or discontinue our operations.
If we obtain additional financing through more sales of our stock, shareholders'
investments may be worth less. We may be required or may choose to sell equity
securities to obtain financing in the future including the sale of preferred
stock to the selling security holders. If we sell additional equity securities
at a price per share less than the purchase price at which the shares of common
stock are offered, investors purchasing common stock in this offering would
incur additional dilution. As a result, shareholders' investments may be worth
less than they may have anticipated.
CAUTIONARY STATEMENT REGARDING FORWARDING-LOOKING STATEMENTS
Some discussions in this prospectus may contain forward-looking statements that
involve risks and uncertainties. All statements, other than statements of
historical facts, included in this prospectus that address future activities,
events or developments, including such things as future revenues, product
development, market acceptance, responses from competitors, capital
expenditures, including their amount and nature, business strategy and measures
to implement strategy, competitive strengths, goals, expansion and growth of our
business and operations, plans, references to future success and other matters,
are forward-looking statements. These statements are based on certain
assumptions and analyses made by us in light of our experience and our
assessment of historical trends, current conditions and expected future
developments as well as other factors we believe are appropriate in the
circumstances.
Whether actual results will conform to our expectations and predictions,
however, is subject to a number of risks and uncertainties that may cause actual
results to differ materially, including the risks and uncertainties discussed in
this prospectus; general economic, market or business conditions; the
opportunities (or lack thereof) that may be presented to and pursued by us;
competitive actions by other companies; changes in laws or regulations; and
other factors, many of which are beyond our control. Consequently, all of the
forward-looking statements made in this prospectus are qualified by these
cautionary statements and there can be no assurance that the actual results
anticipated by us will be realized or, even if substantially realized, that they
will have the expected consequences to or effects on us or our business or
operations.
WHERE YOU CAN FIND MORE INFORMATION ABOUT US
We have filed with the Securities and Exchange Commission a registration
statement on Form SB-2,
8
<PAGE>
of which this prospectus is a part, under the Securities Act specifically to
register the shares of common stock offered. This prospectus does not contain
all of the information included in the registration statement. Statements in
this prospectus concerning the provisions of any document are not necessarily
complete. You should refer to the copies of these documents filed as exhibits to
the registration statement or otherwise filed by us with the Securities and
Exchange Commission for a more complete understanding of the matter involved.
We are subject to the informational requirements of the Exchange Act and file
reports, proxy statements and other information with the Securities and Exchange
Commission. The Securities and Exchange Commission maintains a website that
contains reports, proxy statements and other information about us. The address
of the Securities and Exchange Commission website is http://www.sec.gov.
Copies of our reports, proxy statements and other information also may be
inspected and copied at the public reference facilities maintained by the
Securities and Exchange Commission at Room 1024 of the Securities and Exchange
Commission's office at 450 Fifth Street, N.W., Judiciary Plaza, Washington, DC
20549, and at its regional offices located at 7 World Trade Center, Suite 1300,
New York, NY 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, IL 60661. Copies of these materials can also be obtained by mail at
prearranged rates from the Public Reference Section of the Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 or by
calling the Securities and Exchange Commission at 1-800-SEC-0330.
ITEM 4. USE OF PROCEEDS
We will not receive any proceeds upon the sale of shares by the selling
shareholders. However, this prospectus relates to the sale of up to 1,525,000
shares of our common stock that may be issued if the outstanding warrants held
by selling shareholders are exercised. In the event all of these warrants are
exercised, we will receive proceeds of $1,457,500. Those proceeds, if received,
will be used for working capital to support our business.
ITEM 5. DETERMINATION OF OFFERING PRICE
The selling shareholders will be able to determine the price at which they sell
their common stock.
ITEM 6. DILUTION
We are not registering any unissued shares in this registration statement.
ITEM 7. SELLING SHAREHOLDERS
The following table lists the beneficial ownership of our common stock by the
selling shareholders as of the effective date of this registration statement,
the number of shares of common stock covered by this prospectus, and includes:
. the names of the selling shareholders
. the number of shares of common stock that each selling shareholder
owns, assuming the exercise of all warrants and options
. the percentage of all outstanding shares of common stock that
ownership represents
. the number of shares of common stock owned by each selling shareholder
that may be offered for sale from time to time by this prospectus
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<PAGE>
. the number of shares of common stock owned assuming the sale of all
shares covered by this prospectus and the percentage of all
outstanding shares of common stock that ownership represents
The shares may be offered by the selling shareholders or by others whom receive
shares as a gift or through another non-sale related transfer. We may amend or
supplement this prospectus from time to time to update the information provided
in the table.
Except as otherwise noted below, during the past three years no selling
shareholder has been an officer, director or affiliate of ours, nor has any
selling shareholder had any material relationship with us during that period.
The shares of common stock being offered by our selling shareholders are being
registered to permit public secondary trading, and the selling shareholders may
offer all or part of their shares for resale from time to time. However, the
selling shareholders are under no obligation to either
. exercise their options and/or warrants, or
. if exercised, to sell all or any portion of the shares of common stock
received upon exercise immediately.
Because the selling shareholders may sell all or a portion of their shares of
common stock, no estimate can be given as to the number of shares of common
stock that will be held by any selling shareholder upon termination of this
offering. Accordingly, the table below assumes
. the exercise of the selling shareholders' warrants and options, even
if not yet vested, and
. the sale of all shares of common stock by the selling shareholders
immediately following the date of this prospectus.
Except for the shares offered by Gerald Parsons and the shares issued to
creditors of the company, the shares offered by the selling shareholders are
those obtained in connection with our December private placement and issuable
upon exercise of warrants to purchase shares issued to the selling shareholders
in connection with our December private placement. The form of the warrants is
filed as Exhibit 99.1 to the Registration Statement of which this prospectus is
a part. The shares offered by Gerald Parsons are issuable to him at his option
as of February 1, 2000.
The calculation of percentage ownership for each listed selling shareholder is
based upon the number of shares of common stock issued and outstanding at August
30, 2000, plus the shares of common stock offered by the selling shareholders,
which are issuable upon exercise of the warrants, or in the case of Gerald
Parsons, plus the shares he is entitled to but have not been issued to him. The
shares owned prior to the offering by each selling shareholder, other than
Gerald Parsons, includes the warrants. The number and percentage of shares owned
after the offering assumes all shares offered are sold to unaffiliated third
parties. A percentage ownership of less than one percent is indicated by an
asterisk.
<TABLE>
<CAPTION>
Shares Shares
Owned Prior to Number of Owned After
Offering (1) Shares Being Offering (2)
------------ ----------------
Selling Shareholder Number Percent Offered Number Percent
------------------- ------ ------- ------- ------ -------
<S> <C> <C> <C> <C> <C>
Joseph Kalb 93,500 * 75,000 18,500 *
Harry Binder 338,000 3.49 300,000 38,000 *
Alexander Zeltzer 150,000 1.56 150,000 0 *
Lev Paukman 300,000 3.10 300,000 0 *
Raoul Biniaurishvill 75,000 * 75,000 0 *
</TABLE>
10
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Irina Benaur 75,000 * 75,000 0 *
Eugene Khavinson 150,000 1.56 150,000 0 *
Roman Shlossberg 75,000 * 75,000 0 *
Howard Bernstein 150,000 1.56 150,000 0 *
Gregory Lipkin 75,000 * 75,000 0 *
Fernando Giancola 150,000 1.56 150,000 0 *
Steve Weintraub 75,000 * 75,000 0 *
Michael Pento 87,500 * 77,500 10,000 *
Henry Grinberg 150,000 1.56 150,000 0 *
Leon Rubakhim 75,000 * 75,000 0 *
B&J Realty, LLC 150,000 1.56 150,000 0 *
Traditions, LP 1,500,000 14.88 1,500,000 0 *
SCI Partnership 99,000 1.02 99,000 0 *
C. Barry Zolot 392,300 4.06 225,000 167,300 1.75
David Gitlin 49,500 * 49,500 0 *
Green Mountain Group, LLC 99,000 1.02 99,000 0 *
Gerald Parsons 110,000 1.15 100,000 10,000 *
Brendan Dawson 20,000 * 20,000 0 *
Cornell Technical Services 100,000 1.04% 100,000 0 *
Financial Technologies 100,000 1.04% 100,000 0 *
Jetform Corporation 100,000 1.04% 100,000 0 *
Comarco 20,000 * 20,000 0 *
</TABLE>
ITEM 8. PLAN OF DISTRIBUTION
The 4,515,000 shares of common stock covered by this prospectus may be offered
and sold from time to time by the selling shareholders. The selling shareholders
will act independently of us in making decisions related to the timing, manner
and size of each sale of the common stock offered. The selling shareholders may
sell the shares offered through the OTC Bulletin Board or some other mechanism.
The shares may be offered at prices related to our then current market price or
in negotiated transactions, including as part of an underwritten offering or one
or a combination of the following methods:
. purchases by a broker-dealer as a principal and the resale by the
broker or dealer for our account in connection with this prospectus
. ordinary brokerage transactions and transactions in which a broker
solicits purchasers
. block trades in which a broker-dealer will attempt to sell the shares
as agent but may position and resell a portion of the block as a
principal to facilitate the transaction.
We have agreed to use diligent efforts to maintain the effectiveness of the
registration of the shares being offered under this Registration Statement until
the expiration date of the warrants (December 31, 2004). Maintaining the
effectiveness may be for a shorter period which will terminate when all of our
shares issued or issuable upon exercise of the warrants have been registered
under the 1933 Act and disposed of as provide for an effective Registration
Statement under the 1933 Act.
Hedging Transactions The selling shareholders may enter into hedging
transactions with broker-dealers or other financial institutions. In connection
with these transactions, broker-dealers or other financial institutions may
engage in short sales of our common stock in the course of hedging the positions
they assume with selling shareholders. The selling shareholders may also sell
our common stock short and deliver the shares offered to close out their short
positions. The selling
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<PAGE>
shareholders also may enter into option or other transactions with broker-dealer
or other financial institutions. These transactions may require the delivery of
shares offered to broker- dealers or other financial institution, who may resell
the shares pursuant to this prospectus, as supplemented or amended to reflect
those transactions. The selling shareholders also may pledge the shares offered
under this prospectus to a broker-dealer or other financial institution. If a
default occurs under the pledge, the broker-dealer or other financial
institution may effect sales of the pledged shares pursuant to this prospectus,
as supplemented or amended to reflect those transactions. In addition, any
shares offered that qualify for sale pursuant to Rule 144 may be sold under Rule
144 rather than under this prospectus.
Broker-Dealer Transactions Any broker-dealer participating as an agent in the
sale of the shares offered may receive commissions from the selling
shareholders, and, if acting as agent for the purchaser of shares, from that
purchaser. Usual and customary brokerage fees will be paid by the selling
shareholders. Broker-dealers may agree with the selling shareholders to sell a
specified number of shares at a stipulated price per share. To the extent a
broker- dealer is unable to sell all of the shares allotted, it may purchase as
principal any unsold shares at the price required to fulfill the broker- dealer
commitment to the selling shareholders. Broker-dealers who acquire shares as
principal may resell those shares from time to time in transactions in the over-
the-counter market, in negotiated transactions or by a combination of these
methods of sale. These resales may be at market prices prevailing at the time of
sale or at negotiated prices. Broker-dealers may pay to or receive commissions
from the purchasers of these shares.
Regulation M We have advised the selling shareholders that the anti-
manipulation of Regulation M under the Exchange Act may apply to sales of shares
in the market and to the activities of the selling shareholders and their
affiliates. We will make copies of this prospectus available to the selling
shareholders and we have informed them of the need for delivery of copies of
this prospectus to purchasers on or prior to sales of the shares offered. The
selling shareholders may indemnify any broker-dealer that participates in
transactions involving the sale of the shares against certain liabilities,
including liabilities arising under the Securities Act. If any broker-dealers
purchase shares as principal, commissions paid or any discounts or concessions
allowed to any broker-dealers, and any profits received on the resale of the
shares, may be considered to be underwriting discounts and commissions under the
Securities Act. In order to comply with the securities laws of certain states,
the common stock will be sold in those jurisdictions only through registered or
licensed brokers or dealers. In addition, in certain states, the common stock
may not be sold unless the shares have been registered or qualified for sale in
the applicable state or an exemption from the registration or qualification
requirement is available and is met. We cannot guarantee that the selling
shareholders will sell all or any of the shares of common stock offered under
this prospectus.
ITEM 9. LEGAL PROCEEDINGS
We are not a party to any pending litigation and none is contemplated or
threatened.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS
The following table presents information about each of our directors and
executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION DIRECTOR SINCE
---- --- -------- --------------
<S> <C> <C> <C>
Sandor Rosenberg 53 Chairman of the Board and 1979
President
Richard DeRose 62 Executive Vice President
Stanley A. Reese 43 Senior Vice President
</TABLE>
12
<PAGE>
<TABLE>
<S> <C> <C> <C>
James D. Wester 62 Director 1985
Bonnie K. Wachtel 44 Director 1992
Charles A. May, Jr. 63 Director 1997
</TABLE>
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, 53, 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, 62, has been Executive Vice President since 1991. From 1979
to 1991 he served as the President and Chief Executive Officer 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 involved in computer and
telecommunications industry for the past 30 years.
Stanley A. Reese, 43, joined the company in 1993. Mr. Reese has been Senior
vice President since 1997 and Chief Operating Officer since march 1999. From
1992 to 1993 he served as Vice President, Technical Services at Tomco Systems,
Inc. Prior to Tomco Systems, he served as Senior Program Manager at ICF
Information Technology, Inc. Mr. Reese has over 17 years experience managing
and marketing in the large scale mainframe marketplace.
James D. Wester, 62, 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, 44, 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, a provider of technical services to
the federal government.
Charles A. May, Jr., 63, is a consultant focusing on national security and
defense conversion issues. In 1992, he retired as a Lt. General from the Air
Force where he last served as Assistant Vice Chief of Staff, Headquarters US Air
Force, Washington, D.C. He is a graduate of the U.S. Air Force Academy, where
he once served as an Associate Professor of Political Science. General May has
also graduated from the NATO Defense College and has completed the University of
Pittsburgh's Management Program for Executives.
As of the date of this prospectus, there have been no family relationships among
the directors and executive officers. No director, executive officer, promoter
or control person has been involved in any legal proceedings during the past
five years that are material to an evaluation of the ability or integrity of
that director, person nominated to become a director, executive officer,
promoter or control person of our company.
None of the individuals listed in this Item 10 has had a bankruptcy petition
filed by or against any business of which that person was a general partner or
executive officer either at the time of the bankruptcy, if any, or within two
years prior to that time.
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<PAGE>
No director, executive officer, promoter or control person was or has been
convicted in a criminal proceeding or is subject to a pending criminal
proceeding or subject to any order, judgment, or decree, not subsequently
reversed, suspended or vacated, of any court of competent jurisdiction,
permanently or temporarily enjoining, borrowing, or otherwise limiting his or
her involvement in any type of business, securities or banking activities.
No director, executive officer, promoter or control person has been found by a
court of competent jurisdiction in a civil action to have violated federal or
state securities or commodities law.
ITEM 11. PRINCIPAL SHAREHOLDERS
The following table presents the beneficial ownership of our common stock as of
August 30, 2000, as to:
. each person known by us to beneficially own more than 5% of our common
stock
. each of our directors
. each of our named executive officers
. all of our directors and officers as a group
The following conditions apply to all of the following tables:
. except as otherwise noted, the named beneficial owners have direct
ownership of the stock and have sole voting and investment power
associated with the shares shown
. the class listed as "common" includes the shares of common stock
underlying our options and warrants
. an asterick in the percentage of class column means the percentage is
equal to less than 1% of the outstanding share of common stock
. the address of all beneficial owners is care of our executive offices,
except for the following shareholders:
. Ms. Wachtel, whose address of record is 1101 14/th/ St. NW,
Washington, DC 20001
. Kenneth Parsons, whose address of record is 4318 Pennbrooke
Court, West River, MD 20764
. Traditions LP, whose address of record is 1717 Main Street,
Suite 2500, Dallas, TX 75201.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF SHARES BENEFICIALLY
BENEFICIAL OWNER OWNED % OF CLASS
---------------------------------------------------------------------------------
<S> <C> <C>
Sandor Rosenberg, Chairman,
Chief Executive Officer, and Director 1,902,800 19.9%
Richard S. DeRose, Executive Vice President 215,900 2.2%
Stanley A. Reese, Senior Vice President 134,750 1.4%
Charles A. May, Jr., Director 16,000 *
Bonnie K. Wachtel, Director 112,800 1.2%
James D. Wester, Director 383,500 3.9%
Kenneth Parsons 712,500 6.9%
Traditions LP 1,500,000 14.9%
All directors and executive officers as a group 2,765,750 27.1%
</TABLE>
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<PAGE>
The following is a breakdown of the amount of underlying common stock the listed
holders have the right to acquire within 60 days from options and warrants.
This underlying common stock has been included as part of the "shares
beneficially owned" listed in the above table.
<TABLE>
<CAPTION>
Total Equity and Underlying
Holder Rights to Equity Type of Security Common Stock
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Richard S. DeRose 215,900 Options 167,900
Stanley A. Reese 134,750 Options 128,750
Charles A. May 16,000 Options 16,000
Bonnie K. Wachtel 112,800 Options 13,000
James D. Wester 383,500 Options 185,000
Warrants 108,000
Kenneth Parsons 712,500 Options 712,500
Traditions, LP 1,500,000 Warrants 500,000
</TABLE>
There currently are no arrangements that may result in a change of ownership or
control of us.
ITEM 12. DESCRIPTION OF SECURITIES
COMMON STOCK
The following is a summary of certain rights and provisions of the shares of our
common stock. This summary includes all of the material rights and provisions of
these shares.
Authorization. We are authorized to issue 30,000,000 shares of common stock of
which 9,581,473 shares were issued and outstanding as of August 30, 2000. All
shares of common stock now outstanding are fully paid for and non-assessable.
Dividend Rights. The holders of common stock are entitled to receive dividends
and other distributions as and when declared by our board of directors out of
the assets and available funds. We have not paid any cash dividends to date, and
have no intention to pay any cash dividends on our common stock in the
foreseeable future. The declaration and payment of dividends is subject to the
discretion of our Board of Directors and to certain limitations imposed by the
Virginia corporate laws. The timing, amount and form of dividends, if any, will
depend, among other things, on our results of operations, financial condition,
cash requirements and other factors considered relevant by Board of Directors.
Voting Rights. The holders of common stock are entitled to one vote per share on
all matters presented for a shareholder vote. There is no provision for
cumulative voting. Our business is controlled by our board of directors. This
board is elected by a majority vote of the shareholders and bylaws have been
adopted for our guidance and control. Amendments to the bylaws can be made by
majority vote of the board of directors. The vote of the holders of a majority
of the outstanding shares of the voting stock of the common stock is required
for mergers, consolidations or other similar transactions.
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<PAGE>
Liquidation Rights. Upon the voluntary or involuntary dissolution, liquidation,
or winding up of our business affairs, the holders of common will receive the
remainder of ours assets, if any, after
. the payment in full of our debts and other liabilities
. the payment of dividends due to the holders of preferred stock
. the distribution of assets to the holders of preferred stock
The directors, at their discretion, may authorize and issue debt obligations,
whether or not subordinated, without prior approval of the shareholders. The
issuance of debt obligations may reduce the liquidation value of the shares of
common stock.
Preemptive Rights. Owners of our common stock do not have the preemptive right
to purchase additional shares offered by us in the future. That is, we may sell
additional shares of common stock to particular shareholders or to non-
shareholders without first offering shares to current shareholders.
Redemption. We do not have the discretionary right to redeem our common stock.
ITEM 13. INTEREST OF NAMED EXPERTS AND COUNSEL.
Not applicable.
ITEM 14. DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES
ACT LIABILITIES.
The Amended and Restated Certificate of Incorporation and By-Laws contain
provisions eliminating the personal liability of a director to us and our
shareholders for certain breaches of his or her fiduciary duty of care as a
director. These provisions, however, do not eliminate or limit the personal
liability of a director for:
. any breach of a director's duty of loyalty to us or our shareholders
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law
. any transaction from which the director derived an improper personal
benefit
These provisions offer persons who serve on our board of directors protection
against awards of monetary damages resulting from breaches of their duty of
care, except as indicated above, including grossly negligent business decisions
made in connection with takeover proposals. As a result of these provisions,
our ability or that of our shareholders to prosecute an action against a
director for a breach of his duty of care has been limited. These provisions,
however, do not affect the availability of equitable remedies such as an
injunction or rescission based upon a director's breach of his duty of care.
The Securities and Exchange Commission has taken the position that these
provisions will have no effect on claims arising under the federal securities
laws.
ITEM 15. ORGANIZATION WITHIN LAST FIVE YEARS.
To the best of our knowledge, we are not a party to any transaction or proposed
transaction where any director or executive officer, shareholder, or immediate
family member is an interested party or has a direct or indirect material
interest.
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<PAGE>
ITEM 16. DESCRIPTION OF BUSINESS.
OVERVIEW
Founded in 1979, Information Analysis Incorporated is in the business of
modernizing client computer information systems. Since our beginning, we have
performed software development and conversion projects for over 100 commercial
and government clients including Computer Sciences Corporation, IBM, Computer
Associates, MCI, Sprint, Citibank, U.S. Customs Service, U.S. Department of
Agriculture, U.S. Department of Energy, U.S. Army, U.S. Air Force, Veterans
Administration, and the Federal Deposit Insurance Corporation. Today, we
primarily apply our technology, services and experience to moving information
from larger and older computer systems, called legacy systems, into newer
systems and modernizing outdated software and to developing Internet based
programs.
Conversion and Modernization The conversion and modernization market is
extremely complex and diverse because clients often have multiple computer
systems that were purchased over decades of time and operate on several
different generations of computer software. Systems are often pieced together
over time and software that operates well on one type of computer system will
not work well on another. These patch-work systems present a wide variety of
challenges to integrate all of the computers and software.
In the early 1990's, many organizations tried to convert or re-engineer their
legacy systems to the personal computer based systems that most companies are
using today. These personal computer based systems, when connected into a
network, are known as client server systems. Many of these attempts failed
because the technology for client servers lacked sufficient performance and
capacity. The available software languages and tools were not well enough
developed to be capable of operating effectively with the newer systems.
By the mid 1990's, organizations did establish technology to work more
effectively with some of their newer computer systems. The benefits of the new
technologies were limited because of the substantial cost in replacing older
systems. Even today many legacy systems remain in use because of the enormous
cost to replace or improve these systems.
Currently, the options available to modernize these older systems are many.
There is an abundance of software that can communicate between legacy and
personal computer systems. New software development languages also allow users
to store information and retrieve information from legacy databases. Finally,
the arrival of the internet and intranet technology offers a different approach
at collecting and processing large volumes of user information including
transactions.
Now that Year 2000 projects are completed, companies are being driven for
various reasons to address the upgrading of their legacy systems. The Year 2000
experience has impressed on them the difficulty of finding and retaining staff
with outdated technical skills, much of which are practiced by senior
programmers in their fifties. Older computer hardware platforms such as Unisys
and Honeywell are reaching the end of their usefulness, and older programming
and data base languages are poorly supported by the companies that originally
sold these systems and software. Additionally, maintenance costs are
skyrocketing as vendors squeeze the most out of clients before the useful lives
of hardware and software expire. In addition, the Internet has added a new
level of pressure to compete in the computer areas electronic marketplace with
their business rivals. The next ten years should see an upsurge of movement and
change as organizations revamp their older legacy systems.
Internet Solution Market The internet/web solutions market is the fastest
growing segment of the computer consulting business as individuals, small
companies, large companies, and governmental
17
<PAGE>
agencies rush to establish a presence on the Internet. The range of products and
services involved in this sector is extensive and therefore, require some
specialization for a small company such as ours to make an impact. Most small
web companies are involved in building web-sites. Web sites are like small
reserved places on the Internet where companies and individuals can have people
see information. Web-sites typically provide many small duration projects. More
complex web projects generally require knowledge of clients' computer and
software systems which are often based on different types of large mainframe or
smaller mid sized-computers. Few small companies have the expertise to develop
these more sophisticated web applications. However, these types of applications
will be more prominent in the future as the web is better understood and this
will be the area that future business will grow the most.
The commercial and government sectors of the market can be quite different in
their requirements on the Internet. Generally, companies are interested in
cataloging and selling items on the Internet. In contrast, government agencies
tend to wish to disseminate data to the citizens the government agency is
intended to represent. There is some overlap in uses when web applications are
designed for procurement transactions or customer relations. What distinguishes
the government requirements is that most government processes are based on
forms. Many government agencies rely on thousands of internal and external
forms to conduct their business. Any company that wishes to develop
governmental web applications must address the forms issue. JetForm, the
electronic forms product resold and supported by us is the predominant forms
software in the federal government.
DESCRIPTION OF BUSINESS AND STRATEGY
We are currently structured to provide three business lines:
. conversion and modernization of mainframe legacy software systems
group,
. Internet application development, our e-processes group and
. outsourcing of professional services.
Each business group has been established as a separate profit and loss center,
responsible for expanding revenues and capabilities for their particular
markets. In reality, there is some overlap in personnel for projects that
require specific skills that another group may have. Clients who have engaged us
to convert a legacy system from one computer language to another, or one
computer system to another will often also need our services to connect their
computers to the Internet.
In the cases where the client needs our conversion products and services as well
as our Internet services, the conversion groups and e-process groups will
collaborate to achieve a workable solution. Additionally, there will be times
when clients need the outsourcing group to provide a pool of skilled talent and
recruiting services to a project where the conversion group or the e-process
group have worked out new systems for the client.
Conversion and Modernization
Since the mid 1990's, we have assisted clients in the move from older computer
languages generally associated with legacy computer systems to more modern
languages used with current-day computer systems. In updating their legacy
systems to comply with Year 2000 dates issues, many organizations became aware
of the evolving obsolescence of these systems and are now beginning to spend
money on their system modernization. In addition, as part of this modernization
many organizations wish to make it technically possible to connect these legacy
18
<PAGE>
systems to Internet applications. Our strategy has been to develop or acquire
tools that will facilitate the modernization process and demonstrate how we
provide unique offerings in the marketplace.
Our Products. We have developed a series of computer tools called ICONS, which
stands for Integrated CONversion Solutions. These tools, used with our
production methods, enhance a programmer's ability to convert older computer
code to new computer languages. ICONS can be used with several of the older
computer languages. ICONS will facilitate our ability to provide systems
modernization services to companies that seek to move from mainframe legacy
systems to modern computer systems
ICONS represents the culmination of over 15 years of our computer language
transition engineering experience and research. Automated functions and
features include:
. Computer code analysis and creation of the necessary database
. Analysis of all components of the original systems computer code
. Flexible computer code conversions
. Full-purpose computer code editing
. User interface conversion, which are the systems which allow the
computer user to interact with the computer in a way that is easier
for the user to understand.
Employing the ICONS tool suite gives us a significant advantage over traditional
methods used to convert legacy systems. With ICONS, a programmer can achieve
productivity levels five-fold or more over a programmer using traditional
methods and achieve an accuracy level up to 95% for portions that are run
through the ICONS tools.
The ICONS Methodology. Just as important as the ICONS tool set is the ICONS
methodology that we have developed through experience over the last 15 years. A
conversion project is very different from standard software development and
maintenance practiced by most programmers. The ICONS tools rely on careful
analysis as well as procedures that must be applied consistently throughout the
project. In fact, according to the Gartner Group over 50% of this type of
conversion fail and most of those that are successful are over budget and late
on delivery. The ICONS methodology includes processes for:
. Planning: Careful analysis and inventory of the system's programs
allows the project to divide the work into tasks that can be executed
by designated teams.
. Pilot project: Converting a small portion of the system from
beginning to end enables important procedural and programming
standards to be set and accepted by the client.
. Database Modeling: Ensures that the database system will perform
within acceptable performance standards and that every element of data
is correctly translated.
. Data conversion: Mapping out and translating data from original
system to the target system requires careful analysis and accurate
translation tools.
. Performance Tuning: Expert skills are required to ensure that the
target system performs as well or better than the original system. The
methodology includes certain procedures to ensure that this
performance is attained.
. Functional re-engineering: When appropriate, the methodology permits
certain re-engineering of functions to take advantage of modern
technology or changing business requirements.
. Implementation: Operational testing under controlled conditions
ensures that final implementation of the converted system occurs
smoothly and without serious interruption.
We have structured ourselves to address the wide range of requirements that we
envision the market
19
<PAGE>
for conversion and modernization of legacy systems will demand. We have
employees dedicated to sales and marketing, research and development of the
ICONS products, and project conversion specialists all reporting to the Chief
Operating Officer. Sales personnel rely on combing lists of potential clients
that fit the profile of legacy software users that should be interested in
modernizing their systems. In addition, relationships we have established with
many other professional services firms such as IBM and Computer Sciences
Corporation have provided valuable leads and led to opportunities. The suite of
ICONS tools give us, in our opinion, a competitive edge in performing certain
conversions and migrations faster and more economically than many other vendors.
The diverse capabilities of our staff in mainframe technology and personal
computer implementations help to assure that our staff can analyze the original
systems properly to conduct accurate and thorough conversions.
Our modernization methodology has developed over the past several years through
the completion of successful conversion projects. Senior members of our
professional staff can perform both technical and business requirements
analyses, and prepare general and detail design documentation, develop project
plans including milestones, staffing, deliverables, and schedules. The actual
work can be performed at client sites or at our premises, which has mainframe
and client server facilities for the use of our personnel.
Internet Application Development
We are also using the experience we have acquired over the last eight years as a
JetForm reseller to help secure projects for web based applications requiring
the use of forms. The JetForm product has evolved over the years into a strong
tool that can form the backbone of applications, especially those requiring
forms. We have used this expertise to obtain a number of federal government
clients and build sophisticated web applications. Our knowledge of legacy
system languages has been instrumental in connecting these web applications to
legacy databases residing on mainframe computers. During 1999, we have built a
core group of professionals that can build this practice over the coming years.
JetForm. The array of Jetform products available to us gives us a competitive
advantage in building Internet applications for the government agencies that
rely on forms as the media for most of the information transfer internally and
externally. Jetform's Formflow-99 product can design electronic forms that are
accessible by the primary Internet browser programs. These forms can then act
as data collectors and disseminators, which can correct incoming data and store
those data into legacy databases. JetForm's Central product can provide
translation of data to other computer based media such as e-mail, faxes, local
and remote printing, and ensure proper workflow sequences are instituted. The
e-process Framework product currently being introduced is able to provide
electronic forms on virtually all of the recognized computer systems including
computers using the most popular operating systems such as NT, Unix, MacIntosh,
and Linux.
As one of the largest resellers of JetForm products nationally, we have
developed a large base of federal government clients. We have been successful
in convincing many of these clients to use our professional expertise to build
electronic forms and applications that work and live on the Internet. At this
time, we have seven projects underway that create the core of our web-
application work. In addition, we continue to submit proposals to other
government agencies that are now being directed by executive order to provide
public forms on the Internet for public access.
Internet Application Program Development We have dedicated employees who focus
on Internet application program development and more specifically, in the area
of sales and marketing, professional services, product support, and training
staff. The sales staff has been successful over the
20
<PAGE>
years, selling over $5 million in products and services over the last five
years, with over $2 million in 1999. JetForm continues to send us prospective
leads and supports us with product and maintenance issues. Professional services
include programming, form design and development, training, and workflow
consulting. We regularly hold training at our headquarters and on-site at client
facilities.
Concentrating on the niche of electronic forms related web applications through
our relationship with JetForm, we have developed a group of professionals that
can quickly and efficiently develop web applications. We will focus on federal
government clients during the next several years and build upon our outstanding
reputation with federal clients to provide access to these agencies. We will be
able to reference successful projects completed or in development for the
Veterans Affairs, Federal Mediation and Conciliation Service, U.S. Department of
Agriculture, and Immigration and Naturalization Service.
Professional Services Outsourcing
Since our beginning, we have provided clients with professional services such as
programming, systems analysis, testing, training, and maintenance. Currently,
approximately 50% of our revenue is derived from providing our specialists and
their professional services and knowlwdge to our clients, primarily at the
client's site. This business unit has its own management, sales, and recruiting
personnel and is responsible for expanding revenues and profits. There are
approximately ten projects underway that consume approximately 30 of our staff.
The expertise of this staff varies widely including all of the currently popular
computer operating systems.
Aside from its revenue contribution, this business line provides a valuable
source of talent for temporary requirements of the other two business units,
which at times need specialized skills on short notice. In addition, since this
business line is constantly recruiting staff for its client base, it can spread
our image to the technical world and survey its clients and prospects for the
services of the other two lines of business.
Representative Assignments
Examples of the types of assignments underway are as follows;
. US Army Headquarters Civilian Personnel System, for which we provide
maintenance and support for mainframe and other systems
. US Customs Services' Automated Targeting System, for which we have
created an information system for obtaining data about potential
dangerous imports and exports processed by Customs.
. US Department of Agriculture's Animal & Plant Health Inspection
System, for which we are developing an inspection and decision making
system.
. Internal Revenue Service, for which we are developing forms for
printing on a mainframe system and providing database services.
It is anticipated that this business line will continue to grow over the next
several years and orient its projects more to web related activities in-line
with the general direction of the industry. With the difficulty in recruiting
permanent employees more evident today and the desire of technical personnel to
change jobs, many clients are opting to hire temporary personnel from companies
such as ours. Our staff prefers the opportunity to work in different places and
on varied projects, learning new skills and conquering new challenges.
According to a leading market research firm, the human resource outsourcing
industry within the United States is forecasted to grow from $13.9 billion in
1999 to $37.7 billion during 2003.
21
<PAGE>
COMPETITION
The competition in the conversion and modernization market is very strong. Many
software professional services companies have had some involvement in this area
and claim proficiency in performing these projects. We also face competition
from other companies which claim to substantially automate the process through
software tools products including Alydaar, Crystal Systems Solutions and Sapiens
International. Non-customized software, known as off the shelf software, for
strategy planning, such as SAP and Baan, provides an additional source of
competition, although, to date, the cost and lengthy installation time for this
planning software has slowed its acceptance in the market place. No matter what
type of solution is offered, many of our competitors have greater name
recognition than us, a larger, more established customer base and significantly
greater financial and market resources in comparison to ours.
In the Internet application development business sector there are many products
and professional services companies competing. At this time the sector is very
fragmented because of the newness of the technology and the ease of getting into
the business. Most large professional services firms are rapidly building their
companies by concentrating on existing customers and selecting best products as
their primary tools. These products are rapidly evolving and are leapfrogging
each other in capability every three to six months. There is also a wide
variety of very small firms that are building web sites and simple electronic
transaction applications. In the electronic forms area there are no companies
that have a complete solution similar to JetForm, but there are other forms
products such as INFORM, and Microsoft's software. The functions performed by
JetForm products can be duplicated using combinations of other products and
customized programming, but the costs for that approach are not competitive with
JetForm.
PATENTS AND PROPRIETARY RIGHTS
We are using the most current and cost effective legal systems to protect our
products from our competitors. As of yet we have not filed any patent
applications covering our methodologies and software. We distribute our ICONS
products under agreements that give customers the use of our system without
allowing those clients to legally provide our systems to anyone else. We also
use specific contracts designed to limit the amount of information about our
software and other systems that employees and consultants can legally provide to
others.
We also seek to protect the special computer software called source code of
ICONS as trade secrets and under copyright law. Source code represents the
secret building blocks of a computer program. We keep all the rights to have
and use our source code. It is important to know that the copyright protection
that the law provides for the information in databases is fairly limited. While
the arrangement and selection of data can be protected from the use of others,
the actual data is not, and others are free to create software performing the
same functions as our software. We believe that creating those same databases
would be very time consuming and costly.
ITEM 17. MANAGEMENT'S DISCUSSION AND ANALYSIS
SUMMARY
1999 was a transition year for us. Our efforts and activities shifted from one
aspect of our business to another. During this year the following occurred:
. We changed our sales strategies and marketing organizations to
complement our services and tools to address the legacy modernization
and conversion market.
. We added additional resources to support growth in our Web based
solutions services and
22
<PAGE>
our growing staff.
. We cut back on other product and service activities which have produced
revenues in prior years as part of our changing business directions for
the company.
. We conducted a private placement to provide cash to pay for some
operations for 2000.
The effect of this change in direction has been to move our focus from primarily
offering Year 2000 conversion services to information technology organizations
to offering a balance of services and products in legacy modernization,
conversion, re-engineering, and Web solutions.
Our management expects changes associated with our change of business direction
will be more evident in 2000 since we have stopped work in the Year 2000 area.
We were not profitable in 1999. Our costs expenses from our sales, marketing,
administrative, and research and development were higher than our profits from
our revenues. As we continue to move from the Year 2000 business, we believe our
economic prospects will improve.
The information in this section should be read together with the financial
statements that are included elsewhere in this Prospectus.
RESULTS OF OPERATIONS
The following table presents selected information from our Consolidated
Statements of Operations, expressed as a percentage of revenue, for the years
ended December 31, 1998 and December 31, 1999:
<TABLE>
<CAPTION>
Years Ended
December 31, 1998 December 31, 1999
--------------------------------------------------------
<S> <C> <C>
Revenue 100.0% 100.0%
Cost of Goods Sold 82.7% 80.3%
Gross Profit 17.3% 19.7%
Operating Expenses
Selling, general and administrative 45.5% 40.1%
Research and development 11.0% 0.6%
(Loss) from operations (39.2%) (21.0%)
Non recurring item (20.1%) (20.6%)
Other (expense) income 0.5% (1.4%)
(Loss) before income taxes (58.9%) (43.0%)
Provision for income taxes (0.0%) (0.0%)
Net (loss) (58.9%) (43.0%)
</TABLE>
1999 Compared to 1998
Revenue
Fiscal 1999 revenue decreased $5.7 million, or 37.5%, to $9.6 million in fiscal
year 1999 from $15.3 million in fiscal year 1998. The reason for this decrease
was primarily due to lower over-all Year 2000 sales in both product and
professional services sales. Revenue from software sales decreased $3.9
million, or 74.6%, to $1.3 million in fiscal year 1999 from $5.2 million in
fiscal year 1998. Revenue from professional services decreased $1.9 million, or
18.4%, to $8.3 million in fiscal year 1999 from $10.1 million in fiscal year
1998. Revenue overall attributable to year 2000 work decreased $7.2 million, or
71.3%, to $2.9 million in 1999 from $10.1 million in 1998.
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<PAGE>
Gross Profit
Gross profit was $1.9 million in fiscal 1999 versus $2.6 million in 1998,or
19.7% of revenue in 1999 compared to 17.3% of revenue in 1998. Professional
services gross margin was 30.1% of revenue in 1999, compared to 4.3% in 1998.
The increase in professional services gross margin was primarily attributable to
the non-existence of certain fixed-price Year 2000 contracts in 1999, which had
a negative effect on the gross margin during the same period in 1998. Software
sales gross margin was (45.5%) of revenue in 1999, down from 42.2% in 1998. The
decrease in software sales gross margin was do to the acceleration in
amortization for Universal Computer Aided Software Translator, also known as
UNICAST, capitalized software. In 1999 UNICAST after write-offs is fully
amortized.
Selling, General and Administrative Expense
Fiscal 1999 selling, general and administrative expense decreased to $3.8
million, or 40.1% of revenue, from $7.0 million, or 45.5% of revenue in 1998, a
decrease in expenses of 44.9%. The decrease was do to a concerted effort by
management to scale back expenses during our transition away from Year 2000
products, services, and support for our UNICAST product line.
Research and Development
Fiscal 1999 research and development expense decreased to $0.1 million, or 0.6%
of revenue, from $1.7 million, or 11% of revenue in 1998. The decrease is due
to lower software maintenance for the versions of our UNICAST product line of
tools.
RESULTS OF SIX MONTH PERIODS ENDED JUNE 30, 2000
The following table presents selected information from our Consolidated
Statements of Operations, expressed as a percentage of revenue, for the six
months ended June 30, 1999 and June 30, 2000:
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1999 June 30, 2000
----------------------------------------------------
<S> <C> <C>
Revenue 100.0% 100.0%
Cost of Goods Sold 73.0% 68.8%
Gross Profit 27.0% 31.2%
Operating Expenses
Selling, general and administrative 37.1% 30.9%
Research and development 1.2% 0.0%
(Loss) from operations (11.3%) 0.3%
Non recurring item 0.0% 0.0%
Other expense (1.2%) (0.2%)
(Loss) income before income taxes (12.5%) 0.1%
Provision for income taxes 0.0% 0.0%
Net (loss) income (12.5%) 0.1%
</TABLE>
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Revenue
Our revenues in the first six months of fiscal 2000 were $3.2 million, compared
to $6.0 million in the first six months of fiscal 1999, a decrease of 46.4%.
Professional services revenues were $2.6
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<PAGE>
million versus $5.4 million, a decrease of 51.7%. Product revenues were $0.606
million versus $0.601 million, an increase of 0.9%. The decrease in revenues for
professional services revenue is primarily attributable to the discontinuation
of sales for Year 2000 related projects as compared with the same period last
year. The increase in product sales were mainly attributable to the increase in
sales of our software toolset, ICONS, which is capable of conversions and
migrations from mainframe legacy systems.
Gross margin
Gross margins were $1.0 million or 31.2% of sales, in the first six months of
fiscal 2000 versus $1.6 million, or 27.0% of sales, in the first six months of
fiscal 1999. Of the $1.0 million in 2000, $0.7 million was attributable to
professional services and $0.3 million was due to software sales. Gross margins
as a percentage of sales were 26.3% for professional services and 52.4% for
software sales for 2000, versus 32.4% for professional services and (22.7%) for
software sales in 1999. The increase in gross margins as a whole is
attributable to the discontinuation of Year 2000 related projects which
contained lower overall margins.
Selling, General & Administrative Expense
Selling, general and administrative expenses were $1.0 million, or 30.9% of
revenues, in the first half of 2000 versus $2.2 million, or 37.1% of revenues,
in the first half of 1999, a decrease in expenses of 55.4%. The decrease is
attributable to elimination of our marketing and support expenses associated
with Year 2000 services and product.
Research and Development
No research and development expenditures were incurred in the first six months
of fiscal 2000 versus $72,935 research and development expenditures in the first
six months of fiscal 1999.
Profit
We reported a profit of $0.002 million in the first half of 2000 compared to an
operating loss of $0.8 million, in the first half of 1999. In general, we
experienced a slight profit through the second quarter of 2000. The improvement
is a combination of higher gross margin percentages, lower selling, general and
administrative expenses and the discontinued amortization of UNICAST capitalized
software which was fully written-off by year-end 1999.
Liquidity and Capital Resources
Through the first six months of 2000, we financed our operations from current
collections and through our bank line of credit. Cash and cash equivalents as
of June 30, 2000 were $96,025 compared to $15,927 at June 30, 1999. As of June
30, 2000 we had an outstanding balance on our line of credit of $732,791.
We are in default with our line of credit with First Virginia Bank because of
our failure to meet certain financial tests. However, we currently have a
forbearance agreement with First Virginia Bank that effectively extends our
$1,000,000 line of credit to September 28, 2000.
We are in negotiations with various organizations to obtain a new line of
credit.
If revenue continues at current levels, we believe we will produce sufficient
cash flow to continue to pay all essential expenses that are required to operate
our business. Any significant reduction in
25
<PAGE>
revenue could have a negative effect on our operational capabilities. We cannot
be certain that we will not need additional cash resources at some point in
fiscal 2000. We may from time to time consider additional equity offerings to
finance business expansion. We are uncertain that if we do need additional cash
resources that we will be able to raise additional capital.
We have no material commitments for capital expenditures
EMPLOYEES
We employ 54 full time and part-time employees. None of our employees are
represented by a union. In addition, we also maintain independent contractor
relationships with 18 individuals for computer services. Approximately 80% of
our professional employees have at least four years of related experience to the
jobs they are doing now for us. For our computer related services, we believe
that the diverse professional opportunities and interaction among our employees
contributes to maintaining a stable professional staff with limited turnover.
LEGAL PROCEEDINGS
We are not involved in any material legal proceedings, although we are involved
from time to time in routine litigation which arises as a result of our
business.
ITEM 18. DESCRIPTION OF PROPERTY
Our offices are located at 11240 Waples Mill Road, Suite 400, Fairfax, VA.
22030. We hold a lease for 18,280 square feet. This lease expires on February
28, 2004.
ITEM 19. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There were none.
ITEM 20. MARKET FOR OUR COMMON STOCK
Our common stock, traded under the symbol IAIC, has been traded on over the
counter bulletin board since July 29, 1999. From June 2, 1998 to July 28, 1999
our common stock was traded on the Nasdaq National Market. Our common stock was
traded on the Nasdaq Small Cap Market from September 8, 1997 to June 1, 1998.
Prior to September 8, 1997, our common stock was traded over the counter.
Despite trading in these various markets, the market for our common stock is
limited. As of the date of this prospectus, only 9,581,473 shares of our common
stock are eligible for public trading. We cannot give you any assurance that a
significant trading market for our common stock will develop or, if developed,
that it will be sustained.
The following table presents the range of the high and low closing bid prices of
our common stock during each of the calendar quarters identified below.
HIGH LOW
---- ---
1998
1st Quarter....................................... $ 20.75 $11.75
2nd Quarter....................................... $16.375 $9.875
3rd Quarter....................................... $ 14.50 $1.531
4th Quarter....................................... $ 2.438 $1.063
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<PAGE>
1999
1st Quarter........................................ $1.593 $0.625
2nd Quarter........................................ $0.750 $0.375
3rd Quarter........................................ $0.625 $0.125
4th Quarter........................................ $1.218 $0.156
2000
1st Quarter........................................ $2.250 $0.531
2nd Quarter........................................ $1.093 $0.375
Any quotations for periods prior to September 8, 1997 and after July 29, 1999
reflect inter-dealer prices without adjustment for retail markups, mark downs or
commissions and may not necessarily represent actual transactions. From
September 8, 1997 to July 28, 1999, the prices reflect the high and low bid
prices as reported by Nasdaq.
As of August 30, 2000, our records indicate we have 108 shareholders. We have
not paid a cash dividend on our common stock for the last two fiscal years. We
intend to retain any future earnings to finance the expansion of our business.
We do not anticipate that we will pay cash dividends in the foreseeable future.
Our future dividend policy will depend on our earnings, capital requirements,
expansion plans, financial condition as well as other relevant factors.
ITEM 21. EXECUTIVE COMPENSATION
The following table provides summary information concerning compensation paid to
or accrued by our Chief Executive Officer and all other executive officers who
earned more than $100,000 (salary and bonus) for all services they provided in
all capacities to us during the year ended December 31, 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Securities
Name and Principal Annual Compensation Underlying
-------------------
Position Year Salary Bonus Options (#)
-------- ---- ------ ----- -------
<S> <C> <C> <C> <C>
Sandor Rosenberg 1999 $ 76,457 -- --
Chairman of the Board & 1998 $102,083 -- --
Chief Executive Officer 1997 $100,375 -- --
------------------------------------------------------------------------------------------------
Richard S. DeRose 1999 $ 97,617 -- 20,000
Executive Vice President 1998 $150,010 -- --
Chief Financial Officer 1997 $110,835 $27,500 5,000
------------------------------------------------------------------------------------------------
Stanley A. Reese 1999 $ 97,867 20,000
Senior Vice President & 1998 $135,827 -- 50,000
Chief Operating Officer 1997 $103,382 -- 5,000
</TABLE>
No executive officer has received any perquisite or benefit, securities, or
property that exceeded the lesser of $50,000 or 10% of the executive officer's
total annual salary and bonus.
27
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table presents all option grants during 1999 to all executive
officers:
<TABLE>
<CAPTION>
% of Total Options Granted Exercise
Name Granted To Employees in Fiscal year Price Expiration Date
---- ------- --------------------------- ----- ---------------
<S> <C> <C> <C> <C>
Richard S. DeRose 20,000 18.6% $0.59 05/11/09
Stanley A. Reese 20,000 18.6% $0.59 05/11/09
</TABLE>
The following table depicts option exercise activity in the last fiscal year and
fiscal year-end option values associated with the executive officers named
below. The value of unexercised in-the-money options at December 31, 1999
equals the market value of the underlying common stock at December 31, 1999
minus the option exercise price. The fair market value of our common stock at
December 31, 1999 was $0.844.
Aggregated Option Exercises in Last Fiscal Year and FY End Option Values
<TABLE>
<CAPTION>
Shares Number of Securities
Acquired Underlying Unexercised Value of Unexercised In-the-
Name on Value Options at 12/31/99 Money Options at 12/31/99
---- ----- ------------------- --------
Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
-------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richard S. DeRose -- 117,900 $42,438 --
Stanley A. Reese -- 128,750 $ 8,615 --
</TABLE>
ITEM 22. FINANCIAL STATEMENTS.
See Consolidated Financial Statements which begin on page F-1.
ITEM 23. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On January 11, 1999, we dismissed Ernst & Young, LLP as our independent
accountant. Ernst & Young's report for the period January 1 until December 31,
1997, which was the only fiscal year Ernst & Young was engaged as our
accountants, did not have either an adverse opinion or a disclaimer of opinion,
nor was their report qualified or modified as to uncertainty, audit scope or
accounting principles. During our 1997 the fiscal year and for all other
interim financial reporting periods prior to Ernst & Young's dismissal, we had
no disagreements on any matter related to accounting principles or practices,
disclosures made in our financial statements, or the scope and procedure related
to their audits of us. Our decision to change accountants was approved by our
audit committee.
Effective January 11, 1999, we engaged Rubino & McGeehin, Chtd. as our new
independent accountant to audit our financial statements, beginning with our
1998 fiscal year. During the time that Ernst & Young served as our independent
accountant, including all interim periods within 1998, we never consulted Rubino
& McGeehin about any matter. Rubino & McGeehin were our independent accountants
prior to our engagement of Ernst & Young.
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<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Certified Public Accountants..... F-1
Financial Statements
Consolidated Balance Sheets............................ F-2
Consolidated Statements of Operations.................. F-3
Consolidated Statement of Stockholders' Deficit........ F-4
Consolidated Statements of Cash Flows.................. F-5
Notes to Consolidated Financial Statements............. F-6
Interim Consolidated Balance Sheets.................... F-18
Interim Consolidated Statements of Operations.......... F-19
Interim Consolidated Statements of Cash Flows.......... F-20
Notes to Interim Consolidated Financial Statements..... F-21
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<PAGE>
PART II
ITEM 24. INDEMNIFICATION PROVISIONS
Our Amended and Restated Articles of Incorporation and Bylaws provide that we
may indemnify an officer or director who is made a party to any proceeding,
including a law suit, because of his position, if he acted in good faith and in
a manner he reasonably believed to be in our best interest. However, an officer
or director's liability shall not be limited if the officer or director engaged
in willful misconduct or a knowing violation of the criminal law or of any
federal or state securities law, including, without limitation, any claim of
insider trading or manipulation of the market for any security.
In certain cases, we may advance expenses incurred in defending any proceeding.
To the extent that the officer or director is successful on the merits in any
proceeding as to which that person is to be indemnified, we must indemnify him
against all expenses incurred, including attorney's fees. With respect to a
derivative action, indemnity may be made only for expenses actually and
reasonably incurred in defending the proceeding, and if the officer or director
is judged liable, only by a court order. The indemnification is intended to be
to the fullest extent permitted by the laws of the Commonwealth of Virginia.
Regarding indemnification for liabilities arising under the Securities Act of
1933, which may be permitted to directors or officers according to the foregoing
provisions, we are informed that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy, as expressed in the
Act and is, therefore, unenforceable.
TRANSFER AGENT
The transfer agent for our common stock is American Stock Transfer & Trust Co.
LEGAL MATTERS
Certain legal matters in connection with the securities offered under this
Registration Statement will be passed upon for us by Mintz, Levin, Cohn, Ferris,
Glovsky & Popeo, Professional Corporation, Boston, Massachusetts.
EXPERTS
Our financial statements which appear in this Prospectus have been audited by
Rubino & McGeehin, Chtd., independent certified public accountants, to the
extent and for the periods identified in their report appearing elsewhere in
this prospectus. These financial statements are included in reliance upon their
report given upon their authority as experts in accounting and auditing.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
ITEM COST
---- ----
Securities and Exchange Commission Registration fees.. $ 408.84
Legal fees and Expenses............................... 20,000.00
Accounting fees....................................... 500.00
Miscellaneous......................................... 100.00
----------
TOTAL $21,008.84
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<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
In January 2000, we completed the second phase of our December 1999, private
placement memorandum which raised an additional $125,000 in exchange for 250,000
shares of common stock and 125,000 five-year warrants, exercisable at $1.00 per
share. The shares and warrants were sold to individual investors. The funds will
be utilized to finance our business operations. These warrants are exercisable
immediately.
ITEM 27. EXHIBITS
The Exhibit to this Registration Statement are listed in the Index to Exhibits
on Page 34.
ITEM 28. UNDERTAKINGS
The undersigned registrant undertakes:
1. To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
a. To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
b. To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent post-
effective amendment) which, individually or in the aggregate, represent a
fundamental change in the information presented in the registration statement;
c. To include any material information associated with the plan of
distribution not previously disclosed in the registration statement or any
change to such information in the registration statement.
2. For determining liability under the Securities Act, treat each post-
effective amendment as a new registration statement of the securities offered,
and the offering of the securities at that time to be the initial bona fide
offering.
3. To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
4. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the small business issuer according to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable.
31
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing of this Form SB-2/A-2 Registration Statement and has
duly caused this Form SB-2/A-2 Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in Fairfax, Virginia on August
30, 2000.
INFORMATION ANALYSIS INCORPORATED.
By: /s/ Sandor Rosenberg
---------------------
Sandor Rosenberg
Chairman and President
32
<PAGE>
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Sandor Rosenberg his attorneys-in-fact, for him in any
and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement (or any other Registration Statement
for the same offering that is to be effective upon filing pursuant to Rule
462(b) under the Securities Act of 1933), and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby granting unto said attorney-in-fact
full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as full to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact or his substitute may lawfully do or
cause to be done by virtue of this prospectus.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ Sandor Rosenberg Chairman of the Board August 30, 2000
----------------------------
Sandor Rosenberg and President
(principal executive officer)
/s/ Charles A. May, Jr. Director August 30, 2000
----------------------------
Charles A. May, Jr.
/s/ Bonnie K. Wachtel Director August 30, 2000
------------------------
Bonnie K. Wachtel
/s/ James D. Wester Director August 30, 2000
----------------------
James D. Wester
33
<PAGE>
INFORMATION ANALYSIS INCORPORATED
INDEX TO EXHIBITS FILED WITH
FORM SB-2 REGISTRATION STATEMENT
Exhibit
Number Description
--------- -----------
3.1 Amended and Restated Articles of Incorporation of the
Registrant effective March 18, 1997 (incorporated by
reference to Exhibit 3.1 to the Registrant's Form 10-KSB/A
for the fiscal year ended December 31, 1996 and filed on
July 3, 1997)
3.2 Article of Amendment to Articles of Incorporation of the
Registrant (incorporated by reference to Exhibit 3.2 to the
Registrant's Form 10-KSB/A for the fiscal year ended
December 31, 1997 and filed on March 31, 1998)
3.3 Amended By-Laws of the Registrant (incorporated by reference
to Exhibit 3.3 to the Registrant's Form 10-KSB/A for the
fiscal year ended December 31, 1997 and filed on March 31,
1990)
4.1 Copy of Stock Certificate (incorporated by reference to
Exhibit 4.1 to the Registrant's Form 10-KSB/A for the fiscal
year ending December 31, 1997 and filed on March 30, 1998)
4.2 Form of Warrant issued in December 1999 and January 2000
(incorporated by reference to Exhibit 4.2 to Registrant's
Form 10-KSB for the fiscal year ended on December 31, 1999
and filed on March 30, 2000)
4.3 Common Stock and Warrant Purchase Agreement dated December
31, 1999 (incorporated by reference to Exhibit 4.3 to the
Registrant's Form 10-KSB for the fiscal year ended December
31, 1999 and filed on March 31, 2000)
5 Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo,
P.C., with respect to the legality of the securities being
registered (filed herewith)
10.1 Office Lease for 18,280 square feet at 11240 Waples Mill
Road, Fairfax, Virginia 22030 (incorporated by reference to
Exhibit 10.1 to the Registrant's Form 10-KSB/A for the
fiscal year ending December 31, 1996 and filed on July 3,
1997)
10.2 Company's 401(k) Profit Sharing Plan through Aetna Life
Insurance and Annuity Company (incorporated by reference to
Exhibit 10.2 to the Registrant's Form 10-KSB/A for the
fiscal year ending December 31, 1996 and filed on July 3,
1997)
10.3 1986 Stock Option Plan (incorporated by reference from the
Registrant's Form S-8 filed on December 20, 1988)
34
<PAGE>
10.4 1996 Stock Option Plan (incorporated by reference from the
Registrant's Form S-8 filed on June 25, 1996)
10.5 Line of Credit Agreement with First Virginia Bank
(incorporated by reference to the Registrant's Form 10-KSB
for the fiscal year ending December 31, 1995 and filed April
15, 1996 (Commission File No. 33-9390).
10.6 Warrant Agreement between James D. Wester, a director and
the Company dated February 24, 1993 (incorporated by
reference from the Registrant's Form 10-KSB/A for the fiscal
year ending December 31, 1996 and filed on July 3, 1997)
10.7 Royalty Agreement between James D. Wester and the Company in
exchange for development expense advances (incorporated by
reference from the Registrant's Form 10-KSB/A for the fiscal
year ending December 31, 1996 and filed on July 3, 1997)
10.8 Amended Royalty Agreement between James D. Wester and the
Company in exchange for development expense advances
(incorporated by reference from the Registrant's Form 10-QSB
for the period ending March 31, 1998 and filed on May 15,
1998).
15.1 Letter on unaudited interim financial information
(incorporated by reference to the Registrant's Form 10-QSB
for the quarter ended March 30, 2000 and filed on May 15,
2000)
16.1 Letter on change in certifying accountant (incorporated by
reference to Exhibit 27.1 to the Registrant's Form 8-K filed
on January 12, 1999)
21.1 List of Subsidiaries (incorporated by reference to Exhibit
21.1 to the Registrant's Form 10-KSB for the fiscal year
ended December 31, 1999 and filed on March 31, 2000)
23.1 Consent of Rubino & McGeehin, Chartered (incorporated by
reference to Exhibit 23.1 to the Registrant's Form 10-KSB
for the fiscal year ended December 31, 1999 and filed on
March 31, 2000)
23.2 Consent of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo,
P.C., (reference is made to Exhibit 5)
24 Power of Attorney (filed in Part II of this Registration
Statement)
27.1 Financial Data Schedule (incorporated by reference to
Exhibit 27.1 to the Registrant's Form 10-QSB for the quarter
ended March 30, 2000 and filed on May 15, 2000)
99.1 Form of Warrant (incorporated by reference to Exhibit 99.1
to the Registrant's Form S-3 filed on January 31, 2000.
35
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Information Analysis Incorporated
We have audited the accompanying consolidated balance sheet of Information
Analysis Incorporated and subsidiaries as of December 31, 1999, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the years ended December 31, 1999 and 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion. In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Information
Analysis Incorporated and subsidiaries as of December 31, 1999, and their
consolidated results of operations and cash flows for the years ended December
31, 1999 and 1998, in conformity with generally accepted accounting principles.
/s/ Rubino & McGeehin, Chartered
________________________________
February 24, 2000
Bethesda, Maryland
F-1
<PAGE>
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
---------
<TABLE>
<CAPTION>
December 31, 1999
-----------------------
<S> <C>
ASSETS
Current assets
Cash and cash equivalents $ 133,468
Accounts receivable, net of allowance of $466,890 1,902,244
Employee advances 6,230
Prepaid expenses 129,995
Other receivables 97,299
------------
Total current assets 2,269,236
Fixed assets, net of accumulated depreciation and amortization
Of $1,940,295 279,787
Equipment under capital leases, net of accumulated amortization
Of $63,649 11,553
Capitalized software, net of accumulated amortization of $2,430,737 463,653
Other receivables 28,992
Other assets 58,275
------------
Total assets $ 3,111,496
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,491,179
Accrued payroll and related liabilities 276,871
Other accrued liabilities 727,904
Revolving line of credit 501,500
Current maturities of capital lease obligations 6,936
------------
Total current liabilities 3,004,390
------------
Common stock, par value $0.01, 15,000,000 shares authorized,
10,723,284 shares issued, 9,218,673 shares outstanding 107,233
Additional paid-in capital 13,763,904
Accumulated deficit (12,909,718)
Less treasury stock, 1,504,611 shares, at cost (854,313)
------------
Total stockholders' equity 107,106
------------
Total liabilities and stockholders' equity $ 3,111,496
============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
<PAGE>
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
----------
<TABLE>
<CAPTION>
For the years ended December 31,
----------------------------------------------
1999 1998
--------------------- ---------------------
<S> <C> <C>
Sales
Professional fees $ 8,259,492 $10,118,435
Software sales 1,326,280 5,213,923
----------- -----------
Total sales 9,585,772 15,332,358
----------- -----------
Cost of sales
Cost of professional fees 5,770,008 9,686,651
Cost of software sales 1,929,496 3,000,639
----------- -----------
Total cost of sales 7,699,504 12,687,290
----------- -----------
Gross profit 1,886,268 2,645,068
Selling, general and administrative expenses 3,842,212 6,974,211
Research and development 60,719 1,680,818
----------- -----------
Loss from operations (2,016,663) (6,009,961)
Other items:
Write-down of capitalized software costs (1,978,362) (3,083,642)
Other (expense) income (129,611) 69,658
----------- -----------
Loss before provision for income taxes (4,124,636) (9,023,945)
Provision for income taxes - -
----------- -----------
Net loss $(4,124,636) $(9,023,945)
=========== ===========
Loss per common share (basic and diluted) $ (0.59) $ (1.35)
Weighted average common shares outstanding
(basic and diluted) 6,988,336 6,665,321
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
F-3
<PAGE>
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------
<TABLE>
<CAPTION>
Shares of (Accumulated
Common Additional Deficit)
Stock Common Paid-in Retained Treasury
Issued Stock Capital Earnings Stock Total
------------ ---------- ------------ -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balances, 7,498,430 $ 74,984 $ 6,517,655 $ 238,863 $(854,313) $ 5,977,189
December 31, 1997
Exercise of stock options and Warrants 217,684 2,177 453,971 - - 456,148
Stock issued for private placement 580,155 5,802 5,640,883 - - 5,646,685
Stock issued for ISSC acquisition 62,515 625 27,157 - - 27,782
Net loss - - - (9,023,945) - (9,023,945)
---------- -------- ----------- ------------ ------------- -----------
Balances, 8,358,784 83,588 12,639,666 (8,785,082) (854,313) 3,083,859
December 31, 1998
Exercise of stock options and Warrants 44,500 445 19,329 - - 19,774
Stock issued for software purchase 20,000 200 17,909 - - 18,109
Stock issued for private placement 2,300,000 23,000 1,087,000 - - 1,110,000
Net loss - - - (4,124,636) - (4,124,636)
---------- -------- ----------- ------------ ------------- -----------
Balances, 10,723,284 $107,233 $13,763,904 $(12,909,718) $(854,313) $ 107,106
========== ======== =========== ============ ============= ===========
December 31, 1999
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
F-4
<PAGE>
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------
<TABLE>
<CAPTION>
For the years ended December 31,
----------------------------------------------
1999 1998
--------------------- ---------------------
<S> <C> <C>
Net loss $(4,124,636) $(9,023,945)
Adjustments to reconcile net loss to net cash
Provided by operating activities:
Depreciation 282,966 383,214
Amortization 20,325 38,786
Amortization of capitalized software 1,096,170 1,314,272
Loss on sale of fixed assets 24,923 6,886
Capitalized software write-down 1,978,362 2,902,152
Changes in operating assets and liabilities
Accounts receivable 2,517,551 (1,368,743)
Other receivables and prepaid expenses 3,076 (29,362)
Accounts payable and accrued expenses (1,611,793) 1,814,506
Refundable income taxes - 33,119
----------- -----------
Net cash provided (used) in operating activities 186,944 (3,929,115)
----------- -----------
Cash flows from investing activities
Acquisition of furniture and equipment - (266,036)
Increase in capitalized software (113,555) (3,191,574)
Proceeds from sale of fixed assets 56,665 3,670
----------- -----------
Net cash used in investing activities (56,890) (3,453,940)
----------- -----------
Cash flows from financing activities
Net (payments) borrowing under bank revolving line of credit (1,294,700) 1,196,600
Repayment of long-term debt - (83,346)
Principal payments on capital leases (8,059) (20,386)
Proceeds from private placement of common stock 1,110,000 5,646,685
Proceeds from exercise of stock options and warrants 19,774 456,148
----------- -----------
Net cash (used) provided by financing activities (172,985) 7,195,701
----------- -----------
Net decrease in cash and cash equivalents (42,931) (187,354)
Cash and cash equivalents at beginning of the year 176,399 363,753
----------- -----------
Cash and cash equivalents at end of the year $ 133,468 $ 176,399
=========== ===========
Supplemental cash flow information
Interest paid $ 137,988 $ 44,965
Income taxes paid $ - $ -
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
F-5
<PAGE>
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_______________
1. Summary of Significant Accounting Policies
Operations
----------
Information Analysis Incorporated 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
---------------------------
Our consolidated financial statements include the accounts of our operations and
our wholly owned subsidiaries, International Software System Corporation, Allied
Health & Information Systems, Inc. and DHD Systems, Inc. Upon consolidation,
all material intercompany accounts, transactions and profits are eliminated.
Accounting Estimates
--------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Actual results could differ
from these estimates.
Revenue Recognition
-------------------
We provide services under various pricing arrangements. Revenue from cost-plus-
fixed-fee contracts is recognized on the basis of reimbursable contract costs
incurred during the period, plus a percentage of the fixed fee. Revenue from
fixed-price contracts is recognized on the percentage-of-completion method.
Under this method, individual contract revenues are recorded based on the
percentage relationship that contract costs incurred bear to management's
estimate of total contract costs. Revenue from time and material contracts is
recognized on the basis of hours utilized, plus other reimbursable contract
costs incurred during the period. Contract losses, if any, are accrued when
their occurrence becomes known and the amount of the loss is reasonably
determinable.
Revenue from software sales is recognized upon delivery, when collection of the
receivable is probable. Maintenance revenue is recognized in equal increments
over the maintenance period.
Segment Reporting
-----------------
We adopted Statement No. 131, "Disclosures about Segments of an Enterprise and
Related Information," in 1998, and concluded that we operates in one business
segment, providing products and services to modernize client information
systems.
F-6
<PAGE>
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_______________
1. Summary of Significant Accounting Policies (continued)
Government Contracts
--------------------
Our sales to departments or agencies of the United States Government are subject
to audit by the Defense Contract Audit Agency, which could result in the
renegotiating of amounts previously billed. Audits by the Defense Contract
Audit Agency were completed through the year ended December 31, 1997. No
amounts were changed as a result of the audits. Management believes that any
disallowance of costs for subsequent fiscal years by the government auditors,
other than amounts already provided, will not materially affect the our
financial statements.
Cash and Cash Equivalents
-------------------------
For the purposes of the statement of cash flows, we consider all highly liquid
investments with maturities of ninety days or less at the time of purchase to be
cash equivalents. Deposits are maintained with a federally insured bank.
Balances at times exceed insured limits, but management does not consider this
to be a significant concentration of credit risk.
Fixed Assets
------------
Fixed assets are stated at cost and are depreciated using the straight-line
method over the estimated useful lives of the assets. Leasehold improvements
are amortized over the term of the lease or the estimated life of the
improvement, whichever is shorter. Maintenance and minor repairs are charged to
operations as incurred. Gains and losses on dispositions are recorded in
current operations.
Advertising
-----------
All costs related to advertising our products are expensed in the period
incurred.
Software Development Costs
--------------------------
We have capitalized costs related to the development of the ICONS software
product. As outlined in Statement of Financial Accounting Standards No. 86,
capitalization of costs begins when technological feasibility has been
established and ends when the product is available for general release to
customers. Amortization is computed and recognized for the product when
available for general release to customers based on the greater of
. the ratio that current gross revenues for the product bear to the total of
current and anticipated future gross revenues for that product or,
. the straight-line method over the economic life of the product.
Capitalized costs and amortization periods are management's estimates and may
have to be modified due to inherent technological changes in software
development.
F-7
<PAGE>
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_______________
1. Summary of Significant Accounting Policies (continued)
Stock-Based Compensation
------------------------
We record compensation expense for all stock-based compensation plans using the
intrinsic value method required by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." Our annual financial statements
disclose the required pro forma information as if the fair value method required
by Financial Accounting Standards Board's Statement No. 123, "Accounting for
Stock-Based Compensation," had been adopted.
Earnings Per Share
------------------
Our earnings per share calculations are based upon the weighted average of
shares of common stock outstanding. The dilutive effect of stock options and
warrants are included for purposes of calculating diluted earnings per share,
except for periods when we report a net loss.
Income Taxes
------------
Under Financial Accounting Standards Board Statement No. 109, "Accounting for
Income Taxes," the liability method is used in accounting for income taxes.
Under this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities,
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
Fair Market Value of Financial Instruments
------------------------------------------
Our financial instruments include trade receivables and other receivables,
accounts payable and notes payable. We believes the carrying value of financial
instruments approximates their fair market value, unless disclosed otherwise in
these accompanying notes.
2. Receivables
Account receivable at December 31, 1999, consist of the following:
Billed-federal government $ 353,859
Billed-commercial $1,699,426
----------
Total billed 2,053,285
Unbilled 315,849
Less: allowance of doubtful accounts (466,890)
----------
Total accounts receivable 1,902,244
==========
Unbilled receivables are for services provided through the balance sheet date
which are expected to be billed and collected within one year.
F-8
<PAGE>
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_______________
3. Fixed Assets
A summary of fixed assets and equipment at December 31, 1999, consist of the
following:
Furniture and equipment $ 294,333
Leasehold improvements and other 204,634
Computer equipment and software 1,721,115
-----------
$ 2,220,082
Less: accumulated depreciation and amortization (1,940,295)
-----------
Total $ 279,787
===========
Depreciation expense for the years ended December 31, 1999 and 1998, was
$282,966 for 1999 and $385,448 for 1998.
4. Software Development Costs
Software development costs as of December 31, 1999 consist of the following:
Cumulative costs incurred $ 7,956,394
Accumulated amortization (2,430,737)
Cumulative write-down of capitalized costs (5,062,004)
-----------
Net software development costs $ 463,653
===========
Amortization expense for the years ended December 31, 1999 and 1998, was
$1,096,170 for 1999 and $1,314,272 for 1998. During 1999 and 1998, there was a
$1,978,362 and $2,902,152 write-down of capitalized costs to estimated net
realizable value, which is included separately in the statement of operations.
At December 31, 1999, capitalized software development costs of $463,653, net of
accumulated amortization of $118,010, are for a new software tool being
amortized over four years. All costs related to other products have been
amortized or written off. Additions totaling $131,664 for 1999 include $18,109
recorded for 20,000 shares of stock issued for certain software rights.
5. Other Assets
Other assets at December 31, 1999, consist of the following:
Security deposits $48,275
Other 10,000
-------
Total other assets $58,275
=======
F-9
<PAGE>
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_______________
6. Other Accrued Liabilities
Other accrued liabilities at December 31, 1999, consist of the following:
Royalties payable $343,191
Accrued related Jetform costs 248,971
Accrued payables 50,000
Other 85,742
--------
Total other accrued liabilities $727,904
========
7. Revolving Line of Credit
At December 31, 1999, we had a revolving line of credit with a bank providing
for demand or short-term borrowings up to $1,000,000. Our line of credit of
$2,000,000 with the bank expired on June 19, 1999. The bank has allowed us by
agreement to extend payment on our line of credit until April 20, 2000. Advances
against this line are limited by varying percentages of our accounts receivable
balances depending on the source of the receivables and their age. The bank is
granted a security interest in certain assets if there are borrowings under the
line of credit. Interest on outstanding amounts is payable monthly at the bank's
prime rate plus 0.5%, As of December 31, 1999, that rate was 9.00%. The bank has
a first priority security interest in our receivables and a direct assignment of
our U.S. Government contracts. The revolving line of credit requires us to
comply with certain financial ratios. We were not in compliance with any of the
financial ratios at December 31, 1999, when there was an outstanding balance of
$501,500 on the line.
We are in negotiations with various organizations to obtain a new line of
credit. The current line of credit, coupled with funds produced from operations,
assuming the operations are cash flow positive, should be sufficient to meet our
operating cash requirements. We, however, may be required to delay timely
payments of our accounts payable. We cannot be certain that we will not need
additional working capital in the near future. It is uncertain whether we will
be able to obtain additional working capital.
8. Commitments and Contingencies
Capital Leases
--------------
The future minimum lease payments under capital leases for equipment and the
present value of the minimum lease payments are as follows:
Year ending December 31, 2000 $7,121
Less amount representing interest (185)
------
Total obligation representing principal $6,936
======
F-10
<PAGE>
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_______________
8. Commitments and Contingencies (continued)
Operating Leases
----------------
We lease facilities and equipment under long-term operating lease agreements
extending through 2004. Rent expense was $439,312 for 1999 and $766,314 for
1998. The future minimum rental payments to be made under non-cancelable
operating leases, principally for facilities, are as follows:
Year ending December 31, 2000 $ 595,000
2001 586,500
2002 519,100
2003 494,800
2004 105,600
----------
Total minimum rent payments $2,301,000
==========
The above minimum lease payments reflect the base rent under the lease
agreements. However, these base rents shall be adjusted each year to reflect
increases in the consumer price index and our proportionate share of real estate
tax increases on the leased property. The leases are secured by security
deposits in the amount of $48,275.
The aggregate future minimum rentals to be received under non-cancelable
subleases as of December 31, 1999, is $215,100, of which $110,300 is payable in
2000, $32,000 is payable in 2001, $33,000 is payable in 2002, and $39,800 is
payable in 2003 through 2004.
Royalties
---------
In August 1996, we entered into an agreement to purchase the software product
Universal Computer Aided Software Translator, also called UNICAST. As part of
the agreement, royalties are paid to the seller on sales of the UNICAST fees
collected by us. The aggregate amount of the royalties according to this
agreement will not exceed $1,000,000. No royalties were paid in 1999 and $640 in
royalties were paid in 1998.
In September 1996, we entered into an agreement where, in consideration of an
expense sharing arrangement, we will pay royalties on sales of the UNICAST fees
collected by us. The royalties will not exceed $245,831. As of December 31,
1999, total royalties expenses to date were $34,779 and total royalties paid to
date were $7,667.
F-11
<PAGE>
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_____________
8. Commitments and Contingencies (continued)
In March 1997, we entered into an agreement with Computer Associates
International, Inc, also known as CA. As part of the agreement, royalties are
paid to CA based upon sales of the UNICAST fees collected by us. As of December
31, 1999 total royalties expenses to date were $667,635 and total royalties paid
to date were $403,370.
In February 1998, we entered into an agreement to acquire all rights, title and
interest for the development of a software application which runs on a personal
computer to remedy software which is not Year 2000 compliant. As part of the
agreement, royalties are paid on all professional service fees in which this
application is utilized for assessment and/or remediation services. The
aggregate amount of the royalties according to this agreement will not exceed
$4,000,000. As of December 31, 1999, total royalties expenses to date were
$123,772 and total royalties paid to date were $71,958.
9. Income Taxes
The tax effect of significant temporary differences representing deferred tax
assets and deferred tax liabilities at December 31, 1999, are as follows:
Deferred tax assets
Net operating loss carryforward $ 6,096,142
Accrued vacation 50,056
Allowance for bad debts 117,378
Intangibles 22,741
Fixed assets 79,513
Other 2,464
-----------
Subtotal 6,368,294
Valuation allowance (6,368,294)
-----------
Subtotal -
-----------
Deferred tax liabilities
Intangibles $ -
Fixed assets -
-----------
Subtotal -
-----------
Total $ -
===========
F-12
<PAGE>
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_____________
9. Income Taxes (continue)
The provision for income taxes is at an effective rate different from the
federal statutory rate due principally to the following:
<TABLE>
<CAPTION>
December 31,
1999 1998
---- ----
<S> <C> <C>
Loss before taxes $ 4,124,636 $(9,023,945)
=========== ===========
Income taxes (benefit) on above amount at federal
statutory rate (1,402,400) (3,068,100)
State income taxes net of federal benefit (165,000) (361,000)
Increase in valuation allowance 1,606,200 3,230,500
Effect of change in estimates and non deductible items
(38,800) 198,600
----------- -----------
Provision for income taxes $ - $ -
=========== ===========
</TABLE>
We have recognized a valuation allowance to the full extent of our net deferred
tax assets since the likelihood of realization of the benefit cannot be
determined.
We have net operating loss carryforwards of approximately $16 million, which
expire, if unused, in the year 2018. The tax benefits of approximately $2.3
million of net operating losses related to stock options will be credited to
equity when the benefit is realized through utilization of the net operating
loss carryover.
10. Major Customers
Traditionally, our clients have spanned a wide range of enterprises in the
private sector along with government agencies. Our revenue derived from a single
commercial software company constituted 9% of our1999 revenue and 24% of the
1998 revenue. Our revenue derived from a single commercial technology company
accounted for 6% of our 1999 revenue and 10% of the 1998 revenue.
11. Retirement Plans
We adopted a Cash or Deferred Arrangement Agreement which satisfies the
requirements of section 401(k) of the Internal Revenue Code, on January 1, 1988.
This defined contribution retirement plan covers substantially all employees.
Participants can elect to have up to 15% of their salary reduced and contributed
to the plan. We are required to make a matching contribution of 25% of the first
6% of this salary reduction. We can also make additional contributions at our
discretion. Amounts expensed under the plan for the years ended December 31,
1999 was $44,170 and for 1998 was $106,418.
F-13
<PAGE>
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_____________
12. Stock Options and Warrants
We have an incentive stock option plan, which became effective June 25, 1996.
The plan provides for the granting of stock options to certain employees and
directors. The maximum number of shares for which options may be granted under
the plans is 2,575,000. Options expire no later than ten years from the date of
grant or when employment ceases, whichever comes first, and vest over periods
determined by the board of directors. The average vesting period for options
granted in 1999 was one year. The exercise price of each option equals the
quoted market price of our stock on the date of grant. The stock option plan is
accounted for under Accounting Principles Board Opinion No. 25. No compensation
has been recognized for the plan. Had compensation cost for the plans been
determined based on the estimated fair value of the options at the grant date
consistent with the method of Statement of Financial Accounting Standards No.
123, our net income and earnings would have been:
--------------------------------------------------------------------------
1999 1998
---- ----
Net loss As reported $(4,124,636) $(9,023,945)
Pro forma $(4,175,800) $(9,251,100)
Loss per share As reported $ (0.59) $ (1.35)
Pro forma $ (0.60) $ (1.39)
--------------------------------------------------------------------------
The fair value of the options granted in 1999 and 1998 is estimated on the date
of the grant using the Black-Scholes options-pricing model assuming the
following:
1999 1998
---- ----
Dividend yield None None
Risk-free interest rate 5.5% 5.5%
Expected volatility 102.8% 102.8%
Expected term of options 3 years 3 years
The effects on 1999 and 1998 pro forma net income and earnings per share of
expensing the estimated fair value of stock options are not necessarily
representative of the effects on reported net income for future years due to
such things as the vesting period of the stock options and the potential for
issuance of additional stock options in future years. The weighted average fair
value per option granted in 1999 was $0.33 and in 1998, $3.74.
F-14
<PAGE>
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_____________
12. Stock Options and Warrants (continued)
The following table summarizes information about stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------- ----------------------------------------
Weighted
Weighted Average
Number Average Remaining Weighted
Range of Exercise of Exercise Contractual Number of Average
Prices Options Price Life Options Exercised Price
------- ----- ---- ------- ---------------
<S> <C> <C> <C> <C> <C>
Less than $1.00 1,303,450 $ 0.43 7.1 years 1,153,450 $ 0.42
$1.00 and more 202,100 $ 5.55 7.7 years 196,100 $ 5.68
--------- ---------
Total 1,505,550 $ 1.11 7.2 years 1,349,550 $ 1.19
========= =========
</TABLE>
Unexercisable options are as follows: 1,000 at $0.688 per share, 1,500 options
at $0.444 per share, 2,000 options at $0.720 per share, 60,000 options at $0.590
per share, 11,500 options at $0.620 per share, 21,000 options at $0.500 per
share, 9,000 options at $0.190 per share, 40,000 options at $0.160 per share,
4,000 options at $0.600 per share, 5,000 options at $1.31 per share, and 1,000
options at $1.25 per share. Transactions involving the plan were as follows:
<TABLE>
<CAPTION>
December 31,
1999 1998
---- ----
Weighted Weighted
Average Average
Shares Price Shares Price
--------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 1,626,400 $ 5.42 1,855,550 $ 4.76
Granted 187,300 0.50 78,800 5.87
Exercised (44,500) 0.44 (183,400) 1.29
Canceled (263,650) 11.39 (124,550) 15.50
--------- ------ --------- ------
Outstanding, end of year 1,505,550 $ 1.11 1,626,400 $ 5.42
========= ====== ========= ======
</TABLE>
On January 5, 1999, the Board of Directors authorized us to reprice 122,600
employee stock options at a price range of $9.333 to $14.50 per share, to $1.31
per share which was the fair market value of the common stock at the close on
that date. On October 1, 1999, the Board of Directors authorized us to reprice
100,000 stock options to executive officers at a price range of $0.62 to $14.50
per share, to a price of $0.26 per share which was not less than the current
closing price of our common stock as of October 1, 1999.
F-15
<PAGE>
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_____________
12. Stock Options and Warrants (continued)
The Board of Directors has also granted warrants to directors, employees and
others. No warrants were issued to directors or employees in 1999 and 1998. In
connection with our March 1997 private placement, we issued 97,827 warrants
exercisable at $6.42 per share to an investment banking company. In connection
with our December 1999 private placement, we issued 1,400,000 five-year warrants
exercisable at $1.00 per share to individual investors. There were no warrants
exercised in 1999 and 58,374 warrants were exercised in 1998. As of December 31,
1999, outstanding warrants are 1,535,339, of which 135,339 expire in 3 years and
1,400,000 expire in 5 years. The purchase price for shares issued upon exercise
of these warrants range from $0.56 to $6.42 per share. These warrants are
exercisable immediately.
13. Computation Of Earnings (Loss) Per Share
For the years ended December 31,
--------------------------------
1999 1998
---- ----
Numerator for basic and diluted earnings
(loss) per share - net loss $(4,124,636) $(9,023,945)
Denominator for basic earnings per
share - weighted average shares 6,988,336 6,665,321
Effect of dilutive securities:
Stock options - -
Dilutive potential common shares - -
Denominator for diluted earnings per
Share - adjusted weighted average
Shares and assumed conversions 6,988,336 6,665,321
Basic earnings (loss) per share $ (0.59) $ (1.35)
Diluted earnings (loss) per share $ (0.59) $ (1.35)
Options and warrants to purchase shares of common stock were outstanding during
1999 and 1998 as described in Note 12 above, but were not included in the
computation of diluted earnings per share as the effect would be antidilutive.
F-16
<PAGE>
14. Subsequent Events Private Placement Memorandum
In January 2000, we completed the second phase of our December 1999, private
placement of stock which raised an additional $125,000 in exchange for 250,000
shares of common stock and 150,000 five-year warrants, exercisable at $1.00 per
share. The shares and warrants were sold to individual investors. The funds will
be utilized to finance our operations. These warrants are exercisable
immediately.
F-17
<PAGE>
Information Analysis Incorporated and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
As of As of
June 30, 2000 December 31, 1999
(unaudited) (audited)
----------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 96,025 $ 133,468
Accounts receivable, net 1,595,446 1,902,244
Employee advance - 6,230
Prepaid expenses 118,504 129,995
Other receivables 95,165 97,299
----------- -----------
Total current assets 1,905,140 2,269,236
Fixed assets, net 169,766 279,787
Equipment under capital leases, net 9,135 11,553
Capitalized software, net 521,268 463,653
Other receivables 28,992 28,992
Other assets 58,275 58,275
----------- -----------
Total assets $ 2,692,576 $ 3,111,496
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,278,476 $ 1,491,179
Accrued payroll and related liabilities 278,865 276,871
Other accrued liabilities 133,094 727,904
Revolving line of credit 732,791 501,500
Current maturities of capital lease obligations 3,291 6,936
----------- -----------
Total current liabilities 2,426,517 3,004,390
- -
----------- -----------
Total liabilities 2,426,517 3,004,390
Common stock, par value $0.01, 30,000,000 shares authorized;
11,086,084 and 10,723,284 shares issued, 9,581,473 and
9,218,673 outstanding at June 30,2000 and
December 31, 1999, respectively 110,861 107,233
Additional paid in capital 13,916,902 13,763,904
Retained earnings (12,907,391) (12,909,718)
Less treasury stock; 1,504,611 shares at cost (854,313) (854,313)
----------- -----------
Total stockholders' equity 266,059 107,106
----------- -----------
Total liabilities and stockholders' equity $ 2,692,576 $ 3,111,496
=========== ===========
See accompanying notes
</TABLE>
F-18
<PAGE>
Information Analysis Incorporated and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Six months ended June 30,
(unaudited) 2000 1999
---- ----
<S> <C> <C>
Net sales:
Professional services $2,629,731 $5,440,675
Software sales 605,938 600,599
---------- ----------
Total sales 3,235,669 6,041,274
Cost of goods sold and services provided:
Cost of professional services 1,938,851 3,675,882
Cost of software sales 288,160 736,956
---------- ----------
Total cost of goods sold and services provided 2,227,011 4,412,838
Gross margin 1,008,658 1,628,436
Operating expenses:
Selling, general and administrative 999,626 2,240,553
Research and development - 72,935
---------- ----------
Total operating expenses 999,626 2,313,488
Operating income (loss) 9,032 (685,052)
Other (expense) (6,705) (72,361)
---------- ----------
Income (loss) before income taxes 2,327 (757,413)
Provision for income taxes -- --
---------- ----------
Net income (loss) $ 2,327 $ (757,413)
========== ==========
Earnings per common share:
Basic $ 0.00 $ (0.11)
========== ==========
Diluted $ 0.00 $ (0.11)
========== ==========
Weighted average common shares outstanding:
Basic 9,508,508 6,906,667
Diluted 9,808,201 6,906,667
</TABLE>
F-19
<PAGE>
Information Analysis Incorporated and Subsidiaries
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
---------------------------------
(unaudited) 2000 1999
<S> <C> <C>
Net income (loss) $ 2,327 $ (757,413)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation 106,655 158,310
Amortization 5,783 10,445
Amortization of Capitalized Software 77,274 548,348
Loss on sale of fixed assets - 22,838
Changes in operating assets and liabilities
Accounts receivable 306,798 1,131,338
Other receivables and prepaid expenses 19,856 (21,718)
Accounts payable and accrued expenses (805,519) (1,300,266)
--------- -----------
Net cash used by operating activities $(286,826) $ (208,118)
--------- -----------
Cash flows from investing activities
Increase in capitalized software (134,889) -
Proceeds from sale of fixed assets - 46,845
--------- -----------
Net cash (used) provided in investing activities (134,889) 46,845
--------- -----------
Cash flows from financing activities
Net borrowing (payments) under bank revolving line of credit 231,291 (14,600)
Principal payments on capital leases (3,645) (4,373)
Net Proceeds from private placement 125,000
Proceeds from exercise of stock options and warrants 31,626 19,774
--------- -----------
Net cash provided by financing activities 384,272 801
--------- -----------
Net decrease in cash and cash equivalents (37,443) (160,142)
Cash and cash equivalents at beginning of the period 133,468 176,399
Cash and cash equivalents at end of the period $ 96,025 $ 15,927
========= ===========
Supplemental cash flow Information
Interest paid $ 25,208 $ 79,426
</TABLE>
See accompanying notes
F-20
<PAGE>
INFORMATION ANALYSIS, INCORPORATED
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation
The accompanying consolidated financial statements have been prepared by
Information Analysis Incorporated according to the rules and regulations of the
Securities and Exchange Commission. Financial information included in this
prospectus is unaudited, however, management believe that all adjustments, which
include normal recurring adjustments, considered necessary for a fair
presentation have been made. Certain information and footnote disclosures
normally included in annual financial statements prepared in keeping with
generally accepted accounting principles have been omitted as permitted by those
rules and regulations, but we believe that the disclosures made are adequate to
make the information presented not misleading. For more complete financial
information, these financial statements should be read in conjunction with the
audited financial statements and accompanying notes for the year ended December
31, 1999. These are included in our annual report on Form 10-KSB. Results for
interim periods are not necessarily indicative of the results for any other
interim period or for the full fiscal year. Results for interim periods are not
necessarily indicative of the results for any other interim period or for the
full fiscal year.
Common Stock and Common Stock Options
In the second quarter of 2000, our Stockholders approved a vote to amend the
articles of incorporation to increase our authorized shares of Common Stock to
30,000,000. Our Stockholders also approved a vote to increase the authorized
shares in the present Stock Option Plan to 3,075,000 during the second quarter
of 2000.
Commitments and Contingencies
In March 1997, we entered into an agreement with Computer Associates
International, Inc., also know as CA. As part of the agreement, royalties are
paid to CA based upon the UNCAST licensing fees we collect. In the second
quarter, we settled our outstanding royalties obligation to CA for $232,485. We
do not expect to incur any additional royalty expenses from our agreement with
CA.
Net Income Per Share
Earnings per share are presented as outlined in Statement of Financial
Accounting Standards No. 128, "Earnings Per Share." This statement requires dual
presentation of basic and diluted earnings per share on the face of the income
statement. Basic earnings per share excludes dilution and is computed by
dividing income available to common shareholders by the weighted-average number
of shares outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock.
F-21
<PAGE>
The following is a reconciliation of the amounts used in calculating basic and
diluted net income per common share.
<TABLE>
<CAPTION>
Per Share
(dollars in thousand) Income Shares Amount
------ ------ ------
<S> <C> <C> <C>
Basic net income per common share for the
six months ended June 30, 2000:
Income available to common stockholders $ 2 9,508,508 $ 0.0
Effect of dilutive stock options 299,693
Diluted net income per common share for
the six months ended June 30, 2000: $ 2 9,808,201 $ 0.0
Basic net income per common share for the
six months ended June 30, 1999:
Income available to common stockholders $(757) 6,906,667 $(0.11)
Effect of dilutive stock options
Diluted net income per common share for
the six months ended June 30, 1999: $(757) 6,906,667 $(0.11)
Basic net income per common share for the
three months ended June 30, 2000:
Income available to common stockholders $ (40) 9,581,473 $ 0.0
Effect of dilutive stock options
Diluted net income per common share for
the three months ended June 30, 2000: $ (40) 9,581,473 $ 0.0
Basic net income per common share for the
six months ended June 30, 1999:
Income available to common stockholders $(827) 6,918,673 $(0.12)
Effect of dilutive stock options
Diluted net income per common share for
the six months ended June 30, 1999: $(827) 6,918,673 $(0.12)
</TABLE>
F-22
