<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1999
Commission File No. 0-22405
Information Analysis Incorporated
(Exact name of Registrant as specified in its charter)
Virginia 54-1167364
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
11240 Waples Mill Road, Suite 400 Fairfax, Virginia 22030
(Address of principal executive offices) (Zip Code)
(703) 383-3000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No
The issuer's revenue for its most recent fiscal year was $9,585,772
The aggregate market value of the Registrant's Common Stock held by non-
affiliates as of March 15, 2000 was approximately $10,989,859.
As of March 15, 2000 the Registrant had 9,478,673 shares of Common Stock
outstanding.
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Information Analysis Incorporated 1999 Report on Form 10-KSB
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This Form 10-KSB contains forward looking statementsRichard DeRoseFinancial
Printing GroupThis Form 10-KSB contains forward looking statements. These
statements are based on certain assumptions and involve risks and uncertainties.
Actual future results may vary materially from those discussed herein. Any
statements that are not historical facts should be forward-looking statements.
These forward looking statements are subject to the safe harbor created by the
Private Securities Litigation Reform of 1995. IAI does not undertake any
obligation to publicly release the result of any revision which may be made to
any forward-looking statements after the date of such statements or to reflect
the occurrence of anticipated or unanticipated events.
PART I
Item 1. Business Description
Overview
Founded in 1979, Information Analysis Incorporated ("IAI" or "the Company")
is in the business of modernizing client information systems. Since its
inception, IAI has performed software development and conversion projects for
over 100 commercial and government clients including Computer Sciences
Corporation, IBM, Computer Associates, MCI, Sprint, Citibank, U.S. Customs
Service, U.S. Department of Agriculture, U.S. Department of Energy, U.S. Army,
U.S. Air Force, Veterans Administration, and the Federal Deposit Insurance
Corporation. Today, IAI primarily applies its technology, services and
experience to legacy software migration and modernization and to developing web
based solutions.
The migration and modernization market is complex and diverse as to the
multiple requirements clients possess to upgrade their older systems. In the
early 1990's, many organizations tried to convert or re-engineer their mainframe
legacy systems to PC client server environments. Many of these attempts failed
because the technology for client servers lacked sufficient hardware performance
and capacity. The available software languages and tools were also immature.
By the mid 1990's, organizations did establish mid-level server technology
(Unix) to off-load and decentralize some of their decision support or
departmental systems, and they connected local area networks of PCs to provide
better user interfaces. However, many large legacy systems remained in use
because of the enormous cost to re-engineer these systems.
Currently, the options available to modernize these systems are many.
Performance and capacity of client server systems, both UNIX and NT, rival the
traditional mainframe systems. There is a plethora of software that can
interface with legacy systems via PC interfaces. New software development
languages also allow users to warehouse and data-mine information from legacy
databases. Finally, the arrival of the internet and intranet technology offers
a different approach at collecting and processing large volumes of user
transactions, processes which are the forte of older legacy systems.
Now that Year 2000 projects are virtually completed, companies are being
driven for various reasons to address the upgrading of their legacy systems.
The Y2K experience has impressed on them the difficulty of finding and retaining
staff with outdated technical skills, much of which are practiced by senior
programmers in their fifties. Hardware platforms such as Unisys and Honeywell
are reaching the horizon of their usefulness, and older programming and data
base languages are poorly supported by their providers. Additionally,
maintenance costs are skyrocketing as vendors squeeze the most out of clients
before the life-cycles of hardware and software expire. In addition, the
internet has added a new level of pressure to compete in the electronic
marketplace with their sector rivals. The next ten years should see an upsurge
of movement and change as organizations revamp their older legacy systems.
The web solutions market is the fastest growing segment of the computer
consulting business as individuals, small companies, large companies, and
governmental agencies rush to establish a presence on the Internet. The range
of products and services involved in this sector is extensive and therefore,
require some specialization for a small company such as IAI to make an impact.
Most small web companies are involved in building web-sites and typically have
many small duration projects. More complex web applications generally require
knowledge of clients' back-end systems based on mainframe or mid-level
computers. Few small companies have the expertise to develop these more
sophisticated web applications. However, these types of applications will be
more prominent in the future as the web is better understood and this will be
the area that future expenditures will grow the most.
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Information Analysis Incorporated 1999 Report on Form 10-KSB
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The commercial and government sectors of the market can be quite different
in their requirements on the Internet, as, generally, companies are interested
in cataloging and selling items versus government agencies that wish to
disseminate data to the citizenry. There is some overlap in common
functionality when web applications are designed for procurement transactions or
customer relations. What distinguishes the government requirements is that most
government processes are based on forms. Many government agencies rely on
thousands of internal and external forms to conduct their business. Any company
that wishes to develop governmental web applications must address the forms
issue. JetForm, the electronic forms product resold and supported by IAI is the
predominant forms software in the federal government.
Description of Business and Strategy
Since the mid-90's IAI has migrated clients from older computer languages
generally associated with legacy computer systems to more modern languages used
with current-day computer system platforms. In fixing their legacy systems to
comply with Y2K dates impacts, many organizations became aware of the evolving
obsolescence of these systems and are now beginning to fund their modernization.
In addition, as part of this modernization many organizations wish to extend
these legacy systems to interface with Internet applications The company's
strategy has been to develop and/or acquire tools that will facilitate the
modernization process and differentiate the Company's offerings in the
marketplace.
The Company has developed a series of workbench tools called ICONS. These
tools, used in conjunction with IAI's methodology, enhance a programmer's
ability to convert code to new platforms and/or computer languages. ICONS can
be used with a variety of languages such as DATACOM COBOL and IDEAL, and Unisys
COBOL. ICONS will facilitate the Company's ability to provide systems
modernization services to companies that seek to migrate from mainframe legacy
systems to modern environments, including current computer languages, data
bases, and mainframe, midrange, client servers, intranet and internet platforms.
IAI has structured the company to address the wide range of requirements
that it envisions the market will demand. The suite of ICONS tools give IAI, in
its opinion, a competitive edge in performing certain conversions and migrations
faster and more economically than many other vendors. The diverse capabilities
of IAI's staff in mainframe technology and client server implementations help to
assure that IAI staff can analyze the original systems properly to conduct
accurate and thorough conversions.
IAI's modernization methodology has developed over the past several years
through the completion of successful conversion projects. Senior members of
IAI's professional staff can perform both technical and business requirements
analyses, and prepare general and detail design documentation, develop project
plans including milestones, staffing, deliverables, and schedules. The actual
work can be performed at client sites or at IAI's premises, which has mainframe
and client server facilities for the use of IAI's personnel.
The Company is also using the experience it has acquired as a JetForm
reseller to help secure engagements for web based applications requiring forms..
The JetForm product has evolved over the years into a robust tool that can form
the backbone of applications, especially those requiring forms. The company has
used this expertise to penetrate a number of federal government clients and
build sophisticated web applications. IAI's knowledge of legacy system
languages has been instrumental in connecting these web applications to legacy
databases residing on mainframe computers. During 1999 the company has built a
core group of professionals that can build this practice over the coming years.
Concentrating on the niche of electronic forms related web applications
through IAI's relationship with JetForm, the company has developed a cadre of
professionals that can quickly and efficiently develop web applications. IAI
will focus on federal government clients during 2000 and leverage the company's
outstanding reputation with federal clients to penetrate these agencies. IAI
will be able to reference successful projects completed or in development for
the Veterans Affairs (VA), Federal Mediation and Conciliation Service (FMCS),
U.S. Department of Agriculture (USDA), Immigration and Naturalization Service
(INS), and U.S. Air Force Logistics Command (AFLC).
2
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Information Analysis Incorporated 1999 Report on Form 10-KSB
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Competition
The competition in the conversion and modernization market is very strong.
Many software professional services companies have had some involvement in this
area and profess proficiency in performing these projects. The Company also
faces competition from other companies which purport to substantially automate
the process through software tools including Alydaar, Crystal Systems Solutions
and Sapiens International. "Off the shelf" software for enterprise resource
planning, such as SAP and Baan, provides an additional source of competition,
although, to date, the cost and lengthy installation time for enterprise
resource planning software has slowed its implementation in the market place.
No matter what type of solution is offered, many of the Company's competitors
have greater name recognition than the Company, a larger, more established
customer base and significantly greater financial and market resources in
comparison to the Company.
Patents and Proprietary Rights
The Company depends upon a combination of trade secret and copyright laws,
nondisclosure and other contractual provisions and technical measures to protect
its proprietary rights in its methodologies, databases and software. The Company
has not filed any patent applications covering its methodologies and software.
The Company distributes ICONS under agreements that grant customers non-
exclusive licenses and contain terms and conditions restricting the disclosure
and use of the Company's databases or software and prohibiting the unauthorized
reproduction or transfer of its products. In addition, IAI attempts to protect
the secrecy of its proprietary databases and other trade secrets and proprietary
information through agreements with employees and consultants.
The Company also seeks to protect the source code of ICONS as trade secrets
and under copyright law. The copyright protection accorded to databases,
however, is fairly limited. While the arrangement and selection of data can be
protected, the actual data is not, and others are free to create software
performing the same function. The Company believes, however, that the creation
of competing databases would be very time consuming and costly.
Backlog
As of December 31, 1999, the Company estimated its backlog at approximately
$3.8 million. Of the entire backlog, the Company believes approximately 95%
will be completed by December 31, 2000. This backlog consists of outstanding
contracts and general commitments from current clients. The Company regularly
provides services to certain clients on an as-needed basis without regard to a
specific contract. General commitments represent those services which the
Company anticipates providing to such clients during a twelve-month period.
Employees
As of December 31, 1999, the Company employed 54 full-time and part-time
individuals. In addition, the Company maintained independent contractor
relationships with 18 individuals for computer services. Approximately 80% of
the Company's professional employees have at least four years of related
experience. For computer related services, the Company believes that the
diverse professional opportunities and interaction among its employees
contribute to maintaining a stable professional staff with limited turnover.
Item 2. Properties
The Company's offices are located at 11240 Waples Mill Road, Suite 400,
Fairfax, VA. 22030. IAI holds a lease for 18,280 square feet. This lease
expires on February 28, 2004.
Item 3. Legal Proceedings
The Company is not aware of any legal proceedings against it at this time.
3
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Information Analysis Incorporated 1999 Report on Form 10-KSB
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Item 4. Submission of Matters to a Vote of Security Holders
IAI held its Annual Meeting of Shareholders on December 14, 1999. At that
meeting, shareholders cast votes for Board of Directors for the coming year, and
for the ratification of the Board's selection of Rubino and McGeehin as outside
auditors. Messrs. Rosenberg, May, and Wester: and Ms. Wachtel each received
6,266,385 votes in favor of their serving on the Board with 53,329 votes against
or withheld. Rubino and McGeehin was ratified with 6,263,880 votes in favor,
and 40,284 votes against and 15,550 votes abstained.
PART II
Item 5. Market for the Company's Common Stock and Related Stockholder Matters
The Company's Common Stock (symbol: IAIC) has been traded on over the
counter bulletin board (OTCBB) since July 29, 1999, on the NASDAQ National
Market from June 2, 1998 to July 28 1999, the NASDAQ Small Cap Market from
September 8, 1997 to June 1, 1998; and over the counter prior to September 8,
1997. The following table sets forth, for the fiscal periods indicated, the high
and low bid prices of the Common Stock, as reported:
<TABLE>
<CAPTION>
Fiscal Year Ended December 31, 1998 Fiscal Year Ended December 31, 1999
------------------------------------------------------- ------------------------------------------------------
Quarter Ended: Quarter Ended:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
3/31/98 6/30/98 9/30/98 12/31/98 3/31/99 6/30/99 9/30/99 12/31/99
-------- -------- -------- --------- -------- -------- -------- ---------
High $ 20.75 $ 16.375 $ 14.50 $ 2.438 $ 1.593 $ 0.750 $ 0.625 $ 1.218
Low $ 11.75 $ 9.875 $ 1.531 $ 1.063 $ 0.625 $ 0.375 $ 0.125 $ 0.156
</TABLE>
The quotations on which the above data are based for periods prior to
September 8, 1997 and after July 29, 1999 reflect inter-dealer prices without
adjustment for retail markup, markdown or commission, and may not necessarily
represent actual transactions. From September 8, 1997 to July 28, 1999, the
prices reflect the high and low bid prices as reported by NASDAQ.
As of December 31, 1999, the Company had 111 stockholders of record. The
Company has not paid a cash dividend on its Common Stock for the last two fiscal
years. The Company does not anticipate the payment of cash dividends to the
holders of Common Stock in the foreseeable future.
The Company raised $1,150,000 through a private placement of 2,300,000
shares of common stock and 1,150,000 five-year warrants which expire on December
31, 2004, exercisable at $1.00 per share. All investors were accredited
individuals. The Company relied upon Regulation D under the Securities Act of
1933 as amended in connection with the issuance of these unregistered shares.
4
<PAGE>
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
1999 was a transition year for the Company. During this year the following
occurred:
. During 1999, IAI reoriented its sales and marketing organizations to
capitalize on its services and tools to address the legacy modernization and
conversion market. Additional resources were added to support Web based
solutions and staff augmentation.
. Other product and service activities which have produced revenues in prior
years were further de-emphasized.
. A private placement of shares to fund certain operations for 2000.
The effect of this re-orientation has been to change IAI's focus from
primarily offering Year 2000 conversion services to an information technology
organization offering a balance of services and products in legacy
modernization, conversion, and re-engineering, and Web solutions. Management
expects this change will be more evident in 2000 since the Company has ceased
any work in the remediation area.
IAI was not profitable in 1999. The Company's expenses related to sales,
marketing, administrative, and research and development infrastructure exceeded
the gross profits from its revenues. As the Company transitions away from Year
2000 efforts, the Company believes its economic prospects will improve.
Results of Operations
The following table sets forth, for the periods indicated, selected information
from the Company's Consolidated Statements of Operations, expressed as a
percentage of revenue:
<TABLE>
<CAPTION>
Years Ended
-----------------------------------------
December 31, 1999 December 31, 1998
<S> <C> <C>
Revenue 100.0% 100.0%
Cost of Goods Sold 80.3% 82.7%
Gross Profit 19.7% 17.3%
Operating Expenses
Selling, general and administrative 40.1% 45.5%
Research and development 0.6% 11.0%
(Loss) from operations (21.0%) (39.2%)
Non recurring item (20.6%) (20.1%)
Other (expense) income (1.4%) 0.5%
(Loss) before income taxes (43.0%) (58.9%)
Provision for income taxes (0.0%) (0.0%)
Net (loss) (43.0%) (58.9%)
</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.
5
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Information Analysis Incorporated 1999 Report on Form 10-KSB
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Gross Profit. Gross profit was $1.9 million in fiscal 1999 versus $2.6 million
in 1998,or 19.7% of revenue in 1999 compared to 17.3% of revenue in 1998.
Professional services gross margin was 30.1% of revenue in 1999, compared to
4.3% in 1998. The increase in professional services gross margin was primarily
attributable to the non-existence of certain fixed-price Year 2000 contracts in
1999, which had a negative effect on the gross margin during the same period in
1998. Software sales gross margin was (45.5%) of revenue in 1999, down from
42.2% in 1998. The decrease in software sales gross margin was do to the
acceleration in amortization for UNICAST capitalized software. In 1999 UNICAST
after write-offs is fully amortized.
Selling, General and Administrative (SG&A). Fiscal 1999 SG&A expense decrease
to $3.8 million, or 40.1% of revenue, from $7.0 million, or 45.5% of revenue in
1998, a decrease in expenses of 44.9%. The decrease was do to a concerted
effort by management to scale back expenses during the Company's transition away
from its Year 2000 products, services, and support for the UNICAST product line.
Research and Development (R&D). Fiscal 1999 R&D expense decreased to $0.1
million, or 0.6% of revenue, from $1.7 million, or 11% of revenue in 1998. The
decrease is due to lower software maintenance for the Company's versions of its
UNICAST product line of tools.
Year 2000 Compliance
The Company has installed and tested a new version of our accounting
system. It is in production at this time and is Year 2000 compliant. The Company
uses off the shelf Microsoft Windows software for internal ad hoc reporting.
This software is certified by the vendor to be Year 2000 compliant.
Liquidity and Capital Resources
IAI raised $1.2 million from a private placement during fiscal 1999. This
private placement, along with current collections and net borrowing of $0.5
million from the Company's bank provided financing for the Company's operations
in 1999. For fiscal year 1999, net cash proved by operating and financing
activities of $0.3 million along with a net loss of $4.1 million resulted in a
cash and cash equivalent of $0.2 million. The Company's line of credit of
$2,000,000 with First Virginia Bank expired on June 19, 1999. First Virginia
Bank has executed forbearance agreements with the Company, which effectively
extends a line of credit of $1,000,000 until April 20, 2000. The Company is in
negotiations with various organizations to obtain a new line of credit.
The Company cannot be certain that there will not be a need for additional
cash resources at some point in fiscal 2000. Accordingly, the Company may from
time to time consider additional equity offerings to finance business expansion.
The Company is uncertain that it will be able to raise additional capital.
Item 7. Financial Statements and Supplementary Data
See Consolidated Financial Statements included herein beginning on page
F-1.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On January 11, 1999, the Company dismissed Ernst & Young, LLP ("Ernst &
Young") as its independent accountant. The report of Ernst & Young for fiscal
year ended December 31, 1997 (the sole fiscal year for which Ernst & Young was
engaged) did not contain an adverse opinion or a disclaimer of opinion, nor was
such report qualified or modified as to uncertainty, audit scope or accounting
principles. During the fiscal year ended December 31, 1997 and for all
subsequent interim periods thereafter prior to the dismissal of Ernst & Young,
there were no disagreements on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreement(s), if not resolved to the satisfaction of Ernst & Young, would
have caused it to make a reference to the subject matter of the disagreement(s)
in connection with its reports. The Company's determination to change
accountants was approved by its audit committee.
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Information Analysis Incorporated 1999 Report on Form 10-KSB
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Effective January 11, 1999, the Company engaged Rubino & McGeehin, Chtd.
("Rubino & McGeehin") as its new independent accountant to audit the Company's
financial statement, commencing with the fiscal year ended December 31, 1998.
During the period that Ernst & Young served as the Company's independent
accountant, including all interim periods within 1998, the Company (or someone
on its behalf) never consulted Rubino & McGeehin regarding any matter. Rubino &
McGeehin did serve as the Company's independent accountant prior to the
Company's engagement of Ernst & Young.
7
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PART III
Item 9. Directors and Executive Officers of the Registrant
The information required by item 9 concerning Directors and Executive
Officers of the Registrant is incorporated herein by reference to the Company's
definitive Proxy Statement for its 2000 Annual Meeting of Shareholders which
will be filed pursuant to Regulation 1414A within 120 days after the end of the
Company's last fiscal year.
Item 10. Executive Compensation
The information required by item 10 concerning Executive Compensation is
incorporated herein by reference to the Company's definitive Proxy Statement for
its 2000 Annual Meeting of Shareholders which will be filed pursuant to
Regulation 1414A within 120 days after the end of the Company's last fiscal
year.
Item 11. Security Ownership of Certain Beneficial Owners and Managers
The information required by item 11 concerning Security Ownership of
Certain Beneficial owners and Managers is incorporated herein by reference to
the Company's definitive Proxy Statement for its 2000 Annual Meeting of
Shareholders which will be filed pursuant to Regulation 1414A within 120 days
after the end of the Company's last fiscal year.
Item 13. Exhibits, Financial Statements Schedules, and Reports on Form 8-K
(a) (1) Financial Statements:
Report of Independent Auditors F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Stockholders' Equity F-4
Consolidated Statements of Cash Flow F-5
Notes to Consolidated Financial Statements F-6-F-18
(a) (2) Exhibits:
See Exhibit Index on page 10.
(b) No reports were filed on Form 8-K during the last quarter of
1999.
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Information Analysis Incorporated 1999 Report on Form 10-KSB
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Signatures
Pursuant to the requirements of Section 13 or 15(d), of the Securities Exchange
Act of 1934, the registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
INFORMATION ANALYSIS INCORPORATED
By: ____________________________
Sandor Rosenberg, President
March 29, 2000
Pursuant to the requirements of the Securities Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature Title Date
/s/ Sandor Rosenberg Chairman of the Board March 29, 2000
___________________________ and President
Sandor Rosenberg
/s/ Charles A. May, Jr. Director March 29, 2000
___________________________
Charles A. May
/s/ Bonnie K. Wachtel Director March 29, 2000
___________________________
Bonnie K. Wachtel
/s/ James D. Wester Director March 29, 2000
___________________________
James D. Wester
/s/ Richard S. DeRose Treasurer March 29, 2000
___________________________
Richard S. DeRose
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Information Analysis Incorporated 1999 Report on Form 10-KSB
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Exhibit Index
<TABLE>
<CAPTION>
Exhibit
No. Description Location
<C> <S> <C>
3.1 Amended and Restated Articles of Incorporation Incorporated by reference from the
effective March 18, 1997 Registrant's Form 10-KSB/A for the
fiscal year ending December 31, 1996
and filed on July 3, 1997
3.2 Articles of Amendment to the Articles of Incorporated by reference from the
Incorporation Registrant's Form 10-KSB/A for the
fiscal year ending December 31, 1997
and filed on March 30, 1998
3.3 Amended By-Laws of the Company Incorporated by reference from the
Registrant's Form S-18 dated November
20, 1986
(Commission File No. 33-9390).
4.1 Copy of Stock Certificate Incorporated by reference from the
Registrant's Form 10-KSB/A for the
fiscal year ending December 31, 1997
and filed on March 30, 1998
4.2 Form of Warrant issued in December 1999 and January Filed with this Form 10-KSB
2000
4.3 Common Stock and Warrant Purchase Agreement dated Filed with this Form 10-KSB
December 1999
10.1 Office Lease for 18,280 square feet at 11240 Waples Incorporated by reference from the
Mill Road, Fairfax, Virginia 22030. Registrant's Form 10-KSB/A for the
fiscal year ending December 31, 1996
and filed on July 3, 1997
10.2 Company's 401(k) Profit Sharing Plan through Aetna Incorporated by reference from the
Life Insurance and Annuity Company. Registrant's Form 10-KSB/A for the
fiscal year ending December 31, 1996
and filed on July 3, 1997
10.3 1986 Stock Option Plan Incorporated by reference from the
Registrant's Form S-8 filed on December
20, 1988
10.4 1996 Stock Option Plan Incorporated by reference from the
Registrant's Form S-8 filed on June 25,
1996
10.5 Line of Credit Agreement with First Virginia Bank Incorporated by reference the
Registrant's Form 10-KSB for the fiscal
year ending December 31, 1995 and filed
April 15, 1996 (Commission File No.
33-9390).
10.6 Warrant Agreement between James D. Wester, a Incorporated by reference from the
director, and the Company dated February 24, 1993 Registrant's Form 10-KSB/A for the
fiscal year ending December 31, 1996
and filed on July 3, 1997
10.7 Royalty Agreement between James D. Wester and the Incorporated by reference from the
Company in exchange for development expense advances. Registrant's Form 10-KSB/A for the
fiscal year ending December 31, 1996
and filed on July 3, 1997
10.8 Amended Royalty Agreement between James D. Wester Incorporated by reference from the
and the Company in exchange for development expense Registrant's Form 10-QSB for the period
advances. ending March 31, 1998 and filed on May
15, 1998.
</TABLE>
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Information Analysis Incorporated 1999 Report on Form 10-KSB
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<TABLE>
<CAPTION>
<C> <S> <C>
10.9 Software License Agreement dated March 24, 1997 Incorporated by reference from the
between the Company and Computer Associates, Registrant's Form 10-QSB/A for the
International, Inc., Quarter ended March 31, 1997 and filed
on July 18, 1997.
10.10 Office lease for 19,357 square feet at 3877 Fairfax Incorporated by reference from the
Ridge Road, Fairfax, Virginia Registrant's Form 10-QSB for the period
ending March 31, 1998 and filed on May
15, 1998.
21.1 List of Subsidiaries. Filed with this Form 10-KSB
23.1 Consent of independent auditors, Rubino & Filed with this Form 10-KSB
McGeehin, Chartered
27.1 Financial Data Schedule. Filed with this Form 10-KSB
</TABLE>
11
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Information Analysis Incorporated
We have audited the accompanying consolidated balance sheet of Information
Analysis Incorporated and subsidiaries as of December 31, 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 CHANGES IN STOCKHOLDERS' EQUITY
----------------
<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,
December 31, 1997 7,498,430 $ 74,984 $ 6,517,655 $ 238,863 $(854,313) $ 5,977,189
Exercise of stock
options and 456,148
warrants 217,684 2,177 453,971 - -
Stock issued for
private
placement 580,155 5,802 5,640,883 - - 5,646,685
Stock issued for ISSC
acquisition 62,515 625 27,157 - - 27,782
Net loss - - - (9,023,945) - (9,023,945)
---------- -------- ----------- ------------ ----------- -----------
Balances,
December 31, 1998 8,358,784 83,588 12,639,666 (8,785,082) (854,313) 3,083,859
Exercise of stock
options and
warrants 44,500 445 19,329 - - 19,774
Stock issued for
software
purchase 20,000 200 17,909 - - 18,109
Stock issued for
private
placement 2,300,000 23,000 1,087,000 - - 1,110,000
Net loss - - - (4,124,636) - (4,124,636)
---------- -------- ----------- ------------ ----------- -----------
Balances,
December 31, 1999 10,723,284 $107,233 $13,763,904 $(12,909,718) $(854,313) $ 107,106
========== ======== =========== ============ =========== ===========
</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 (the Company) was incorporated under the
corporate laws of the Commonwealth of Virginia in 1979 to develop and
market computer applications software systems, programming services, and
related software products and automation systems.
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, International Software System
Corporation (ISSC), Allied Health & Information Systems, Inc. (AHISI) and
DHD Systems, Inc. Upon consolidation, all material intercompany accounts,
transactions and profits are eliminated.
Accounting Estimates
--------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from these estimates.
Revenue Recognition
-------------------
The Company provides services under various pricing arrangements. Revenue
from "cost-plus-fixed-fee" contracts is recognized on the basis of
reimbursable contract costs incurred during the period, plus a percentage
of the fixed fee. Revenue from "firm-fixed-price" contracts is recognized
on the percentage-of-completion method. Under this method, individual
contract revenues are recorded based on the percentage relationship that
contract costs incurred bear to management's estimate of total contract
costs. Revenue from "time and material" contracts is recognized on the
basis of hours utilized, plus other reimbursable contract costs incurred
during the period. Contract losses, if any, are accrued when their
occurrence becomes known and the amount of the loss is reasonably
determinable.
Revenue from software sales is recognized upon delivery, when collection of
the receivable is probable. Maintenance revenue is recognized ratably over
the maintenance period.
F-6
<PAGE>
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
1. Summary of Significant Accounting Policies (continued)
Segment Reporting
-----------------
The Company adopted Statement No. 131, "Disclosures about Segments of an
Enterprise and Related Information," in 1998, and concluded that it
operates in one business segment, providing products and services to
modernize client information systems.
Government Contracts
--------------------
Company sales to departments or agencies of the United States Government
are subject to audit by the Defense Contract Audit Agency (DCAA), which
could result in the renegotiating of amounts previously billed. Audits by
DCAA were completed through the year ended December 31, 1997. No amounts
were changed as a result of the audits. Management is of the opinion that
any disallowance of costs for subsequent fiscal years by the government
auditors, other than amounts already provided, will not materially affect
the Company's financial statements.
Cash and Cash Equivalents
-------------------------
For the purposes of the statement of cash flows, the Company considers all
highly liquid investments with maturities of ninety days or less at the
time of purchase to be cash equivalents. Deposits are maintained with a
federally insured bank. Balances at times exceed insured limits, but
management does not consider this to be a significant concentration of
credit risk.
Fixed Assets
------------
Fixed assets are stated at cost and are depreciated using the straight-line
method over the estimated useful lives of the assets. Leasehold
improvements are amortized over the term of the lease or the estimated life
of the improvement, whichever is shorter. Maintenance and minor repairs
are charged to operations as incurred. Gains and losses on dispositions
are recorded in current operations.
Advertising
-----------
All costs related to advertising the Company's products are expensed in the
period incurred.
F-7
<PAGE>
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
1. Summary of Significant Accounting Policies (continued)
Software Development Costs
--------------------------
The Company has capitalized costs related to the development of the ICON
software product. In accordance with Statement of Financial Accounting
Standards No. 86, capitalization of costs begins when technological
feasibility has been established and ends when the product is available for
general release to customers. Amortization is computed and recognized for
the product when available for general release to customers based on the
greater of a) the ratio that current gross revenues for the product bear to
the total of current and anticipated future gross revenues for that product
or, b) the straight-line method over the economic life of the product.
Capitalized costs and amortization periods are management's estimates and
may have to be modified due to inherent technological changes in software
development.
Stock-Based Compensation
------------------------
The Company records compensation expense for all stock-based compensation
plans using the intrinsic value method prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees." The Company's annual financial
statements disclose the required pro forma information as if the fair value
method prescribed by Financial Accounting Standards Board's Statement No.
123, "Accounting for Stock-Based Compensation," had been adopted.
Earnings Per Share
------------------
The Company's earnings per share calculations are based upon the weighted
average of shares of common stock outstanding. The dilutive effect of
stock options and warrants are included for purposes of calculating diluted
earnings per share, except for periods when the Company reports a net loss,
in which case the inclusion of stock options and warrants would be
antidilutive.
Income Taxes
------------
Under Financial Accounting Standards Board Statement No. 109, "Accounting
for Income Taxes," the liability method is used in accounting for income
taxes. Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases
of assets and liabilities, and are measured using the enacted tax rates and
laws that will be in effect when the differences are expected to reverse.
F-8
<PAGE>
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
1. Summary of Significant Accounting Policies (continued)
Fair Market Value of Financial Instruments
------------------------------------------
The Company's financial instruments include trade receivables and other
receivables, accounts payable and notes payable. Management believes the
carrying value of financial instruments approximates their fair market
value, unless disclosed otherwise in the accompanying notes.
2. Receivables
Accounts receivable at December 31, 1999, consist of the following:
<TABLE>
<S> <C>
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
==========
</TABLE>
Unbilled receivables are for services provided through the balance sheet
date which are expected to be billed and collected within one year.
3. Fixed Assets
A summary of fixed assets and equipment at December 31, 1999, consist of
the following:
<TABLE>
<S> <C>
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
===========
</TABLE>
Depreciation expense for the years ended December 31, 1999 and 1998, was
$282,966 and $385,448 respectively.
F-9
<PAGE>
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
4. Software Development Costs
Software development costs as of December 31, 1999 consist of the
following:
<TABLE>
<S> <C>
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
===========
</TABLE>
Amortization expense for the years ended December 31, 1999 and 1998, was
$1,096,170 and $1,314,272, respectively. During 1999 and 1998, there was a
$1,978,362 and $2,902,152 write-down of capitalized costs to estimated net
realizable value, which is included separately in the statement of
operations.
At December 31, 1999, capitalized software development costs of $463,653,
net of accumulated amortization of $118,010, are for a new software tool
being amortized over four years. All costs related to other products have
been amortized or written off. Additions totaling $131,664 for 1999
include $18,109 recorded for 20,000 shares of stock issued for certain
software rights.
5. Other Assets
Other assets at December 31, 1999, consist of the following:
<TABLE>
<S> <C>
Security deposits $48,275
Other 10,000
-------
Total other assets $58,275
=======
</TABLE>
6. Other Accrued Liabilities
Other accrued liabilities at December 31, 1999, consist of the following:
<TABLE>
<S> <C>
Royalties payable $343,191
Accrued related Jetform costs 248,971
Accrued payables 50,000
Other 85,742
--------
Total other accrued liabilities $727,904
========
</TABLE>
F-10
<PAGE>
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
7. Revolving Line of Credit
At December 31, 1999, the Company had a revolving line of credit with a
bank providing for demand or short-term borrowings up to $1,000,000. The
Company's line of credit of $2,000,000 with the bank expired on June 19,
1999. The bank has executed forbearance agreements with the Company, which
effectively extends the line of credit until April 20, 2000. Draws against
this line are limited by varying percentages of the Company's accounts
receivable balances depending on the source of the receivables and their
age. The bank is granted a security interest in certain assets if there
are borrowings under the line of credit. Interest on outstanding amounts
is payable monthly at the bank's prime rate plus 0.5% (9.00% at December
31, 1999). The lender has a first priority security interest in the
Company's receivables and a direct assignment of its U.S. Government
contracts. The revolving line of credit, among other covenants, requires
the Company to comply with certain financial ratios. The Company was not
in compliance with any of the financial ratios at December 31, 1999, when
there was an outstanding balance of $501,500 on the line.
The Company is in negotiations with various organizations to obtain a new
line of credit. The current line of credit, coupled with funds generated
from operations, assuming the operations are cash flow positive, should be
sufficient to meet the Company's operating cash requirements. The Company,
however, may be required from time to time to delay timely payments of its
accounts payable. The Company cannot be certain that there will not be a
need for additional working capital in the near future. It is uncertain
whether the Company will be able to obtain such additional working capital.
8. Commitments and Contingencies
Capital Leases
--------------
The future minimum lease payments under capital leases for equipment and
the present value of the minimum lease payments are as follows:
<TABLE>
<S> <C>
Year ending December 31, 2000 $7,121
Less amount representing interest (185)
------
Total obligation representing principal $6,936
======
</TABLE>
F-11
<PAGE>
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
8. Commitments and Contingencies (continued)
Operating Leases
----------------
The Company leases facilities and equipment under long-term operating lease
agreements extending through 2004. Rent expense was $439,312 and $766,314
for the years ended December 31, 1999 and 1998, respectively. The future
minimum rental payments to be made under non-cancelable operating leases,
principally for facilities, are as follows:
<TABLE>
<S> <C>
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
==========
</TABLE>
The above minimum lease payments reflect the base rent under the lease
agreements. However, these base rents shall be adjusted each year to
reflect increases in the consumer price index and the Company's
proportionate share of real estate tax increases on the leased property.
The leases are secured by security deposits in the amount of $48,275.
The aggregate future minimum rentals to be received under non-cancelable
subleases as of December 31, 1999, is $215,100, of which $110,300 is
payable in 2000, $32,000 is payable in 2001, $33,000 is payable in 2002,
and $39,800 is payable in 2003 through 2004.
Royalties
---------
In August 1996, the Company entered into an agreement to purchase the
software product UNICAST. As part of the agreement, royalties are paid to
the seller on sales of the UNICAST licensing fees collected by the Company.
The aggregate amount of the royalties pursuant to this agreement will not
exceed $1,000,000. No royalties were paid in 1999 and $640 in royalties
were paid in 1998.
In September 1996, the Company entered into an agreement whereby, in
consideration of an expense sharing arrangement, the Company will pay
royalties on sales of the UNICAST licensing fees collected by the Company.
The royalties will not exceed $245,831. As of December 31, 1999, total
royalties expenses to date were $34,779 and total royalties paid to date
were $7,667.
F-12
<PAGE>
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
8. Commitments and Contingencies (continued)
In March 1997, the Company entered into an agreement with Computer
Associates International, Inc. (CA). As part of the agreement, royalties
are paid to CA based upon sales of the UNICAST licensing fees collected by
the Company. As of December 31, 1999 total royalties expenses to date were
$667,635 and total royalties paid to date were $403,370.
In February 1998, the Company entered into an agreement to acquire all
rights, title and interest for the development of a software application
which runs on a personal computer to remedy software which is not Year 2000
compliant (the "Tool"). As part of the agreement, royalties are paid on
all professional service fees in which the Tool is utilized for assessment
and/or remediation services. The aggregate amount of the royalties
pursuant to this agreement will not exceed $4,000,000. As of December 31,
1999, total royalties expenses to date were $123,772 and total royalties
paid to date were $71,958.
9. Income Taxes
The tax effect of significant temporary differences representing deferred
tax assets and deferred tax liabilities at December 31, 1999, are as
follows:
<TABLE>
<S> <C>
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 $ -
===========
</TABLE>
F-13
<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>
The Company has recognized a valuation allowance to the full extent of its
net deferred tax assets since the likelihood of realization of the benefit
cannot be determined.
The Company has net operating loss carryforwards of approximately $16
million, which expire, if unused, in the year 2018. The tax benefits of
approximately $2.3 million of net operating losses related to stock options
will be credited to equity when the benefit is realized through utilization
of the net operating loss carryover.
10. Major Customers
Traditionally, IAI's clients have spanned a wide range of enterprises in
the private sector along with government agencies. The Company's revenue
derived from a single commercial software company constituted 9% of the
Company's 1999 revenue and 24% of the 1998 revenue. The Company's revenue
derived from a single commercial technology company accounted for 6% of the
Company's 1999 revenue and 10% of the 1998 revenue.
11. Retirement Plans
The Company adopted a Cash or Deferred Arrangement Agreement (CODA) which
satisfies the requirements of section 401(k) of the Internal Revenue Code,
on January 1, 1988. This defined contribution retirement plan covers
substantially all employees. Participants can elect to have up to 15% of
their salary reduced and contributed to the plan. The Company is required
to make a matching contribution of 25% of the first 6% of this salary
reduction. The Company can also make additional contributions at its
discretion. Amounts expensed under the plan for the years ended December
31, 1999 and 1998, were $44,170 and $106,418, respectively.
F-14
<PAGE>
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
12. Stock Options and Warrants
The Company has an incentive stock option plan, which became effective June
25, 1996. The plan provides for the granting of stock options to certain
employees and directors. The maximum number of shares for which options
may be granted under the plans is 2,575,000. Options expire no later than
ten years from the date of grant or when employment ceases, whichever comes
first, and vest over periods determined by the board of directors. The
average vesting period for options granted in 1999 was one year. The
exercise price of each option equals the quoted market price of the
Company's stock on the date of grant. The stock option plan is accounted
for under Accounting Principles Board (APB) Opinion No. 25. Accordingly,
no compensation has been recognized for the plan. Had compensation cost
for the plans been determined based on the estimated fair value of the
options at the grant date consistent with the method of Statement of
Financial Accounting Standards (SFAS) No. 123, the Company's net income and
earnings would have been:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
1999 1998
---- ----
<S> <C> <C> <C>
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)
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
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
</TABLE>
The effects on 1999 and 1998 pro forma net income and earnings per share of
expensing the estimated fair value of stock options are not necessarily
representative of the effects on reported net income for future years due
to such things as the vesting period of the stock options and the potential
for issuance of additional stock options in future years. The weighted
average fair value per option granted in 1999 and 1998, was $0.33 and
$3.74, respectively.
F-15
<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 the Company to
reprice 122,600 employee stock options at a price range of $9.333 to $14.50
per share, to $1.31 per share which was the fair market value of the common
stock at the close on that date. On October 1, 1999, the Board of
Directors authorized the Company to reprice 100,000 stock options to
executive officers at a price range of $0.62 to $14.50 per share, to a
price of $0.26 per share which was not less than the current closing price
of the Company's common stock as of October 1, 1999.
F-16
<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 its March 1997 private placement, the Company
issued 97,827 warrants exercisable at $6.42 per share to an investment
banking entity. In connection with it's December 1999 private placement,
the Company issued 1,400,000 five-year warrants exercisable at $1.00 per
share to individual investors. There were no warrants exercised in 1999
and 58,374 warrants were exercised in 1998. As of December 31, 1999,
outstanding warrants are 1,535,339, of which 135,339 expire in 3 years and
1,400,000 expire in 5 years. The purchase price for shares issued upon
exercise of these warrants range from $0.56 to $6.42 per share. These
warrants are exercisable immediately.
13. Computation Of Earnings (Loss) Per Share
<TABLE>
<CAPTION>
For the years ended December 31,
----------------------------------
1999 1998
---- ----
<S> <C> <C>
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)
</TABLE>
Options and warrants to purchase shares of common stock were outstanding
during 1999 and 1998 (See Note 12), but were not included in the
computation of diluted earnings per share as the effect would be
antidilutive.
F-17
<PAGE>
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
14. Subsequent Events Private Placement Memorandum
In January 2000, the Company completed the second phase of its December
1999, private placement memorandum which raised an additional $125,000 in
exchange for 250,000 shares of common stock and 150,000 five-year warrants,
exercisable at $1.00 per share. The shares and warrants were sold to
individual investors. The funds will be utilized to finance the operations
of the Company. These warrants are exercisable immediately.
F-18
<PAGE>
Exhibit 4.2
WARRANT
THIS SECURITY HAS BEEN ACQUIRED IN A TRANSACTION NOT INVOLVING ANY PUBLIC
OFFERING AND HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), AND MAY NOT BE OFFERED, SOLD OR TRANSFERRED EXCEPT IN
COMPLIANCE WITH THE ACT.
INFORMATION ANALYSIS INCORPORATED
______________________________
COMMON STOCK PURCHASE WARRANT
______________________________
Certificate No. ____
Dated as of ______________
1. Grant. For consideration of $_____________ and other value received,
-----
Information Analysis Incorporated, a Virginia corporation (the "Corporation"),
hereby grants to ____________________ or its assigns or transferees (the
"Holder"), at the exercise price set forth in Section 3 below, the right to
purchase ___________________ shares (the "Warrant Shares") of Common Stock (or
other security issued in accordance with Section 6).
2. Exercise Period. The right to exercise this Warrant, in whole or in
---------------
part, begins on the date hereof. The right to exercise this Warrant expires on
December 31, 2004 ("Expiration Date").
3. Exercise Price. The exercise price of this Warrant is $1.00 per share,
--------------
as adjusted from time to time as hereinafter set forth (the "Exercise Price").
4. Adjustments.
------------
(a) Adjustment for Change in Common Stock.
-------------------------------------
<PAGE>
(i) If the Corporation (A) pays a dividend or makes a
distribution on its Common Stock in shares of its Common
Stock, (B) subdivides or reclassifies its outstanding shares
of Common Stock into a greater number of shares, or (C)
combines or reclassifies its outstanding shares of Common
Stock into a smaller number of shares (each, an "Adjustment
Event"), the Exercise Price and the number of Warrant Shares
issuable hereunder immediately prior to such action shall be
proportionately adjusted to reflect such Adjustment Event.
(ii) The adjustment shall become effective immediately after the
record date in the case of a dividend or distribution and
immediately after the effective date in the case of a
subdivision, combination or reclassification.
(iii) The adjustment shall be made successively whenever any
Adjustment Event occurs.
(b) Adjustment for Reorganization. If the Corporation consolidates or
-----------------------------
merges with or into another Person or enters into any other similar transaction,
recapitalization or reorganization (any such action, a "Reorganization"), there
shall thereafter be deliverable, upon exercise of this Warrant (in lieu of the
number of Warrant Shares theretofore deliverable) the number of shares of stock
or other securities or property to which a holder of the number of shares of
Common Stock that would otherwise have been deliverable upon exercise of this
Warrant would have been entitled upon such Reorganization if such Warrant has
been exercised in full immediately prior to such Reorganization.
5. Prior Notice as to Certain Events.
---------------------------------
(a) Dividends, Distributions, Subscription Rights. If the Corporation
---------------------------------------------
(i) pays any dividend or makes any other distribution, or (ii) offers any
subscription rights pro rata to the holders of its Common Stock, then at least
--- ----
15 days prior to the record date for such action, the Corporation will send
written notice (by first class mail, postage prepaid, addressed to the Holder at
its address shown on the books of the Corporation) of the dates on which (A) the
Corporation will close its books or take a record for such action and (B) the
holders of Common Stock of record will participate in such action.
(b) Reorganizations. If the Corporation (i) enters into any
---------------
Reorganization or reclassification of its capital stock, or (ii) is the subject
of a voluntary or involuntary dissolution, liquidation or winding up of the
Corporation, then at least 15 days prior to such action, the Corporation will
send written notice (by first class mail, postage prepaid, addressed to the
Holder at its address shown on the books of the Corporation) of the dates on
which (A) such action will occur and (B) the holders of Common Stock of record
may exchange their Common Stock for securities or other property deliverable
upon such action.
-2-
<PAGE>
6. Alternate Class. In the event the Corporation consummates the
---------------
registration of any of its securities other than Common Stock (the "Alternate
Class") in accordance with the Securities Act of 1933, as amended, upon the
request of the Holder:
(a) the Corporation will issue to Holder, upon exercise of this
Warrant, the equivalent number of shares of such Alternate Class, so long as the
holders of the shares of the Alternate Class have all of the same rights as the
holders of shares of Common Stock, except for voting rights; and
(b) all references herein to Common Stock shall be deemed to refer to
the Alternate Class.
7. Reservation of Common Stock. The Corporation will reserve and keep
---------------------------
available for issuance and delivery upon the exercise of this Warrant such
number of its authorized but unissued shares of Common Stock or other securities
of the Corporation as will be sufficient to permit the exercise in full of this
Warrant. Upon issuance, each of the Warrant Shares will be validly issued,
fully paid and nonassessable, free and clear of all liens, security interests,
charges and other encumbrances or restrictions on sale and free and clear of all
preemptive rights.
8. No Voting Rights; Limitations of Liability. Prior to exercise, this
------------------------------------------
Warrant will not entitle the Holder to (a) any voting rights, or (b) other
rights as a stockholder of the Corporation not granted herein. No provision of
this Warrant, in the absence of affirmative action by the Holder to exercise
this Warrant, and no enumeration in this Warrant of the rights or privileges of
the Holder, will give rise to any liability of such Holder for the Exercise
Price.
9. Exercise Procedure. To exercise this Warrant, the Holder must deliver
------------------
to the principal office of the Corporation (prior to the Expiration Date) this
Warrant, the subscription substantially in the form of Exhibit A attached
---------
hereto, and the Exercise Price (as adjusted pursuant to the terms hereof). The
Holder may deliver the Exercise Price by any of the following methods, at its
option: (i) in legal tender, (ii) by bank cashier's or certified check, (iii) by
wire transfer to an account designated by the Corporation, or (iv) in accordance
with Section 10. Upon exercise, the Corporation, at its sole expense (including
the payment of any documentary, stamp, issue or transfer taxes), will issue and
deliver to Holder, within 10 days after the date on which the Holder exercises
this Warrant, certificates for the Warrant Shares purchased hereunder. The
Warrant Shares shall be deemed issued, and the Holder deemed the holder of
record of such Warrant Shares, as of the opening of business on the date on
which the Holder exercises this Warrant.
10. Cashless Payment.
----------------
(a) Right to Convert. In lieu of paying the applicable Exercise Price
----------------
by legal tender, check, or wire transfer, the Holder may elect to receive, upon
exercise of this Warrant, that number of Warrant Shares equal to the quotient
obtained by dividing:
[(A-B)(X)] by (A), where:
-3-
<PAGE>
A = the Conversion Value (as defined below) of a share of Common
Stock on the date of exercise;
B = the Exercise Price for a share of Common Stock;
X = the number of Warrant Shares (equal to or less than the
number of Warrant Shares then issuable hereunder) as to
which this Warrant is being exercised.
(b) Conversion Value. For purposes of this Section 10 only, the
---------------- ----
Conversion Value of a share of Common Stock means:
(i) if the Common Stock is listed on a national securities
exchange or admitted to unlisted trading privileges on such
exchange or listed for trading on the Nasdaq National
Market System maintained by the National Association of
Securities Dealers, Inc., -- the last reported sale price
of the Common Stock on the last trading day prior to the
date of exercise of this Warrant (or the average closing
bid and asked prices for such day if no such sale is made
on such day);
(ii) if clause (i) does not apply, and if the prices are
reported by the National Quotation Bureau, Inc., -- the
mean of the last reported bid and asked prices reported on
the last trading day prior to the date of exercise of this
Warrant; and
(iii) in all other cases -- the per share value as determined by
the board of directors in good faith.
11. Participation in Repurchases or Redemptions. If the Corporation
-------------------------------------------
repurchases or redeems any of its securities, the Corporation will offer to
include the Holder in such repurchase or redemption, as if the Holder had
exercised this Warrant immediately prior to the event (or any record date with
respect thereto). If the Holder elects to participate in a repurchase or
redemption, this Warrant shall be modified (as of the date of such event) so
that the Holder shall be entitled to receive, upon exercise, the number of
Warrant Shares issuable hereunder less the number of Warrant Shares redeemed or
repurchased. Any such repurchases or redemptions should be net of the Exercise
Price for the Warrant Shares being deemed repurchased or redeemed.
12. Sale of Warrant or Warrant Shares. Neither this Warrant nor any of
---------------------------------
the Warrant Shares have been registered under the Act or under the securities
laws of any state. Neither this Warrant nor any of the Warrant Shares (when
issued) may be sold, assigned, transferred, pledged or hypothecated or otherwise
disposed of except as permitted: (i) by any shareholders agreement then in
effect, (ii) by any effective registration statement under the Act and by the
securities laws of any state in question, or (iii) by an opinion of counsel
reasonably satisfactory to the Corporation stating that such registration under
the Act and registration or qualification under the securities
-4-
<PAGE>
laws of any state is not required. Until the Warrant Shares have been registered
under the Act and registered and qualified under the securities laws of any
state in question, the Corporation shall cause each certificate evidencing any
Warrant Shares to bear the following legend:
The shares evidenced by this certificate have not been registered
under the Securities Act of 1933, as amended, or under the securities laws
of any state. The shares may not be offered, sold, assigned, transferred,
pledged or hypothecated or otherwise disposed of in the absence of an
effective registration statement under the Securities Act of 1933, as
amended, and such registration or qualification as may be necessary under
the securities laws of any state, or an opinion of counsel satisfactory to
the CORPORATION that such registration or qualification is not required.
13. Transfer. The Corporation will register this Warrant on its books and
--------
keep such books at its offices. To effect a transfer permitted by Section 11
hereof, the Holder must present (either in person, or by duly authorized
attorney) written notice substantially in the form of Exhibit B attached hereto.
---------
To prevent a transfer in violation of Section 11, the Corporation may issue
appropriate stop orders to its transfer agent.
14. Replacement of Warrant. If the Holder provides evidence that this
----------------------
Warrant or any certificate or certificates representing the Warrant Shares have
been lost, stolen, destroyed or mutilated, the Corporation (at the request and
expense of the Holder) will issue a replacement warrant upon reasonably
satisfactory indemnification by the Holder (if required by the Corporation).
15. Governing Law. The laws of the Commonwealth of Virginia (other than
-------------
its conflict of law rules) govern this Warrant.
IN WITNESS WHEREOF, the Corporation has caused this Warrant to be signed on
its behalf, in its corporate name, by its President, and its corporate seal to
be hereunto affixed and the said seal to be attested by its Secretary, as of the
____ day of _______________.
INFORMATION ANALYSIS INCORPORATED
a Virginia corporation
Attest: _________________ By: ______________________________[Seal]
______________ , _________________________,
Secretary President
-5-
<PAGE>
Exhibit A
---------
IRREVOCABLE SUBSCRIPTION
------------------------
To: Information Analysis Incorporated
The undersigned hereby elects to exercise its right under the attached
Warrant by purchasing ____ shares of the Common Stock, and hereby irrevocably
subscribes to such issue. The certificates for such shares shall be issued in
the name of:
______________________________
(Name)
______________________________
(Address)
______________________________
(Taxpayer Number)
and delivered to:
______________________________
(Name)
______________________________
(Address)
The Exercise Price of $_______ is enclosed.
Or
--
In lieu of payment of the Exercise Price, the undersigned hereby invokes
the provisions of Section 10 of the Warrant.
Date:_______________
Signed: ________________________________________
(Name of Holder, Please Print)
________________________________________
(Address)
________________________________________
(Signature)
-6-
<PAGE>
Exhibit B
---------
ASSIGNMENT
----------
For value received, the undersigned hereby sells, assigns and transfers
unto:
_______________________________
(Name)
_______________________________
(Address)
the attached Warrant, together with all right, title and interest therein
to purchase [__] shares of the Common Stock, and does hereby irrevocably appoint
_______________________ as attorney-in-fact to transfer said Warrant on the
books of Information Analysis Incorporated with full power of substitution in
the premises.
Done this ______ day of ____________ 19__.
______________________________
(Signature)
______________________________
(Name and title)
______________________________
______________________________
(Address)
-7-
<PAGE>
Exhibit 4.3
- --------------------------------------------------------------------------------
INFORMATION ANALYSIS INCORPORATED
COMMON STOCK AND WARRANT PURCHASE AGREEMENT
- --------------------------------------------------------------------------------
THIS COMMON STOCK AND WARRANT PURCHASE AGREEMENT is made as of the ______ day of
______________, 1999, by and between Information Analysis Incorporated, a
Virginia corporation (the "Company"), and the Investors who execute a signature
page to this Agreement which the Company accepts, all of whom shall be set forth
on Schedule A hereto and each of whom is herein referred to as an "Investor,"
and all of whom are herein referred to collectively as the "Investors."
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Purchase and Sale of Units.
---------------------------
1.1 Sale and Issuance of Units. Subject to the terms and conditions of
---------------------------
this Agreement, each Investor agrees, severally, to purchase, and the Company
agrees to sell and issue to such Investor, at the Closing (as defined below),
that number of Units set forth in the signature page submitted by each Investor
which is accepted by the Company. Each "Unit" shall be equal to one share of
the Company's Common Stock (the "Common Stock") and one-half Warrant. The Units
shall be sold at a price per unit of $0.50 (the "Price Per Unit").
1.2 The Warrants. Subject to the terms and conditions of this Agreement,
------------
the Warrants herein referred to individually as a "Warrant" and collectively as
the "Warrants," which terms shall also include any warrants delivered in
exchange or replacement thereof, shall be substantially in the form set forth as
Exhibit B hereto.
- ---------
1.3 Initial Closing. The initial purchase and sale of the Units to the
----------------
Investors pursuant to Section 1.1 hereof shall take place at such time the
Company secures minimum subscriptions at least equal to $400,000 ("Initial
Closing"). At the Initial Closing, the Company shall deliver to each of the
Investors a certificate representing the number of Units that such Investor is
purchasing as set forth in the signature page submitted by each Investor and
opposite such Investor's name in Schedule A hereto against delivery to the
----------
Company by such Investor a certified or cashier's check acceptable to the
Company in the amount of the purchase price therefor payable to the Company's
order, or by the wire transfer of immediately available funds to a bank
designated by the Company, for the Company's account, in the amount of the
purchase price therefor.
1.4 Subsequent Sale of Units. Following the Initial Closing, the Company
-------------------------
may for a period of three (3) months sell and issue additional Units to such
purchasers as it shall select (each of whom is herein also referred to as an
"Additional Investor," and all of whom are herein also referred to collectively
as the "Additional Investors"), at a price as provided in Section 1.1. Each
such Additional Investor shall become a party to this Agreement and shall have
the rights and obligations of an Investor hereunder. The Company shall have the
right to accept from Additional Investors such subscriptions for the purchase of
the number of Units identified on the signature page submitted by each
Additional Investor. Each Additional Investor hereby agrees to purchase the
number of Units identified on the signature page submitted by each Investor and
opposite such Investor's name in Schedule A.
----------
- -------------------------------------------------------------------------------
Information Analysis Incorporated Page 1
- -------------------------------------------------------------------------------
<PAGE>
2. Representations and Warranties of the Company. The Company hereby
----------------------------------------------
represents and warrants to each Investor that, except as to the matters set
forth in the Schedule of Exceptions attached hereto as Schedule B (the "Schedule
----------
of Exceptions"), which shall be deemed to be (a) exceptions to the
representations and warranties made herein and (b) additional representations
and warranties as if made hereunder.
2.1 Organization, Good Standing and Qualification. The Company is a
----------------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the Commonwealth of Virginia, has all requisite corporate power and authority
to carry on its business as now conducted and is duly qualified to transact
business and is in good standing in each jurisdiction in which the failure so to
qualify would have a material adverse effect on its business or properties.
2.2 Capitalization. The authorized capital of the Company consists of:
---------------
(A) Common Stock. 15,000,000 shares authorized of Common Stock, of which
-------------
6,918,673 shares are outstanding. Up to 3,000,000 shares will be sold
to the Investors pursuant to Sections 1.1 of this Agreement.
The rights, privileges and preferences of the Common Stock are as
stated in the Company's Articles of Incorporation (the "Articles of
Incorporation").
(B) Except for Warrants to purchase up to 1,500,000 shares of Common
Stock issued or issuable to the Investors, and, up to 1,608,589 shares
of Common Stock issuable to employees and directors of the Company as
compensation or as an incentive for the retention of services, as
approved by the Board of Directors, there are not outstanding any
options, warrants, rights (including conversion or preemptive rights)
or agreements for the purchase or acquisition from the Company of any
of its securities.
2.3 Authorization. All corporate action on the part of the Company, its
--------------
officers, directors and shareholders necessary for the authorization, execution
and delivery of this Agreement and the Warrants, the performance of all
obligations of the Company hereunder and thereunder and the authorization,
issuance (or reservation for issuance) and delivery of (a) the Common Stock
being sold hereunder, and (b) the Warrants and the Common Stock issuable upon
the exercise of the Warrants, has been taken or will be taken prior to the
Closing, and this Agreement and the Warrants, constitute valid and legally
binding obligations of the Company, enforceable in accordance with their
respective terms, except (i) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium, and other laws of general application affecting
enforcement of creditors' rights generally, (ii) as limited by laws relating to
the availability of specific performance, injunctive relief, or other equitable
remedies.
2.4 Valid Issuance of Common Stock.
-------------------------------
(A) Based in material part upon the representations of the Investors in
this Agreement,
(i) the Common Stock which is being purchased by the Investors
hereunder, when issued, sold and delivered in accordance with the
terms hereof for the consideration expressed herein, will be duly
and validly issued, fully paid and nonassessable and will be
issued in compliance with all applicable federal and state
securities laws; and
(ii) the Warrants and the Common Stock issuable upon the exercise of
the Warrants purchased under this Agreement has been duly and
validly reserved
- -------------------------------------------------------------------------------
Information Analysis Incorporated Page 2
- -------------------------------------------------------------------------------
<PAGE>
for issuance and, upon issuance will be duly and validly issued,
fully paid and nonassessable, and will be issued in compliance
with all applicable federal and state securities laws, as
presently in effect.
(B) The outstanding shares of Common Stock are all duly and validly
authorized and issued. All of said shares are fully paid and
nonassessable. All of the outstanding shares of Common Stock were
issued in compliance with all applicable federal and state securities
laws.
2.5 Disclosure. The Company will, if requested, provide to each Investor,
-----------
all of the information which such Investor has requested or requests for
deciding whether to purchase the Common Stock and all information which the
Company believes is reasonably necessary to enable such Investor to make such
decision. Neither this Agreement, the Warrants, nor other statements or
certificates made or delivered in connection herewith or therewith and all
reports filed by the Company with the SEC, including Forms 10K and Forms 10Q,
contains any untrue statement of a material fact or omits to state a material
fact necessary to make the statements herein or therein not misleading.
3. Representations and Warranties of the Investors. Each Investor hereby
------------------------------------------------
represents and warrants that:
3.1 Authorization. This Agreement constitutes its valid and legally
--------------
binding obligation, enforceable in accordance with its terms.
3.2 Purchase Entirely for Own Account. This Agreement is made with each
----------------------------------
Investor in reliance upon such Investor's representation to the Company, which
by such Investor's execution of this Agreement such Investor hereby confirms,
that the Units to be received by such Investor will be acquired for investment
for such Investor's own account, not as a nominee or agent, and not with a view
to the resale or distribution of any part thereof, and that such Investor has no
present intention of selling, granting any participation in, or otherwise
distributing the same. By executing this Agreement, each Investor further
represents that such Investor does not have any contract, undertaking, agreement
or arrangement with any person to sell, transfer or grant participation to such
person or to any third person, with respect to any of the Securities. Each
Investor represents, that such investor has full power and authority to enter
into this Agreement.
3.3 Disclosure of Information. Each Investor has received all of the
--------------------------
information that such investor has requested and believes such investor has
received all of the information such investor considers necessary or appropriate
for deciding whether to purchase the Units. Each Investor further represents
that such investor has read carefully and understands the information provided
by the Company and has had ample opportunity to ask questions and receive
answers from the Company regarding the terms and conditions of the offering of
the Units. The foregoing, however, does not limit or modify the representations
and warranties of the Company in Section 2 of this Agreement or the right of the
Investors to rely thereon.
3.4 Investment Experience. Each Investor is an investor in securities of
----------------------
early stage companies and acknowledges that such investor is able to fend for
himself or herself, can bear the economic risk of the investment in the Units
and has such knowledge and experience in financial or business matters that such
investor is capable of evaluating the merits and risks of the investment in the
Units.
3.5 Adequate Means. Each Investor has adequate means of providing for the
--------------
each Investor's current needs and possible personal contingencies and has no
need for liquidity in this
- -------------------------------------------------------------------------------
Information Analysis Incorporated Page 3
- -------------------------------------------------------------------------------
<PAGE>
investment and each Investor can bear the economic risk and/or entire loss of
any investment in the Units. Each Investor's commitment to illiquid investments
is reasonable in relation to such investor's needs. All financial information
provided to the Company by each Investor is true and correct.
3.6 Accredited Investor. Each Investor, if a United States resident, is
-------------------
an "accredited investor" within the meaning of Regulation D promulgated under
the Securities Act of 1933, as amended, inasmuch as each Investor is:
(A) a natural person whose individual net worth, or joint net worth with
that person's spouse, at the time of purchase exceeds $1,000,000;
(B) a natural person who had an individual income in excess of $200,000 in
each of the two most recent years or joint income with that person's
spouse of $300,000 in each of those years and who has a reasonable
expectation of reaching the same income level in the current year;
(C) an organization described in section 501(c)(3) of the Internal Revenue
Code, corporation, Massachusetts or similar business trust or
partnership, not formed for the specific purpose of acquiring the
securities offered, with total assets in excess of $5,000,000; or
(D) otherwise meets the requirements under Regulation D.
If the Investor is purchasing the Units hereby in a fiduciary capacity, the
above representations and warranties shall be deemed to have been made on behalf
of the person or persons for whom the Investor is so purchasing.
3.7 No Public Solicitation. Neither the offer nor the sale of the Units
----------------------
to each Investor has been accomplished by the publication of any form of
advertisement or general solicitation, including, but not limited to, the
following:
(A) Any advertisement, article, notice or other communication published
in any newspaper, magazine, or similar media or broadcast over
television or radio; and
(B) Any seminar or meeting whose attendees have been invited by any
general solicitation or general advertising.
3.8 Restricted Securities. Each Investor understands that the Units are
----------------------
characterized as "restricted securities" under the federal securities laws in as
much as they are being acquired from the Company in a transaction not involving
a public offering and that under such laws and applicable regulations such
securities may be resold without registration under the Securities Act of 1933,
as amended (the "Act"), only in certain limited circumstances. In this
connection, each Investor represents that such investor is familiar with SEC
Rule 144, as presently in effect, and understands the resale limitations imposed
thereby and by the Act.
3.9 Further Limitations on Disposition. Without in any way limiting the
-----------------------------------
representations set forth above, each Investor further agrees not to make any
disposition of all or any portion of the Units unless and until the transferee
has agreed in writing for the direct benefit of the Company to be bound by this
Section 3, and:
(A) There is then in effect a Registration Statement under the Act
covering such proposed disposition and such disposition is made in
accordance with such Registration Statement; or
(B) (i) Such Investor shall have notified the Company of the proposed
disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed
disposition, and
- -------------------------------------------------------------------------------
Information Analysis Incorporated Page 4
- -------------------------------------------------------------------------------
<PAGE>
(ii) If reasonably requested by the Company, such Investor shall have
furnished the Company with an opinion of counsel, reasonably
satisfactory to the Company, that such disposition will not
require registration of such Units under the Act. It is agreed
that the Company will not require opinions of counsel for
transactions made pursuant to Rule 144, except in unusual
circumstances.
(C) Notwithstanding the provisions of paragraphs (A) and (B) above, no
such registration statement or opinion of counsel shall be necessary
for a transfer by an Investor which is a partnership to a partner of
such partnership, or a retired partner of such partnership who retires
after the date hereof, or to the estate of any such partner or retired
partner or the transfer by gift, will or intestate succession of any
partner to his spouse or to the siblings, lineal descendants or
ancestors of such partner or his spouse, if the transferee agrees in
writing to be subject to the terms hereof to the same extent as if he
were an original Investor hereunder.
3.10 Legends. It is understood that the certificates evidencing the Units
--------
may bear one or all of the following legends:
(A) "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933. THE SHARES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE
SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A
REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER
SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT
SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144
OF SUCH ACT."
(B) "THIS WARRANT HAS BEEN ACQUIRED FOR INVESTMENT AND HAS NOT BEEN
REGISTREED UNDER THE SECURITIES ACT OF 1933 OR ANY APPLICABLE STATE
SECURITIES LAWS. THIS WARRANT MAY NOT BE OFFERED, PLEDGED, SOLD OR
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION
THEREFROM."
(C) Any legends required by law.
3.11 Risks. Each Investor recognizes that an investment in the Units
-----
involves significant risks and has taken full cognizance of and understands all
of the risk factors related to the purchase of the Units. The risks associated
with investment in the Company include, but are not limited to those risks
described on Exhibit A hereto. Each Investor understands that Exhibit A attached
---------
hereto does not contain a complete list of the risks involved in the investment
in the Units.
4. Conditions of Investor's Obligations at Closing. The obligations of each
------------------------------------------------
Investor under Section 1.1 of this Agreement are subject to the fulfillment on
or before the Closing of each of the following conditions, the waiver of which
shall not be effective against any Investor who does not consent in writing
thereto:
4.1 Representations and Warranties. The representations and warranties of
-------------------------------
the Company contained in Section 2 hereof shall be true on and as of the Closing
with the same effect as though such representations and warranties had been made
on and as of the date of the Closing.
- -------------------------------------------------------------------------------
Information Analysis Incorporated Page 5
- -------------------------------------------------------------------------------
<PAGE>
4.2 Performance. The Company shall have performed and complied with all
------------
agreements, obligations and conditions contained in this Agreement that are
required to be performed or complied with by it on or before the Closing.
5. Conditions of the Company's Obligations at Closing. The obligations of the
---------------------------------------------------
Company to each Investor under this Agreement are subject to the fulfillment
on or before the Closing of each of the following conditions by that
Investor:
5.1 Representations and Warranties. The representations and warranties of
-------------------------------
the Investors contained in Section 3 shall be true on and as of the Closing with
the same effect as though such representations and warranties had been made on
and as of the Closing.
5.2 Payment of Purchase Price. The Investors shall have paid in full in
--------------------------
the manner provided above, and the Company shall have received, the purchase
price for the number of Units subscribed for by them.
6. Registration Rights. The Company covenants and agrees as follows:
--------------------
6.1 Definitions. For purposes of this Section 6:
------------
(A) The term "Act" refers to the Securities Act of 1933, as amended. The
term "1934 Act" refers to the Securities and Exchange Act of 1934, as
amended.
(B) The terms "register," "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement
or similar document in compliance with the Act, and the declaration or
ordering of effectiveness of such registration statement or document,
(C) The term "Registerable Securities" means (1) the Common Stock
underlying this Agreement; and (2) any Common Stock issued as a
dividend or other distribution with respect to, or in exchange for or
in replacement of, such Common Stock;
(D) The number of shares of "Registerable Securities then outstanding"
shall be determined by the number of shares of Common Stock
outstanding which are, and the number of shares of Common Stock
issuable pursuant to then exercisable securities which are,
Registerable Securities.
(E) The term "Holder" means any person owning or having the right to
acquire Registerable Securities, or any assignee thereof; and
(F) The term "Form S-3" means such form under the Act as in effect on the
date hereof or any registration form under the Act subsequently
adopted by the Securities and Exchange Commission ("SEC") which
permits inclusion or incorporation of substantial information by
reference to other documents filed by the Company with the SEC.
6.2 Reports Under Securities Exchange Act of 1934. With a view to making
----------------------------------------------
available to the Holders the benefits of Rule 144 promulgated under the Act and
any other rule or regulation of the SEC that may at any time permit a Holder to
sell securities of the Company to the public without registration or pursuant to
a registration on Form S-3, the Company agrees to:
(A) Make and keep public information available, as those terms are
understood and defined in SEC Rule 144;
- -------------------------------------------------------------------------------
Information Analysis Incorporated Page 6
- -------------------------------------------------------------------------------
<PAGE>
(B) Take such action as is necessary to enable the Holders to utilize Form
S-3 for the sale of their Registerable Securities;
(C) File with the SEC in a timely manner all reports and other documents
required of the Company under the Act and the 1934 Act; and
(D) Furnish to any Holder, so long as the Holder owns any Registerable
Securities, forthwith upon request (i) a written statement by the
Company that it has complied with all reporting requirements so as to
enable Investor to utilize SEC Rule 144, or that it qualifies as a
registrant whose securities may be resold pursuant to Form S-3 (at any
time after it so qualifies), (ii) a copy of the most recent annual or
quarterly report of the Company and such other reports and documents
so filed by the Company, and (iii) such other information as may be
reasonably requested in availing any Holder of any rule or regulation
of the SEC which permits the selling of any such securities without
registration or pursuant to such form.
6.3 Form S-3 Registration.
----------------------
(A) No later than fifteen (15) days after the Initial Closing, the Company
shall file a registration statement on Form S-3 covering the Common
Stock issuable or issued upon exercise of the Warrants and will
promptly give written notice of the proposed registration, and any
related qualification or compliance, to all Holders. No later than six
(6) months from the date of this Agreement, the Company shall file a
registration statement on Form S-3 covering the Registerable
Securities and will promptly give written notice of the proposed
registration, and any related qualification or compliance, to all
Holders;
(B) The Company shall not be obligated to effect any such registration,
qualification or compliance, pursuant to this Section 6.3: (1) if Form
S-3 or another short form registration statement under the Act is not
available for such registration, except if such short form is not
available because of a breach by the Company of Section 6.2; (2) if
the Holders, together with the holders of any other security of the
Company entitled to inclusion in such registration, propose to sell
Registerable Securities and such other securities (if any) at an
aggregate gross offering price of less than $300,000; (3) if the
Company shall furnish to such Holders a certificate signed by the
President of the Company stating that in the good faith judgment of
the Board of Directors of the Company, it would be seriously
detrimental to the Company and its shareholders for such Form S-3
Registration to be effected at such time, in which event the Company
shall have the right to defer the filing of the Form S-3 registration
statement for a period of not more than 90 days under this Section
6.3; provided, however, that the Company shall not utilize this right
more than once in any twelve-month period; (4) within six months of
the effective date of any other registration statement relating to an
underwritten public offering filed by the Company with the SEC so long
as the Holders have piggyback registration rights under said other
registration statement; or (5) in any particular jurisdiction in which
the Company would be required to qualify to do business or to execute
a general consent to service of process in effecting such
registration, qualification or compliance.
(C) All expenses the Company incurs in connection with a registration
pursuant to this Section 6.3, including (without limitation) all
registration, filing, qualification, printer's and accounting fees and
the reasonable fees and disbursements of counsel for the Company shall
be paid by the Company. All discounts and commissions associated with
the Registerable Securities shall be borne pro rata by the Holders.
- -------------------------------------------------------------------------------
Information Analysis Incorporated Page 7
- -------------------------------------------------------------------------------
<PAGE>
6.4 Indemnification.
---------------
(a) In the event of a registration of any of the Registerable
Securities under the Securities Act pursuant to this Section 6, the Company will
indemnify and hold harmless each holder of Registerable Securities, its officers
and directors, each underwriter of such Registerable Securities thereunder and
each other person, if any, who controls such seller or underwriter within the
meaning of the Securities Act, against any losses, claims, damages or
liabilities, joint or several, to which such holder, officer, director,
underwriter or controlling person may become subject under the Securities Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon (i) any untrue statement or
alleged untrue statement of any material fact contained in any registration
statement under which such Registerable Securities was registered under the
Securities Act pursuant to this Section 6, any preliminary prospectus or final
prospectus contained therein, or any amendment or supplement thereof, (ii) any
blue sky application or other document executed by the Company specifically for
that purpose or based upon written information furnished by the Company filed in
any state or other jurisdiction in order to qualify any or all of the
Registerable Securities under the securities laws thereof (any such application,
document or information herein called a "Blue Sky Application"), (iii) the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, (iv)
any violation by the Company or its agents of any rule or regulation promulgated
under the Securities Act applicable to the Company or its agents and relating to
action or inaction required of the Company in connection with such registration,
or (v) any failure to register or qualify the Registerable Securities in any
state where the Company or its agents has affirmatively undertaken or agreed in
writing that the Company (the undertaking of any underwriter chosen by the
Company being attributed to the Company) will undertake such registration or
qualification on the seller's behalf (provided that in such instance the Company
shall not be so liable if it has undertaken its best efforts to so register or
qualify the Registerable Securities) and will reimburse each such holder, and
such officer and director, each such underwriter and each such controlling
person for any legal or other expenses reasonably incurred by them in connection
with investigating or defending any such loss, claim, damage, liability or
action; provided, however, that the Company will not be liable in any such case
-------- -------
if and to the extent that any such loss, claim, damage or liability arises out
of or is based upon an untrue statement or alleged untrue statement or omission
or alleged omission so made in conformity with information furnished by any such
seller, any such underwriter or any such controlling person in writing
specifically for use in such registration statement or prospectus.
(b) In the event of a registration of any of the Registerable
Securities under the Securities Act pursuant to this Section 6, each seller of
such Registerable Securities thereunder, severally and not jointly, will
indemnify and hold harmless the Company, each person, if any, who controls the
Company within the meaning of the Securities Act, each officer of the Company
who signs the registration statement, each director of the Company, each other
holder of Registerable Securities, each underwriter and each person who controls
any underwriter within the meaning of the Securities Act, against all losses,
claims, damages or liabilities, joint or several, to which the Company or such
officer, director, other seller, underwriter or controlling person may become
subject under the Securities Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of any material fact
contained in the registration statement under which such Registerable Securities
was registered under the Securities Act pursuant to this Section 6, any
preliminary prospectus or final prospectus contained therein, or any amendment
or supplement thereof, or any Blue Sky Application or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
and will reimburse the Company and each such officer, director, other seller,
underwriter and controlling person for any legal or other expenses reasonably
incurred by them in
- -------------------------------------------------------------------------------
Information Analysis Incorporated Page 8
- -------------------------------------------------------------------------------
<PAGE>
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that such seller will be liable
-------- -------
hereunder in any such case if and only to the extent that any such loss, claim,
damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in reliance upon
and in conformity with information pertaining to such seller, as such, furnished
in writing to the Company by such seller specifically for use in such
registration statement or prospectus; and provided, further, however, that the
--------------------------
liability of each seller hereunder shall be limited to the proportion of any
such loss, claim, damage, liability or expense which is equal to the proportion
that the public offering price of the shares sold by such seller under such
registration statement bears to the total public offering price of all
securities sold thereunder, but not in any event to exceed the proceeds received
by such seller from the sale of Registerable Securities covered by such
registration statement.
(c) Promptly after receipt by an indemnified party hereunder of notice
of the commencement of any action, such indemnified party shall, if a claim in
respect thereof is to be made against the indemnifying party hereunder, notify
the indemnifying party in writing thereof, but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
such indemnified party other than under this Section 6.4 and shall only relieve
it from any liability which it may have to such indemnified party under this
Section 6.4 if and to the extent the indemnifying party is prejudiced by such
omission. In case any such action shall be brought against any indemnified party
and it shall notify the indemnifying party of the commencement thereof, the
indemnifying party shall be entitled to participate in and, to the extent it
shall wish, to assume and undertake the defense thereof with counsel
satisfactory to such indemnified party, and, after notice from the indemnifying
party to such indemnified party of its election so to assume and undertake the
defense thereof, the indemnifying party shall not be liable to such indemnified
party under this Section 6.4 for any legal expenses subsequently incurred by
such indemnified party in connection with the defense thereof other than
reasonable costs of investigation and of liaison with counsel so selected;
provided, however, that, if the defendants in any such action include both the
- -------- -------
indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded that the interests of the indemnified party reasonably
may be deemed to conflict with the interests of the indemnifying party, the
indemnified party shall have the right to select a separate counsel and to
assume such legal defenses and otherwise to participate in the defense of such
action, with the expenses and fees of such separate counsel and other expenses
related to such participation to be reimbursed by the indemnifying party as
incurred.
(d) The indemnities provided in this Section 6.4 shall survive the
transfer of any Registerable Securities by such holder.
7. Miscellaneous.
-------------
7.1 Survival of Warranties. The warranties, representations and covenants
----------------------
of the Company and Investors contained in or made pursuant to this Agreement
shall survive the execution and delivery of this Agreement and the Closing and
shall in no way be affected by any investigation of the subject matter thereof
made by or on behalf of the Investors or the Company.
7.2 Successors and Assigns. Except as otherwise provided herein, the
-----------------------
terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties (including
transferees of any shares of Common Stock sold hereunder or any Common Stock
issued upon conversion thereof). Nothing in this Agreement, express or implied,
is intended to confer upon any party other than the parties hereto or their
respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
- -------------------------------------------------------------------------------
Information Analysis Incorporated Page 9
- -------------------------------------------------------------------------------
<PAGE>
7.3 Governing Law. This Agreement shall be governed by and construed
--------------
under the laws of the Commonwealth of Virginia.
7.4 Counterparts. This Agreement may be executed in two or more
-------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
7.5 Titles and Subtitles. The titles and subtitles used in this Agreement
---------------------
are used for convenience only and are not to be considered in construing or
interpreting this Agreement.
7.6 Notices. Unless otherwise provided, any notice required or permitted
--------
under this Agreement shall be given in writing and shall be deemed effectively
given upon personal delivery to the party to be notified or upon deposit with
the United States Post Office, by registered or certified mail, postage prepaid
and addressed to the party to be notified at the address indicated for such
party on the signature page hereof, or at such other address as such party may
designate by ten (10) days' advance written notice to the other parties.
7.7 Aggregation of Stock. All shares of Common Stock held or acquired by
--------------------
affiliated entities or persons shall be aggregated together for the purpose of
determining the availability of any rights under this Agreement.
7.8 Amendments and Waivers. Any term of this Agreement may be amended and
-----------------------
the observance of any term of this Agreement may be waived (either generally or
in a particular instance and either retroactively or prospectively), only with
written consent of the Company and the holders of a majority of the Common Stock
issued or issuable upon conversion of the Common Stock. Any amendment or waiver
effected in accordance with this Section 7.8 shall be binding upon each holder
of any securities purchased under this Agreement at the time outstanding
(including securities into which such securities are convertible), each future
holder of all such securities, and the Company; provided, however, that no
condition set forth in Section 5 hereof may be waived with respect to any
Investor who does not consent thereto.
7.9 Severability. If one or more provisions of this Agreement are held to
-------------
be unenforceable under applicable law, such provision shall be excluded from
this Agreement and the balance of the Agreement shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its
terms.
7.10 Entire Agreement. This Agreement and the documents referred to herein
-----------------
constitute the entire agreement among the parties and no party shall be liable
or bound to any other party in any manner by any warranties, representations, or
covenants except as specifically set forth herein or therein.
IN WITNESS WHEREOF, the parties have executed the undersigned has executed this
signature page on the date set forth below.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
- --------------------------------------------------------------------------------
Information Analysis Incorporated Page 10
- --------------------------------------------------------------------------------
<PAGE>
Signature Page
--------------
The undersigned hereby purchases _______________ Units comprised of _________
Shares of Common Stock and _________________ Warrants at a price of $0.50 per
Unit, and tenders herewith, in full payment thereof, good funds in the amount of
$__________________ (the "Purchase Price") by check payable to "Information
Analysis Incorporated" on this _____ day of ______________, 1999.
NON INDIVIDUAL INVESTOR INDIVIDUAL INVESTOR(S)
_____________________________ (If Units are to be held in joint ownership,
Print Name of Entity all owners must sign.)
By: _________________________ __________________________________
Signature Signature
_____________________________ __________________________________
Print Name and Title Print Name
_____________________________ __________________________________
Tax Identification No. Social Security No.
_____________________________ __________________________________
Street No. Street No.
_____________________________ __________________________________
City State Zip City State Zip
__________________________________
ACCEPTED: Signature
COMPANY
__________________________________
Print Name
INFORMATION ANALYSIS INC.
a Virginia corporation
__________________________________
Social Security No.
By: _________________________ __________________________________
Title: Executive Vice President Street No.
Address: 11240 Waples Mill Road __________________________________
Fairfax, Virginia 22030 City State Zip
- --------------------------------------------------------------------------------
Information Analysis Incorporated Page 11
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE A
Schedule of Investors
- --------------------------------------------------------------------------------
Number of Number of Warrants
Share Purchased
Name & Address of Investor Purchased
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Information Analysis Incorporated Page 12
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE B
Schedule of Exceptions
- --------------------------------------------------------------------------------
None.
- --------------------------------------------------------------------------------
Information Analysis Incorporated Page 13
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
EXHIBIT A
Risk Factors
- --------------------------------------------------------------------------------
Each Investor has carefully considered the risks described below. If any
of the following risks actually occurs, the Company's business, financial
condition or operating results could be materially adversely affected. In such
case, the Investors may lose all or part of their investment.
The risks and uncertainties described below are not the only ones the
Company face. Additional risks and uncertainties, including those not presently
known to the Company or that the Company currently deem immaterial, may also
impair the Company's business.
RISKS RELATED TO THE COMPANY'S BUSINESS.
The Company's Business Is Difficult to Evaluate Because The Company Has a
Limited Operating History Under The Company's Current Business Model.
The Company has a limited operating history under the Company's current
business model upon which the Investor can evaluate the Company's business.
Accordingly, an investor in the Company's Securities must consider the
challenges, risks and uncertainties frequently encountered by companies using
new business models in new and rapidly evolving markets. These challenges
include the Company's:
* Need to increase the Company's brand name awareness;
* Need to manage changing and expanding operations;
* Need to compete effectively;
* Dependence on experienced personnel.
The Company cannot be certain that the Company's business strategy will be
successful or that the Company will successfully address these and other
challenges, risks and uncertainties. Any failure to do so would seriously harm
the Company's business and operating results.
The Company Has a Negative Current Net Worth; May Incur Future Losses.
The Company has a negative current net worth and has been incurring losses
on its business operations for the past several years. The Company is not
currently able to satisfy its obligations and requires additional working
capital. The Company may continue to incur operating losses. Operating results
may be affected by factors beyond the Company's control, such as the state of
the economy, business conditions in general and the other factors discussed
herein.
The Company Need to Manage Changing and Expanding Operations.
The Company expects the Company's business to grow. This growth may place
a significant strain on the Company's business resources, which have been
reduced as a result of the Company's recent losses. To manage this growth
effectively, the Company may need to implement additional management information
systems capabilities, further develop the Company's operating, administrative,
financial and accounting systems and controls, improve coordination among
accounting, finance, marketing and operations and hire and train additional
personnel. The Company may not successfully implement the Company's expansion
program in whole or in part. The Company cannot be certain that the Company's
management will be able to successfully identify, manage and exploit existing
and potential market opportunities.
- --------------------------------------------------------------------------------
Information Analysis Incorporated Page 14
- --------------------------------------------------------------------------------
<PAGE>
The Company's Market is Highly Competitive.
The Company does business in a market that is highly competitive, and the
Company expects 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 the Company's net revenue and results of
operations.
The Company 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. Further, some of the Company's
competitors provide or have the ability to provide the same range of services
the Company offers. Also, competitors may compete directly with the Company by
adopting a similar business model or through the acquisition of companies which
can provide complementary products or services. The Company's failure to compete
effectively in the Company's markets would have a material adverse affect on the
Company's business.
The Company Must Attract and Retain Experienced Personnel and The Company Rely
on Senior Management.
The success of the Company's business depends to a large extent upon the
efforts of the Company's officers and management personnel. If the Company
fails to attract, assimilate or retain highly qualified managerial and technical
personnel the Company's business could be materially adversely affected. The
Company's performance is substantially dependent on the performance of the
Company's executive officers and key employees who must be knowledgeable and
experienced. The Company is also dependent on its 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 material adverse effect on the Company's business. The
Company's future success also depends on the continuing ability to identify,
hire, train and retain other highly qualified managerial and technical
personnel. Competition for such personnel is intense.
Discretion as to Use of Proceeds.
The Company expects that the proceeds from the sale of the Securities will
be used for working capital. The Company expects to also use the proceeds to
meet current operating cost obligations and to make payments on outstanding
obligations which are estimated to be about $1,000,000. However, the projected
uses of proceeds are approximate, and management will have discretion with
respect to the allocation of proceeds.
Proceeds Insufficient to Satisfy Current Obligations.
The proceeds from the sale of Securities will not be sufficient to satisfy
the full value of the Company's current outstanding obligations. The Company's
creditors are working closely with the Company to allow it to continue
operations while making reduced payments. While the Company does not consider
the risk likely, such creditors can and may sue to collect upon the full amount
of their outstanding obligations at any time.
Revenue May Be Insufficient to Reverse Losses.
The Company expects its losses to continue; however, cash flow from
operations is likely to be positive. The Company has several large contracts
that are moving toward fruition in the next
- --------------------------------------------------------------------------------
Information Analysis Incorporated Page 15
- --------------------------------------------------------------------------------
<PAGE>
several months, but if any of these contracts do not become finalized, it could
have a material adverse effect on the Company's operations.
Investment Risk; Additional Financing.
There can be no assurance that the investors in the Securities will recoup
their investment. The Company may seek to raise additional capital for future
expansion. There is no assurance that the Company will be able to raise this
capital. Should the Company obtain such additional funds, prospective investors
in this Offering may experience dilution of their equity interest in the
Company.
The Company may not achieve cash flow break-even and may require additional
infusions of capital to sustain operations. This capital may not be available.
The Company may need to raise additional funds sooner than the Company expects
if the Company incurs unforeseen required capital expenditures or substantial
operating losses. If adequate funds are not available or are not available on
acceptable terms, the Company may not be able to develop or enhance the
Company's services, take advantage of future opportunities or respond to
competitive pressures, which could have a material adverse effect on the
Company's business.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Company's materials may contain statements about future events and
expectations, which are "forward-looking statements." Any statement in the
Company's materials that is not a statement of historical fact may be deemed to
be a forward-looking statement. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors which may cause the Company's
actual results, performance or achievements to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. In evaluating these statements, the Investor should
specifically consider various factors, including the risks outlined in the Risk
Factors section above. These factors may cause the Company's actual results to
differ materially from any forward-looking statement. Specific factors that
might cause such a difference include, but are not limited to:
. the potential fluctuation in the Company's operating results;
. the Company's potential need for additional capital;
. the Company's potential inability to expand the Company's services;
. the Company's competition; and,
. the Company's ability to attract and retain skilled personnel.
Although the Company believes that the expectations reflected in the
forward-looking statements are reasonable, the Company cannot guarantee future
results, levels of activity, performance or achievements. Moreover, neither the
Company nor any other person assumes responsibility for the accuracy and
completeness of the forward-looking statements. The Company is under no duty to
update any of the forward-looking statements to conform such statements to
actual results or to changes in the Company's expectations.
Use of Financial Forecasts. Any financial forecasts the Company may have
provided in connection with this Offering are based on assumptions made by the
Company's management in formulating the Company's current business plan. The
Company can provide no assurance that the assumptions will prove to be valid and
therefore, can give no assurance that the projected yields will be realized.
The validity and accuracy of all such assumptions will depend in large part on
future events over which the Company has limited control. To the extent that
any of the assumptions upon which the financial forecasts are based are
incorrect or inaccurate, the actual operating results of the Company will not
correspond to the financial forecast. Such differences
- --------------------------------------------------------------------------------
Information Analysis Incorporated Page 16
- --------------------------------------------------------------------------------
<PAGE>
may be material and actual results may differ substantially from those
projected. Accordingly, the Investor should not make an investment in the
Company in reliance on any projected financial performance.
- --------------------------------------------------------------------------------
Information Analysis Incorporated Page 17
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
EXHIBIT B
Form of Warrant
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Information Analysis Incorporated Page 18
- --------------------------------------------------------------------------------
<PAGE>
Information Analysis Incorporated 1999 Report on Form 10-KSB
- --------------------------------------------------------------------------------
Exhibit 21.1
SUBSIDIARIES OF
INFORMATION ANALYSIS INCORPORATED
<TABLE>
<CAPTION>
Name under which
Name State of Incorporation Subsidiary Does Business
<S> <C> <C>
Allied Health & Information Systems, Inc. VA N/A
DHD Systems, Inc. VA N/A
International Software Services Corporation VA N/A
</TABLE>
<PAGE>
Information Analysis Incorporated 1999 Report on Form 10-KSB
- --------------------------------------------------------------------------------
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-26249 and No. 33-305136) pertaining to the 1986 Stock Option
Plan and 1996 Stock Option Plan of Information Analysis Incorporated of our
report dated February 24, 2000, with respect to the consolidated financial
statements of Information Analysis Incorporated included in the Annual Report
(Form 10-KSB) for the year ended December 31, 1999.
/s/ Rubino & McGeehin, Chartered
________________________________
Bethesda, Maryland
March 29, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S 10-KSB AS FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 133,468
<SECURITIES> 0
<RECEIVABLES> 1,902,244
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,269,236
<PP&E> 1,284,835
<DEPRECIATION> 529,842
<TOTAL-ASSETS> 3,111,496
<CURRENT-LIABILITIES> 3,004,390
<BONDS> 0
0
0
<COMMON> 107,233
<OTHER-SE> (127)
<TOTAL-LIABILITY-AND-EQUITY> 3,111,496
<SALES> 9,585,772
<TOTAL-REVENUES> 9,838,099
<CGS> 7,699,504
<TOTAL-COSTS> 13,580,797
<OTHER-EXPENSES> 243,950
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 137,988
<INCOME-PRETAX> (4,124,636)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,124,636)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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</TABLE>
