<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 17, 2000
REGISTRATION NO. 333-95775
--------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
PRE-EFFECTIVE ADMENDMENT #1
TO FORM S-3
ON
FORM SB-2
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
INFORMATION ANALYSIS INCORPORATED
(Exact name of small business issuer in its charter)
<TABLE>
<S> <C> <C>
VIRGINIA 7372 54-1167364
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
11240 WAPLES MILL ROAD, SUITE 400, FAIRFAX, VIRGINIA 22030
(703) 383-3000
(Address and telephone number of principal executive offices)
-------------------------------------------------------------
MR. RICHARD S. DEROSE
11240 WAPLES MILL ROAD, SUITE 400, FAIRFAX, VIRGINIA 22030
(703) 383-3000
(Name, address and telephone number of agent for service)
---------------------------------------------------------
COPIES TO:
MARK J. WISHNER, ESQ.
MINTZ, LEVIN, COHN, FERRIS, GLOVSKY & POPEO, PC
ONE FOUNTAIN SQUARE, 11911 FREEDOM DRIVE, RESTON, VIRGINIA 20190
TELEPHONE: (703) 464-4808
FACSIMILE: (703) 464-4895
-------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: from time to time
after the effective date of this Registration Statement
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [x]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
-------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed Proposed
maximum maximum
Title of each class offering aggregate Amount of
of securities to be Amount to be price per offering registration
registered registered unit (1) price (1) fee
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par 4,515,000 (2) $0.47 $2,122,050.00 $211.65 (3)
value $.01 per share
-------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) of the Securities Act of 1933, as amended, based
upon the average of the high and low sales prices of the Registrant's
Shares on the Nasdaq OTC Bulletin Board on July 14, 2000.
(2) Consists of 2,550,000 issued and outstanding shares of Common Stock,
1,525,000 shares issuable upon exercise of warrants to acquire Common Stock
and 440,000 shares issuable upon exercise.
(3) Amount of registration fee calculated as the sum of the proposed maximum
aggregate offering price multiplied by $0.000264 less $348.57, which
represents the amount previously paid by Registrant contemporaneous with
filing of Form S-3 on January 31, 2000.
<PAGE>
Prospectus
July 17, 2000
INFORMATION ANALYSIS INCORPORATED
4,515,000 Shares of Common Stock - (Par Value $.01 Per Share)
This prospectus relates to 4,515,000 shares of the common stock, $.01 par
value, of Information Analysis Incorporated, a Virginia corporation, which may
be offered from time to time by the Selling securityholders who are named in
this prospectus. 2,550,000 of these shares were issued in connection with a
private placement that took place in December of 1999. 1,525,000 of these
shares are issuable upon exercise of certain warrants issued in connection with
the December 1999 private placement. Each warrant is exercisable at $1.00 per
share (excluding 250,000 of the warrants which are exercisable at $0.73 per
share). Additionally, we are registering 100,00 shares which are issuable to
one of our employees as compensation and 340,000 shares issued to five (5)
creditors of the Company who have agreed to accept shares in partial
satisfaction of the obligations we have to them. We will not receive any of the
proceeds from the sale of the shares. We will bear the costs relating to the
registration of the shares estimated to be approximately $11,160.22. The
following expenses will be borne by the selling securityholders: selling
commissions, if any, and the fees of legal counsel, if any, for the selling
securityholders in connection with the registration of the shares offered
herein. The filing by us of this prospectus in accordance with the requirements
of Form SB-2 is not an admission that the person whose shares are included in
this prospectus is an "affiliate" of ours.
The shares are registered as a result of our agreement to register the shares
in connection with certain transactions. We have been advised that each selling
securityholder expects to offer his, her or its shares to or through brokers and
dealers to be selected by the selling securityholder from time to time. In
addition, the shares may be offered for sale through the over-the-counter
market, through a market maker, in one or more private transactions, or a
combination of such methods of sale, at prices and on terms then prevailing.
Each selling securityholder may pledge all or a portion of the shares owned by
him, her or it as collateral in loan transactions. Upon default by any selling
securityholder, the pledgee in such loan transactions would have the same rights
of sale as such selling securityholder under this prospectus. Each selling
securityholder may also transfer the shares owned by him, her or it in other
ways not involving market makers or established trading markets, including
directly by gift, distribution, or other transfer without consideration, and
upon any such transfer the transferee would have the same rights of sale as such
selling securityholder under this prospectus. Each selling securityholder and
any broker executing selling orders on behalf of any selling stockholder may be
deemed to be "underwriters" within the meaning of the 1933 Act, in which event
commissions received by any such broker may be deemed to be underwriting
commissions under the 1933 Act. The shares are traded on the Nasdaq OTC
Bulletin Board under the symbol IAIC. On July 14, 2000, the closing sale price
of the shares, as reported by the Nasdaq OTC Bulletin Board, was $0.47 per
share.
Our executive offices are located at 11240 Waples Mill Road, Suite 400,
Fairfax, Virginia 22030, and our telephone number is (703) 383-3000.
This investment involves risks. See "Risk Factors" beginning on Page 3.
--------------------------------------------------------------------------------
Neither the SEC nor any state securities commission has determined whether this
prospectus is truthful or complete, nor have they made, nor will they make, any
determination as to whether anyone should buy these securities. Any
representation to the contrary is a criminal offense.
--------------------------------------------------------------------------------
We will amend and complete the information in this prospectus. Although we are
permitted by US federal securities law to offer these securities using this
prospectus, we may not sell them or accept your offer to buy them until the
documentation filed with the SEC relating to these securities has been declared
effective by the SEC. This prospectus is not an offer to sell these securities
or our solicitation of your offer to buy these securities in any jurisdiction
where that would not be permitted or legal.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary............................................................................ 1
Selected Financial Data....................................................................... 1
Where You Can Find More Information about Information Analysis Incorporated................... 2
Incorporation of Certain Information by Reference............................................. 2
Item 3. Risk Factors........................................................................ 3
Item 4. Use of Proceeds..................................................................... 6
Item 5. Determination of Offering Price..................................................... 7
Item 6. Dilution............................................................................ 7
Item 7. Selling securityholders............................................................. 7
Item 8. Plan of Distribution................................................................ 8
Item 9. Legal Proceedings................................................................... 9
Item 10. Directors, Executive Officers, Promoters & Control Persons.......................... 9
Item 11. Principal securityholders........................................................... 10
Item 12. Description of Securities........................................................... 10
Item 13. Interest of Named Experts and Counsel............................................... 11
Item 14. Disclosure of Commission Position on Indemnification for Securities Act............. 11
Item 15. Organization with Last Five Years................................................... 11
Item 16. Description of Business............................................................. 11
Item 17. Management's Discussion and Analysis................................................ 16
Item 18. Description of Property............................................................. 18
Item 19. Certain Relationships and Related Transactions...................................... 18
Item 20. Market for Our Common Stock......................................................... 18
Item 21. Executive Compensation.............................................................. 19
Item 22. Financial Statements................................................................ 20
Item 23. Changes and Disagreements with Accountants on Accounting and Financial Disclosure... 20
Index to Consolidated Financial Statements.................................................... 21
Part II
Item 24. Indemnification Provisions.......................................................... 22
Item 25. Recent Sales of Unregistered Securities............................................. 22
Item 27. Exhibits............................................................................ 22
Item 28. Undertakings........................................................................ 23
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
INFORMATION ANALYSIS INCORPORATED
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS, WHICH INVOLVE
RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS
INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSEPCTUS.
THE FOLLOWING INFORMATION IS SELECTIVE AND QUALIFIED IN ITS ENTIRETY BY THE
DETAILED INFORMATION (INCLUDING FINANCIAL INFORMATION AND NOTES THERETO)
APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS SUMMARY OF CERTAIN PROVISIONS OF
THE PROSPECTED IS INTENDED ONLY FOR CONVENIENT REFERENCE AND DOES NOT PURPORT TO
BE COMPLETE. THE ENTIRE PROSPECTUS SHOULD BE READ AND CAREFULY CONSIDERED BY
PROSPECTIVE INVESTORS BEFORE MAKING A DECISION TO PURCHASE COMMON STOCK.
Our Company; Our Business.
We are a Virginia corporation which was organized in 1979. We develop
application software and offer related services including software conversions,
information systems reengineering, and systems integration. Beginning in 1996,
we began a concentrated effort to enhance our software conversion product to
remedy the Year 2000 problem resident in certain computing environments.
Recently, the focus of our business shifted away from Year 2000 computer
solutions and back to providing a full range of software conversion, information
system reengineering, and computer systems integration to both commercial and
government clients. In the past, we have been engaged on a variety of projects
including web solutions, re-engineering, system conversion, platform migration,
and application testing.
We have also been in the business of designing, creating, and automating
solutions for the processing of data collected, assimilated, and distributed via
the Internet. We specialize in engineering solutions that leverage an
organization's investment in its present legacy systems by modernizing the
interface to the Internet. Our personnel are able to create Internet
applications that operate on stand-alone PCs and then interconnect these
applications to the customer's legacy system. We have developed a modernization
workbench tool, ICONS, to support the migration initiatives, which typically
include client/server development, web enablement, and software reengineering
services.
Apart from computer system services, we provide contract personnel for planned
workloads and supplementary staff to satisfy peak demands, and we can provide
candidate screening and evaluation to assist our clients in satisfying their
staffing needs. Overall, our clients have included, among others, Arbitron,
MCI, Computer Sciences Corporation, IBM, Sprint, Citibank, the United States
Customs Service, the United States Department of Energy, the United States Army,
the United States Air Force, the Veterans Administration and the Federal Deposit
Insurance Corporation.
The mailing address and telephone number of our principal executive offices is
11240 Waples Mill Road, Suite 400, Fairfax, Virginia 22030, (703) 383-3000.
The Offering.
As of July 14, 2000, we had 9,581,473 shares of our common stock outstanding.
This offering is comprised of securities offered by selling stockholders only.
Although we have agreed to pay all offering expenses, we will not receive any
proceeds from the sale of the securities registered hereunder.
SELECTED FINANCIAL DATA
The selected financial data set forth below as of March 31, 2000 have been
derived from our financial statements, which have been audited by Rubino &
McGeehin, Chtd., independent certified public accountants, whose report for the
two years ended December 31, 1999 is included elsewhere in this prospectus. The
statement of operations for the three months ended March 31, 2000 and the
balance sheet as of March 31, 2000, are unaudited and, in our opinion, include
all adjustments, consisting of only normal recurring adjustments, necessary for
a fair presentation of the information. The results of operations for the three
months ended March 31, 2000 are not necessarily indicative of results to be
expected for any future period. You should read the selected financial data set
forth below with the financial statements and related notes and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," which are included elsewhere in this prospectus.
1
<PAGE>
Summary Consolidated Financial Data
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months
Ended
Year Ended December 31, March 31,
1995 1996 1997 1998 1999 1999 2000
---------- ---------- ---------- ---------- ---------- ---------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statements
of Operation Data:
Total sales...................... $ 15,697 $ 11,219 $ 8,081 $ 15,332 $ 9,586 $ 3,836 $ 1,688
Total operating expenses......... 15,694 11,432 9,680 21,342 11,602 3,731 1,644
---------- ---------- ---------- ---------- ---------- ---------- -----------
Income (loss) from operations.... 3 (213) (1,599) (6,010) (2,016) 105 44
Other write-downs................ - - - (3,084) (1,978) - -
Other income (expense), net...... (103) (23) 116 70 (130) (35) (2)
---------- ---------- ---------- ---------- ---------- ---------- -----------
Income (loss) before income
taxes........................... (100) (236) (1,483) (9,024) (4,124) 70 42
Provision for income taxes....... (26) (77) 74 - - - -
---------- ---------- ---------- ---------- ---------- ---------- -----------
Net income (loss)................ $ (74) $ (159) $ (1,557) $ (9,024) $ (4,124) $ 70 $ 42
========== ========== ========== ========== ========== ========== ===========
Net income (loss) per common share:
Basic............................ $ (0.02) $ (0.04) $ (0.28) $ (1.35) $ (0.59) $ 0.01 $ -
Diluted.......................... $ (0.02) $ (0.04) $ (0.28) $ (1.35) $ (0.59) $ 0.01 $ -
Weighted average common shares
Outstanding:
Basic............................ 4,203,477 4,214,034 5,649,668 6,665,321 6,988,336 6,894,529 9,435,543
Diluted.......................... 4,203,477 4,214,034 5,649,668 6,665,321 6,988,336 8,029,979 10,149,573
<CAPTION>
As of March 31, 2000
Actual As Adjusted (1)
------ ---------------
<S> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents 89 1,536
Working capital (483) 964
Total assets 2,973 4,420
Total shareholders' equity 306 1,753
</TABLE>
(1) As adjusted to reflect the sale of warrants for 1,275,000 shares of common
stock at a price of $1.00 per share and, warrants for 250,000 shares of
common stock at a price of $0.73 per share, after deducting the underwriting
discount and the estimated offering expenses that we will pay.
WHERE YOU CAN FIND MORE INFORMATION ABOUT US
We are subject to certain informational reporting requirements of the
Securities Exchange Act of 1934, as amended, and in accordance therewith we file
reports and other information with the Securities and Exchange Commission.
These reports, proxy statements and other information can be inspected and
copied at the public reference facilities maintained by the SEC at Room 1024 of
the SEC's office at 450 Fifth Street, N.W., Judiciary Plaza, Washington, DC
20549, and at its regional offices located at 7 World Trade Center, Suite 1300,
New York, NY 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, IL 60661. Copies of such reports, proxy statements and other
information can be obtained from the Public Reference Section of the SEC at 450
Fifth Street, N.W., Judiciary Plaza, Washington, DC 20549 at prescribed rates.
The Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC. The address of the SEC's Web site is http://www.sec.gov.
Additional updating information with respect to the shares being registered may
be provided in the future to purchasers by means of appendices to this
prospectus.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The SEC allows us to incorporate by reference the information we file with
them, which means that we can disclose important information to you by referring
you to those documents. The information incorporated by reference is considered
to be a part of this prospectus. Any information we file with the SEC will
automatically
2
<PAGE>
update and supercede this information. We incorporate by reference the documents
listed below and any additional documents we file with the SEC into this
prospectus. They contain important information about us and our financial
condition. We incorporated by reference the documents listed below:
1. Our Annual Report on Form 10-KSB for the year ended December 31, 1999.
2. Our Quarterly Report on Form 10Q-SB for the quarter ended March 31, 2000.
3. Our Definitive Proxy Statement relating to the Meeting of Stockholders
held May 31, 2000.
All documents filed by us pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Exchange Act after the date of this prospectus and prior to the termination
of the offering of securities contemplated by this prospectus shall be deemed to
be incorporated by reference in this prospectus. These documents shall be
considered to be a part of this prospectus from the date of filing.
We will provide without charge to each person who receives a prospectus, upon
written or oral request of such person, a copy of any of the information that is
incorporated by reference in this prospectus (other than exhibits to such
documents which are not specifically incorporated by reference into the
information that this prospectus incorporates). Written or telephone requests
should be directed to: Mr. Richard S. DeRose, Executive Vice President,
Information Analysis Incorporated, 11240 Waples Mill Road, Suite 400, Fairfax,
Virginia 22030, (703) 383-3000.
This prospectus constitutes a part of a Registration Statement which we have
filed with the SEC under the Securities Act of 1933 with respect to the shares.
This prospectus omits certain of the information contained in the Registration
Statement, and reference is hereby made to the Registration Statement and
related Exhibits thereto for further information with respect to us. Any
statements contained in this prospectus concerning the provisions of any
documents are not necessarily complete, and, in each instance, reference is made
to the copy of such document filed as an exhibit to the Registration Statement
or otherwise filed with the SEC. Each such statement is qualified in its
entirety by such reference.
ITEM 3. RISK FACTORS
An investment in the shares being offered by this prospectus involves a high
degree of risk. In addition to the other information contained in this
prospectus or incorporated in this prospectus by reference, prospective
investors should carefully consider the following risk factors before purchasing
the shares offered hereby. This prospectus contains and incorporates by
reference forward-looking statements within the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995 which are based on management's
current expectations. To the extent that any of the statements contained in
this prospectus relating to our products and our operations are forward looking,
such statements are based on management's current expectations and involve a
number of uncertainties and risks.
Reference is also made in particular to the discussion set forth under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in our Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1999 and in our Quarterly Report on Form 10-QSB for the quarter
ended March 31, 2000 and under "Description of Business" in the Form 10-KSB,
incorporated into this prospectus by reference. Both the forward-looking
statements contained in this prospectus and those incorporated in this
prospectus by reference are based on current expectations that involve a number
of uncertainties including those set forth in the risk factors below. Actual
results could differ materially from those projected in the forward-looking
statements.
Shift in Business Focus. While, in fiscal years 1997, 1998 and 1999, we still
derived most of our revenue from sales of our software conversion product to
remedy the Year 2000 problem resident in certain computing environments, we have
shifted our focus back to the development of application software and offering
related services including software conversion, information systems
reengineering, and systems integration. We expect to derive a substantial
majority of our total revenue and net income from sales of these services in the
future. Continued growth of our business will depend upon several factors,
including demand for our services, our ability to develop new technology to meet
the changing requirements of our customers, technological change and competitive
pressures. There can be no assurance that our services will re-establish itself
and grow. If we are unsuccessful in shifting our business focus, it will have a
material negative impact on our business.
Negative Current Net Worth; May Incur Future Losses. We have a negative
current net worth and have been incurring losses on our business operations for
the past several years. We are not currently able to satisfy
3
<PAGE>
our obligations and require additional working capital. We may continue to incur
operating losses. If we do continue to incur operating losses, our business may
suffer. Operating results may be affected by factors beyond our control, such as
the state of the economy, business conditions in general and the other factors
discussed in this prospectus.
Need to Manage Changing and Expanding Operations. Our goal is to grow our
business. If achieved, this growth may place a significant strain on our
business resources, which have been reduced as a result of our recent losses.
To manage this growth effectively, we may need to implement additional
management information systems capabilities, further develop our operating,
administrative, financial and accounting systems and controls, improve
coordination among accounting, finance, marketing and operations and hire and
train additional personnel. We may not successfully implement our expansion
program in whole or in part. We cannot be certain that our management will be
able to successfully identify, manage and exploit existing and potential market
opportunities. If we are unable to manage changing and expanding operations,
our business may suffer.
Market is Highly Competitive. We do business in a market that is highly
competitive, and we expect competition to intensify in the future. Increased
competition is likely to result in price reductions, reduced gross margins and
loss of market share, any of which could harm our net revenue and results of
operations. We may not be able to compete with current and potential
competitors, many of whom have longer operating histories, greater name
recognition, larger, more established customer bases and significantly greater
financial, technical, and marketing resources. Further, some of our competitors
provide or have the ability to provide the same range of services we offer.
Also, competitors may compete directly with us by adopting a similar business
model or through the acquisition of companies which can provide complementary
products or services. Our failure to compete effectively in our markets would
have a material adverse affect on our business.
Dependence on Experienced Personnel; Reliance on Senior Management. The
success of our business depends to a large extent upon the efforts of our
officers and management personnel. If we fail to attract, assimilate or retain
highly qualified managerial and technical personnel our business could be
materially adversely affected. Our performance is substantially dependent on
the performance of our executive officers and key employees who must be
knowledgeable and experienced. We are also dependent on our ability to retain
and motivate high quality personnel, especially management and highly skilled
technical teams. The loss of the services of any executive officers or key
employees could have a material adverse effect on our business. Our future
success also depends on the continuing ability to identify, hire, train and
retain other highly qualified managerial and technical personnel. Competition
for such personnel is intense. If we fail to identify, hire, train and retain
highly qualified managerial and technical personnel, our business may suffer.
Revenue May Be Insufficient to Reverse Losses. We are hopeful that cash flow
from operations will be positive; however, our losses may continue. If our
losses should continue, it will have a material adverse effect on our business.
We have several large potential contracts that are being negotiated, but if we
do not finalize any of these contracts, it could have a material adverse effect
on our operations.
Rapid Technological Change. The computer industry in general, and the market
for our application software in particular, are characterized by rapidly
changing technology, frequent new technology introductions, and significant
competition. In order to keep pace with this rapidly changing market
environment, we must continually develop and incorporate into our services new
technological advances and features desired by the marketplace at acceptable
prices. The successful development and commercialization of new services and
technology involves many risks, including the identification of new
opportunities, timely completion of the development process, the control and
recoupment of development and production costs and acceptance by customers of
our products. There can be no assurance that we will be successful in
identifying, developing and marketing new service and technology, or that these
services and technology will be accepted in the marketplace. If we are
unsuccessful in adapting our business to rapid technological change, our
business will suffer.
Cyclical Nature of the Computer Industry. The computer industry is highly
cyclical and has historically experienced periodic downturns. The cyclical
nature of the computer industry is beyond our control. As an example, we
experienced a substantial reduction in demand for Year 2000 computer solutions.
A similar decrease in demand for our new applications and related services could
materially adversely affect our business and products.
Uncertainties Related to Company's Ability to Raise Additional Necessary
Capital. In December 1999, we completed a private placement of common stock
which resulted in approximately $1.275 million in gross
4
<PAGE>
proceeds to the Company. However, because of our continuing losses from
operations, we anticipate that unless revenues increase significantly, we will
require additional capital in order to continue our operations. We have no
assurance that we will be able to raise such additional capital, if needed, in a
timely manner or on favorable terms, if at all. If we are unable to increase
revenues significantly and/or secure additional financing, we could be forced to
curtail or discontinue our operations.
Losses. For the fiscal year ended December 31, 1999, we incurred a loss of
$4,124,636 on revenues of $9,585,772. These losses are primarily the result of
lower than expected demand for our services and technology in the Year 2000
remediation market combined with our making a large investment and commitment in
that market. It is possible that our losses could continue into the foreseeable
future and have a material adverse effect on our business.
Volatility of Share Price. Market prices for securities of technology
companies have been volatile. The market price for our shares has fluctuated
significantly, and it is likely that the market price will continue to fluctuate
in the future. Quarterly fluctuations in operating results, announcements by us
or our present or potential competitors, technological innovations or new
commercial products or services, developments or disputes concerning patent or
proprietary rights and other events or factors may have a significant impact on
our business and on the market price of the shares.
Shares Eligible for Future Sale. Sales of substantial amounts of shares in
the public market could have an adverse effect on the price of our shares.
There were a total of 3,069,989 options to purchase shares outstanding as of
July 14, 2000 pursuant to our stock option plans, and 3,027,989 of such options
were vested and can be exercised at any time prior to their respective
expiration dates.
1,525,000 shares offered hereby are issuable upon exercise of warrants to
purchase shares issued to certain securityholders in connection with our
December private placement. The warrants are exercisable at any time prior to
December 31, 2004 at an exercise price of $1.00 per share of shares (excluding
250,000 of the warrants which may be converted into common stock at any time
prior to December 31, 2006 at an exercise price of $0.73). We have agreed to
register for resale the shares sold in our December private placement as well as
the shares underlying the warrants. All of the shares registered for resale by
the holders thereof, including the shares offered hereby, may be reoffered and
resold in the public trading market from time to time during the period we have
agreed to maintain the effectiveness of the Registration Statement registering
those shares.
Dilution. Dilution is likely to occur upon exercise of the warrants and also
upon the exercise of existing stock options. The warrants can be converted into
our shares of common stock at any time prior to December 31, 2004 at an exercise
price of $1.00 per share of shares (excluding 250,000 of the warrants which may
be converted into common stock at any time prior to December 31, 2006 at an
exercise price of $0.73).
We Need To Grow To Make Money. If our sales revenues remain at current
levels, we believe that we may continue to incur operating losses as our
expenses increase. As a result, our future profitability is likely to depend
upon the successful implementation of our business strategy, which relies
significantly upon the growth of our business.
We Depend On Intellectual Property Rights That May Fail To Protect Our
Business. Our success depends in part on our ability to obtain and maintain
proprietary protection for our technologies, products, and processes, and our
ability to operate without infringing the proprietary rights of other parties.
We may not be able to obtain copyright, patent or other protection for our
proprietary technologies or for the processes developed by our employees. Legal
standards relating to intellectual property rights in computer software are
still developing. Any copyrights, patents or other registrations may not
sufficiently protect us against competitors with similar technology. In
addition, our intellectual property rights may be challenged, narrowed,
invalidated or circumvented. Furthermore, our intellectual property rights do
not guarantee any competitive advantage.
We may have to initiate litigation to enforce our intellectual property
rights. If our competitors file patent applications covering technology that we
employ, we may have to participate in interference or opposition proceedings to
determine the priority of invention. An adverse outcome could subject us to
significant liabilities to third parties and require us to cease using the
technology or to license the disputed rights from third parties. We may not be
able to obtain any required licenses on commercially acceptable terms or at all.
The cost to us of any litigation or proceeding relating to intellectual property
rights, even if resolved in our favor, could be substantial. Some of our
competitors may be able to sustain the costs of litigation more effectively than
we can because of their
5
<PAGE>
substantially greater resources. Uncertainties resulting from the initiation and
continuation of any intellectual property litigation could have a material
adverse effect on our ability to compete in the marketplace.
There Is A Limited Market For Our Stock, And Our Stock Price Will Likely Be
Volatile. Our common stock is quoted on the Nasdaq OTCBB. However, in view of
the relatively small supply of shares eligible for public resale, trading has
been limited. We are uncertain as to whether a more regular trading market will
develop. Selling our shares is more difficult because smaller quantities of
shares are bought and sold and security analysts' and news media's coverage of
our company is limited. These factors could result in lower prices and larger
spreads in the bid and ask prices for our shares. Because our shares are not
currently listed on a national exchange, they are subject to Rule 15g-9 under
the Securities Exchange Act of 1934. That rule imposes additional sales practice
requirements on broker-dealers that sell low-priced securities to persons other
than established customers and institutional accredited investors. For
transactions covered by this rule, a broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transaction prior to sale. Consequently, the rule affects
the ability of broker-dealers to sell our shares and may affect the ability of
shareholders to sell our shares in the secondary market.
As of the date of this Prospectus, there are 9,581,473 outstanding shares
of common stock. The trading market for our common stock may be adversely
affected by the subsequent influx into the market of the 4,515,000, shares of
common stock being registered for resale hereunder, as well as additional shares
issuable upon the exercise of other outstanding options and warrants which we
may in the future register for resale under the Securities Act of 1933, as
amended. This increase in the number of shares available for public sale could
have a depressive effect on the market. In addition, the stock markets generally
have experienced, and continue to experience, extreme price and volume
fluctuations which have affected the market price of many small capitalization
companies. These market fluctuations, as well as general economic and political
conditions, may adversely affect the market price of our common stock.
We Have Substantial Near-Term Capital Needs; We May be Unable to Obtain
Additional Funding. We will require funding over the next twenty-four (24)
months. The percentage ownership of our current securityholders will be reduced
if additional funds are raised through the issuance of equity securities. Such
equity securities may have rights, preferences, and privileges senior to those
of our common stock holders. Further, there can be no assurance that additional
capital will be available on terms favorable to our company or its shareholders.
Our cash requirements may vary materially depending on our rate of
development, research and development results, competitive, and technological
advances and other factors. If adequate funds are not available, we may be
required to significantly curtail operations or obtain funds by entering into
collaboration agreements, which may contain unfavorable terms. Our inability to
raise capital would have a material adverse effect on our business, financial
condition, and operations.
Year 2000 Readiness Disclosure. Our business operations were not adversely
affected by any year 2000 issues. Prior to the end of 1999, we acted to ensure
that our products and critical internal business systems were year 2000
compliant. We funded the costs to become year 2000 compliant from operating
cash flow and have not separately accounted for these costs in the past. To
date, these costs have not been material. However, we may incur significant
costs if unanticipated year 2000 compliance problems arise. These unanticipated
costs, or our failure to correct any unanticipated year 2000 problems in a
timely manner, could have a material adverse effect on our business, financial
condition, results of operations and prospects for growth.
Special Note Regarding Forward-Looking Statements
This prospectus contains forward-looking statements. Forward-looking
statements relate to future events or our future financial performance. In some
cases, you can identify forward-looking statements by terminology such as "may,"
"will," "should," "expects," "plans," "anticipates," "could," "believes,"
"estimates," "predicts," "potential" or "continue" or the negative of these
terms or other similar words. These statements are only predictions. The
outcome of the events described in these forward-looking statements is subject
to risks. Actual results could differ materially. This "Risk Factors" section
and those sections entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business" as well as other sections in
this prospectus discuss some of the factors that could contribute to these
differences.
6
<PAGE>
ITEM 4. USE OF PROCEEDS
We will not receive any proceeds upon the sale of shares by the selling
securityholders. However, this Prospectus relates to the sale of up to 1,525,000
shares of our common stock that may be issued in the event of exercise of
outstanding warrants held by selling securityholders. In the event all of such
warrants are exercised, we will receive proceeds of $1,457,500 Such proceeds, if
received, will be used for working capital.
ITEM 5. DETERMINATION OF OFFERING PRICE
Not Applicable. The selling securityholders will be able to determine the
price at which they sell their Securities.
ITEM 6. DILUTION
Not Applicable. We are not registering any unissued shares in this
registration statement.
ITEM 7. SELLING SECURITYHOLDERS
The following table sets forth the name of each selling securityholder, the
number of shares of common stock beneficially owned by such selling
securityholder as of the date of this Prospectus, giving pro forma effect to the
exercise of the selling securityholders' warrants and options into shares of
common stock as described below, and the number of shares being offered by each
selling securityholder. Except as otherwise noted below, during the past three
years no selling securityholder has been an officer, director or affiliate of
the Company, nor has any selling securityholder had any material relationship
with IAI during such period. The shares of common stock being offered hereby are
being registered to permit public secondary trading, and the selling
securityholders may offer all or part of the shares for resale from time to
time. However, such selling securityholders are under no obligation to either
(a) exercise the selling securityholders' options and/or warrants, as the case
may be, or (b) if exercised, to sell all or any portion of such shares of common
stock immediately under this Prospectus. Because the selling securityholders may
sell all or a portion of their shares of common stock, no estimate can be given
as to the number of shares of common stock that will be held by any selling
securityholder upon termination of this offering. Accordingly, the following
table assumes (i) the exercise of the selling securityholders' warrants and
options, event if not yet vested, and (ii) the sale of all shares of common
stock by the selling securityholders immediately following the date of this
Prospectus. All expenses of the registration of the common stock on behalf of
the selling securityholders are being borne by the Company; however, the Company
will receive none of the proceeds of this offering.
Except for the shares offered by Gerald Parsons and the shares issued to
creditors of the company, the shares offered by the selling securityholders are
those obtained in connection with our December private placement and issuable
upon exercise of warrants to purchase shares issued to the selling
securityholders in connection with our December private placement. The form of
the warrants is filed as Exhibit 99.1 to the Registration Statement of which
this prospectus is a part. The shares offered by Gerald Parsons are issuable to
him at his option as of February 1, 2000.
The following table sets forth information with respect to the beneficial
ownership of our shares by the selling securityholders as of July 14, 2000, as
adjusted to reflect the sale of the shares offered hereby by each selling
stockholder.
<TABLE>
<CAPTION>
Shares Shares
Owned Prior to Owned After
Offering (1) Number of Offering (2)
-------------------- Shares Being -----------------
Selling securityholder Number Percent Offered Number Percent
----------------------------- --------- -------- ------------ ------- -------
<S> <C> <C> <C> <C> <C>
Joseph Kalb 93,500 * 75,000 18,500 *
Harry Binder 338,000 3.49 300,000 38,000 *
Alexander Zeltzer 150,000 1.56 150,000 0 *
Lev Paukman 300,000 3.10 300,000 0 *
Raoul Biniaurishvill 75,000 * 75,000 0 *
Irina Benaur 75,000 * 75,000 0 *
Eugene Khavinson 150,000 1.56 150,000 0 *
</TABLE>
7
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Roman Shlossberg 75,000 * 75,000 0 *
Howard Bernstein 150,000 1.56 150,000 0 *
Gregory Lipkin 75,000 * 75,000 0 *
Fernando Giancola 150,000 1.56 150,000 0 *
Steve Weintraub 75,000 * 75,000 0 *
Michael Pento 87,500 * 77,500 10,000 *
Henry Grinberg 150,000 1.56 150,000 0 *
Leon Rubakhim 75,000 * 75,000 0 *
B&J Realty, LLC 150,000 1.56 150,000 0 *
Traditions, LP 1,500,000 14.88 1,500,000 0 *
SCI Partnership 99,000 1.02 99,000 0 *
C. Barry Zolot 392,300 4.06 225,000 167,300 1.75
David Gitlin 49,500 * 49,500 0 *
Green Mountain Group, LLC 99,000 1.02 99,000 0 *
Gerald Parsons 110,000 1.15 100,000 10,000 *
Brendan Dawson 20,000 * 20,000 0 *
Cornell Technical Services 100,000 1.04 100,000 0 *
Financial Technologies 100,000 1.04 100,000 0 *
Jetform Corporation 100,000 1.04 100,000 0 *
Comarco 20,000 * 20,000 0 *
</TABLE>
(1) The number of shares of common stock issued and outstanding on July 14,
2000 was 9,581,473. The calculation of percentage ownership for each
listed selling stockholder is based upon the number of shares of common
stock issued and outstanding at July 14, 2000, plus the shares of common
stock offered hereby by the selling securityholders, which are issuable
upon exercise of the warrants, or in the case of Gerald Parsons, plus the
shares to which he is entitled but have not yet been issued. The shares
owned prior to the offering by each selling shareholder, other than Gerald
Parsons, includes the warrants each such selling shareholder holds. A
percentage ownership of less than one percent is indicated by an asterisk.
(2) Assuming all shares offered hereby are sold to unaffiliated third parties.
A percentage ownership of less than one percent is indicated by an
asterisk.
ITEM 8. PLAN OF DISTRIBUTION
The 4,515,000 shares of our common stock offered hereby may be offered and
sold from time to time by the selling securityholders, or by pledgees, donees,
transferees or other successors in interest. The selling securityholders will
act independently of us in making decisions with respect to the timing, manner
and size of each sale. Such sales may be made on the Nasdaq OTC Bulletin Board
or otherwise, at prices related to the then current market price or in
negotiated transactions, including pursuant to an underwritten offering or one
or more of the following methods: (a) purchases by a broker-dealer as principal
and resale by such broker or dealer for our account pursuant to this prospectus;
(b) ordinary brokerage transactions and transactions in which a broker solicits
purchasers; and (c) block trades in which a broker-dealer so engaged will
attempt to sell the shares as agent but may position and resell a portion of the
block as principal to facilitate the transaction. In effecting sales, brokers
or dealers engaged by the selling securityholders may arrange for other brokers
or dealers to participate. Brokers or dealers may receive commissions or
discounts from the selling securityholders or from the purchasers in amounts to
be negotiated immediately prior to the sale. The selling securityholders may
also sell the shares in accordance with Rule 144 under the 1933 Act.
We have agreed to use diligent efforts to maintain the effectiveness of the
registration of the shares being offered hereunder until the expiration date of
the warrants (December 31, 2004) or such shorter period which will terminate
when all of our shares issued or issuable upon exercise of the warrants have
been registered under the 1933 Act and disposed of in accordance with an
effective Registration Statement under the 1933 Act.
The selling securityholders and any brokers participating in such sales may be
deemed to be underwriters within the meaning of the 1933 Act. There can be no
assurance that the selling securityholders will sell any or all of the shares
offered hereunder.
8
<PAGE>
All proceeds from any such sales will be the property of the selling
securityholders who will bear the expense of underwriting discounts and selling
commissions, if any, and the selling securityholders' own legal fees, if any.
At the time a particular offer of the securities is made by or on behalf of
a selling securityholder, to the extent required, a Prospectus will be
distributed which will set forth the number of shares of common stock being
offered and the terms of the offering, including the name or names of any
underwriters, dealers or agents, if any, the purchase price paid by any
underwriter for the shares of common stock purchased from the selling
securityholder and any discounts, commissions or concessions allowed or
reallowed or paid to dealers, and the proposed selling price to the public. We
have informed the selling securityholders that the anti-manipulative rules under
the Exchange Act, including Regulation M thereunder, may apply to their sales in
the market. We have also informed the selling securityholders of the need for
delivery of copies of this Prospectus in connection with any sale of securities
registered hereunder. Sales of securities by us and the selling securityholders
or even the potential of such sales would likely have an adverse effect on the
market price of the shares of common stock offered hereby.
ITEM 9. LEGAL PROCEEDINGS
To the best of our knowledge, we are not a party to any pending legal
proceeding. We are not aware of any contemplated legal proceeding by a
governmental authority involving the Company.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS
The following table sets forth information regarding each of the directors
and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION DIRECTOR SINCE
---- --- -------- --------------
<S> <C> <C> <C>
Sandor Rosenberg 53 Chairman of the Board and 1979
President
Richard DeRose 61 Executive Vice President
Stanley A. Reese 43 Senior Vice President
James D. Wester 61 Director 1985
Bonnie K. Wachtel 44 Director 1992
Charles A. May, Jr. 63 Director 1997
</TABLE>
Directors serve until the next annual meeting of shareholders or until
successors have been elected and qualified. Officers serve at the discretion of
the Board of Directors.
Sandor Rosenberg, 53, has been President and Chairman of the Board since 1979.
Mr. Rosenberg holds a B.S. degree in Aerospace Engineering from Rensselear
Polytechnic Institute, and has done graduate studies in Operations Research at
George Washington University.
Richard S. DeRose, 61, has been Executive Vice President since 1991. From
1979 to 1991 he served as the President and CEO for DHD, Inc. Mr. DeRose holds
a B.S. degree in Science from the U.S. Naval Academy and an M.S. degree in
Computer Systems Management from the U.S. Naval Post Graduate School, Monterey.
Mr. DeRose has been involved in computer and telecommunications industry for the
past 30 years.
Stanley A. Reese, 43, joined the company in 1993. Mr. Reese has been Senior
vice President since 1997 and Chief Operating Officer since march 1999. From
1992 to 1993 he served as Vice President, Technical Services at Tomco Systems,
Inc. Prior to Tomco Systems, he served as Senior Program Manager at ICF
Information Technology, Inc. Mr. Reese has over 17 years experience managing
and marketing in the large scale mainframe marketplace.
James D. Wester, 61, has been a Director since 1985. He has been a computer
services marketing consultant for more than 15 years. Since 1984, he has been
president of Results, Inc. Mr. Wester obtained a B.M.E. degree from Auburn
University and an M.B.A. from George Washington University.
Bonnie K. Wachtel, 44, has been a Director since 1992. Since 1984, she has
served as vice president and general counsel of Wachtel & Co., Inc., investment
bankers in Washington, D.C. Ms. Wachtel holds B.A. and M.B.A. degrees from the
University of Chicago and a J.D. from the University of Virginia. She is a
director of Integral
9
<PAGE>
Systems, Inc., a provider of computer systems and software for the satellite
communications market; SSE Telecom, Inc., a satellite equipment manufacturer;
and VSE Corporation, a provider of technical services to the federal government.
Charles A. May, Jr., 63, is a consultant focusing on national security and
defense conversion issues. In 1992, he retired as a Lt. General from the Air
Force where he last served as Assistant Vice Chief of Staff, Headquarters US Air
Force, Washington, D.C. He is a graduate of the U.S. Air Force Academy, where
he once served as an Associate Professor of Political Science. General May has
also graduated from the NATO Defense College and has completed the University of
Pittsburgh's Management Program for Executives.
There are no family relationships between any directors or executive officers
of IAI.
ITEM 11. PRINCIPAL SECURITYHOLDERS
The following table sets forth, as of July 14, 2000, the number of shares
and percentage of the Company's Common Stock owned by all persons known by the
Company to own beneficially more than 5% of the Company's Common Stock, by each
director, by each executive officer named in the Summary Compensation Table, and
by all directors and executive officers as a group. This information has been
obtained in part from such persons and in part from the Company's records. Each
person has sole voting and investment power with respect to the shares indicated
except for shares which may be acquired upon exercise of options and as
otherwise noted.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF SHARES BENEFICIALLY
BENEFICIAL OWNER (1) OWNED (2) % OF CLASS
----------------------------------------------------------------------------------------------
<S> <C> <C>
Sandor Rosenberg, Chairman, CEO, and Director 1,902,800 20.1%
Richard S. DeRose, Executive Vice President 165,900 (3) 1.7%
Stanley A. Reese, Senior Vice President 134,750 (4) 1.4%
Charles A. May, Jr., Director 16,000 (5) *
Bonnie K. Wachtel, Director 112,800 (6) 1.2%
James D. Wester, Director 383,500 (7) 3.9%
Kenneth Parsons 712,500 (8) 7.0%
Traditions LP 1,500,000 (9) 15.0%
All directors and executive officers as a group 2,715,750 (10) 27.0%
</TABLE>
*less than 1%
(1) The address of all beneficial holders is care of the Company, except Ms.
Wachtel, whose address of record is 1101 14th St. NW, Washington, DC 20001,
Kenneth Parsons, whose address of record is 4318 Pennbrooke Court, West
River, MD 20764, and Traditions LP, whose address of record is 1717 Main
Street, Suite 2500, Dallas, TX 75201.
(2) All shares are held outright by the individuals listed. References to
options and warrants include all options and warrants exercisable within 60
days of July 14, 2000.
(3) Includes options on 117,900 shares.
(4) Includes options on 128,750 shares.
(5) Includes options on 16,000 shares.
(6) Includes options on 13,000 shares .
(7) Includes warrants for 108,000 shares, and options on 185,000 shares.
(8) Includes options on 712,500 shares.
(9) Includes warrants on 500,000 shares.
(10) Includes options on 473,650 shares and warrants for 108,000 shares.
* Represents less than 1% of the outstanding shares of common stock.
10
<PAGE>
ITEM 12. DESCRIPTION OF SECURITIES
COMMON STOCK
We are authorized to issue 30,000,000 shares of common stock, $.01 par
value per share, of which 9,581,473 shares were issued and outstanding as of
July 14, 2000.
Holders of common stock have equal rights to receive dividends when, as and
if declared by the Board of Directors, out of funds legally available therefor.
Holders of common stock have one vote for each share held of record and do not
have cumulative voting rights.
Holders of common stock are entitled upon our liquidation to share ratably
in the net assets available for distribution, subject to the rights, if any, of
holders of any preferred stock then outstanding. Shares of common stock are not
redeemable and have no preemptive or similar rights. All outstanding shares of
common stock are fully paid and nonassessable.
DIVIDEND POLICY
We have not paid any cash dividends to date, and have no intention to pay
any cash dividends on our common stock in the foreseeable future. The
declaration and payment of dividends is subject to the discretion of our Board
of Directors and to certain limitations imposed by the Virginia corporate laws.
The timing, amount and form of dividends, if any, will depend, among other
things, on our results of operations, financial condition, cash requirements and
other factors deemed relevant by Board of Directors.
ITEM 13. INTEREST OF NAMED EXPERTS AND COUNSEL.
Not applicable.
ITEM 14. DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES
ACT LIABILITIES.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers, or persons controlling the Company
we have been informed that in the opinion of the SEC such indemnification is
against public policy as expressed in therein and is therefore unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by us of expenses incurred or paid by a director, officer or
controlling person of ours in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, we will, unless in the opinion
of our counsel the matter has been settled by controlling precedent, submit to a
court of competent jurisdiction the question of whether such indemnification by
it is against public policy as expressed in the Securities Act of 1933 and will
be governed by the final adjudication of such issue.
ITEM 15. ORGANIZATION WITHIN LAST FIVE YEARS.
To the best of our knowledge, we are not a party to any transaction or
proposed transaction where any director or executive officer, securityholder, or
immediate family member is an interested party or has a direct or indirect
material interest.
ITEM 16. DESCRIPTION OF BUSINESS.
Overview
Founded in 1979, Information Analysis Incorporated is in the business of
modernizing client information systems. Since our inception, we have performed
software development and conversion projects for over 100 commercial and
government clients including Computer Sciences Corporation, IBM, Computer
Associates, MCI, Sprint, Citibank, U.S. Customs Service, U.S. Department of
Agriculture, U.S. Department of Energy, U.S. Army, U.S. Air Force, Veterans
Administration, and the Federal Deposit Insurance Corporation. Today, we
primarily apply our technology, services and experience to 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
11
<PAGE>
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 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 our 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.
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
We are currently structured to provide three business lines, conversion and
modernization of mainframe legacy software systems, Internet application
development, and outsourcing of professional services. Each segment has been
established as a separate profit and loss center, responsible for expanding
revenues and capabilities for their respective markets. In reality, there is
some overlap in personnel for projects that require specific skills that another
group may have. Clients who have engaged us to convert a legacy system from one
language to another, or one platform to another are also requiring extension of
the legacy system to the Internet. In those cases the conversion and e-process
groups will collaborate to achieve a solution. The outsourcing group provides a
pool of skilled talent and recruiting services to supply the other groups as
required. In addition, clients can avail themselves of a much broader range of
skills within the company from all three segments.
Conversion and Modernization
Since the mid-90's, we have 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
12
<PAGE>
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 Our strategy has
been to develop and/or acquire tools that will facilitate the modernization
process and differentiate our offerings in the marketplace.
We have developed a series of workbench tools called ICONS (Integrated
CONversion Solutions) Automated Transition Workbench (ATW). These tools, used
in conjunction with our 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 our 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.
ICONS ATW represents the culmination of over 15 years of our migration and
transition engineering experience and research. Automated functions and
features include:
- Source code analysis and creation of resulting SQL database
- Analysis of all components of source environment (including JCL, DBMS
dictionaries, maps, etc.)
- Flexible, rule-based, table-driven code conversion
- Full-purpose code editor
- User interface conversion
- Character-based displays to GUI transformation
Employing the ICONS tool suite gives us a tremendous advantage over
traditional processes used to convert legacy systems. With ICONS a programmer
can achieve productivity levels five-fold or more over a programmer using
traditional methods and achieve an accuracy level up to 95% for portions that
are run through the ICONS tools.
Just as important as the ICONS tool set is the ICONS Methodology that we
have developed through experience over the last 15 years. A conversion project
is very different from standard software development and maintenance practiced
by most programmers. The approach and metrics of performance involved rely on
careful analysis and procedures that must be applied consistently throughout the
project. In fact, according to the Gartner Group over 50% of these conversions
fail and most of those that are successful are over budget and late on delivery.
The ICONS methodology includes processes for:
- Planning: Careful analysis and inventory of the system's programs allows
the project to divide the work into tasks that can be executed by
designated teams.
- Pilot project: Converting a small portion of the system from beginning to
end enables important procedural and programming standards to be set and
accepted by the client.
- Database Modeling: Ensures that the target database system will perform
within acceptable performance metrics and that every element of data is
correctly translated.
- Data conversion: Mapping and translating data from original system to the
target system requires careful analysis and accurate translation tools.
- Performance Tuning: Expert skills are required to ensure that the target
system performs as well or better than the original system. The
methodology includes certain procedures to ensure that this performance
is attained.
- Functional re-engineering: When appropriate the methodology permits
certain re-engineering of functions to take advantage of modern
technology or changing business requirements.
- Implementation: Operational testing under controlled conditions ensure
that final implementation of the converted system occurs smoothly and
without serious interruption.
We have structured ourselves to address the wide range of requirements that
we envision the market for conversion and modernization of legacy systems will
demand. We have employees dedicated to sales and marketing, research and
development of the ICONS products, and project conversion specialists all
reporting to the Chief Operating Officer. Sales personnel rely on combing lists
potential clients that fit the profile of legacy software users that should be
interested in modernizing their systems. In addition, relationships we have
established with many other professional services firms such as IBM and Computer
Sciences Corporation has provided valuable leads and led to opportunities
realized. The suite of ICONS tools give us, in our opinion, a competitive edge
in performing certain conversions and migrations faster and more economically
than many other vendors. The diverse capabilities of our staff in mainframe
13
<PAGE>
technology and client server implementations help to assure that our staff can
analyze the original systems properly to conduct accurate and thorough
conversions.
Our modernization methodology has developed over the past several years
through the completion of successful conversion projects. Senior members of our
professional staff can perform both technical and business requirements
analyses, and prepare general and detail design documentation, develop project
plans including milestones, staffing, deliverables, and schedules. The actual
work can be performed at client sites or at our premises, which has mainframe
and client server facilities for the use of our personnel.
Internet Application Development
We are also using the experience we have acquired over the last eight years
as a JetForm reseller to help secure 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. We have used this expertise to penetrate a number of federal government
clients and build sophisticated web applications. Our knowledge of legacy
system languages has been instrumental in connecting these web applications to
legacy databases residing on mainframe computers. During 1999, we have built a
core group of professionals that can build this practice over the coming years.
The array of Jetform products available to us gives us a tremendous edge in
building Internet applications for the government sector that relies on forms as
the media for most of the information transfer internally and externally.
Jetform's Formflow-99 product can design electronic forms that are accessible by
the primary Internet browser programs. These forms can then act as data
collectors and disseminators, which can correct incoming data and store those
data into legacy databases. JetForm's Central product can provide translation
of data to other media such as e-mail, faxes, local and remote printing, and
ensure proper workflow sequences are instituted. The e-process Framework
product currently being introduced is server based and has the capability to
provide electronic forms on virtually all of the recognized platforms such as
NT, Unix, MacIntosh, and Linux. It solves most of the security concerns that
other products incur by providing a thin-client solution without Active-X
components.
As one of the largest resellers of JetForm products nationally, we have
developed a large base of federal government clients. We have been successful
in convincing many of these clients to use our professional service expertise to
build electronic forms and applications that reside on the Internet. At this
time, we have seven projects underway that form the core of its web-application
work. In addition, we continue to submit proposals to other government agencies
that are now being directed by executive order to provide public forms on the
Internet for public access.
We have dedicated employees who focus on Internet application development
and more specifically, in the area of sales and marketing, professional
services, product support, and training staff. The sales staff has been
successful over the years, selling over $5 million in products and services over
the last five years, with over $2 million in 1999. JetForm continues to send us
prospective leads and supports us with product and maintenance issues.
Professional services include programming, form design and development,
training, and workflow consulting. We regularly hold training at our
headquarters and on-site at client facilities.
Concentrating on the niche of electronic forms related web applications
through our relationship with JetForm, we have developed a cadre of
professionals that can quickly and efficiently develop web applications. We
will focus on federal government clients during 2000 and leverage our
outstanding reputation with federal clients to penetrate these agencies. We
will be able to reference successful projects completed or in development for
the Veterans Affairs, Federal Mediation and Conciliation Service, U.S.
Department of Agriculture, Immigration and Naturalization Service, and U.S. Air
Force Logistics Command.
Professional Services Outsourcing
Since our inception, we have provided clients with professional services such
as programming, systems analysis, testing, training, and maintenance. Currently,
approximately 50% of our revenue is derived from outsourcing professional
services to our clients, primarily at the client's site. This division has its
own management, sales, and recruiting personnel and is responsible for expanding
revenues and profits. There are approximately ten projects underway that consume
approximately 30 of our staff. The expertise of this staff varies widely from
database applications on mainframes to Unix and NT applications.
14
<PAGE>
Aside from its revenue contribution, this division provides a valuable
source of talent for temporary requirements of the other two divisions, which at
times need specialized skills on short notice. In addition, since this division
is constantly recruiting staff for its client base, it can propagate our image
to the technical world and survey its clients and prospects for the services of
the other two divisions.
Examples of the types of assignments underway are as follows;
- US Army Headquarters Civilian Personnel System, for which we
provide maintenance and support for mainframe and Unix platforms in
Datacom and Oracle.
- US Customs Services' Automated Targeting System, for which we have
created an information system for obtaining data about potential
dangerous imports and exports processed by Customs on mainframe
Datacom and Unix Oracle platforms.
- US Department of Agriculture's Animal & Plant Health Inspection
System, for which we are developing an inspection and decision
making system on an UNIX oracle platform.
- Internal Revenue Service, for which we are developing forms for
printing on a Unisys mainframe and providing database administrator
services.
It is anticipated that this division will continue to grow over 2000 and
orient its projects more to web related activities in-line with the general
direction of the industry. With the difficulty in recruiting permanent
employees more evident today and the desire of technical personnel to have a
fluid environment, many clients are opting to hire temporary personnel from
companies such as ours. Our staff prefer the opportunity to work in different
environments and on varied projects, learning new skills and conquering new
challenges. According to a leading market research firm, the human resource
outsourcing industry within the United States is forecasted to grow from $13.9
billion in 1999 to $37.7 billion during 2003.
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. We also face
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 our competitors have greater
name recognition than us, a larger, more established customer base and
significantly greater financial and market resources in comparison to ours.
In the Internet application development sector there are many products
and professional services companies competing. At this time the sector is very
fragmented because of the newness of the technology and the ease of entry. Most
large professional services firms are rapidly building their practices by
concentrating on existing customers and selecting best of breed products as
their primary tools. These products are rapidly evolving and are leapfrogging
each other in capability every three to six months. There is also a plethora of
very small firms that are building web sites and simple e-process transaction
applications. In the electronic forms area there are no companies that have a
complete solution similar to JetForm, but there are other forms products such as
INFORM, and Microsoft's forms capability using WORD Macro's. The functions
performed by JetForm products can be duplicated using combinations of other
products and customized programming, but the costs for that approach are not
competitive with JetForm.
Patents and Proprietary Rights
We depend 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. We have not
filed any patent applications covering our methodologies and software. We
distribute 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
15
<PAGE>
products. In addition, we attempt to protect the secrecy of our proprietary
databases and other trade secrets and proprietary information through agreements
with employees and consultants.
We also seek 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. We believe, however, that the creation of competing databases
would be very time consuming and costly.
ITEM 17. MANAGEMENT'S DISCUSSION AND ANALYSIS
SUMMARY
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.
The information in this section should be read together with the financial
statements that are included elsewhere in this Prospectus.
RESULTS OF OPERATIONS
The following table 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>
16
<PAGE>
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.
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
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
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.
RESULTS OF THREE MONTH PERIODS ENDED MARCH 31, 2000
Three Months Ended March 31, 2000 Versus Three Months Ended March 31, 1999
Revenue
IAI's revenues in the first quarter of fiscal 2000 were $1.7 million,
compared to $3.8 million in the first quarter of fiscal 1999, a decrease of 56%.
Professional services revenue was $1.2 million versus $3.5 million, a decrease
of 65.2%, and product revenue was $0.5 million versus $0.3 million an increase
of 45.9%. The decrease in professional services revenue is primarily
attributable to the discontinuation of Year 2000 sales for the first quarter of
fiscal 2000 versus Year 2000 sales recorded over the same period in 1999. The
increase in product sales were mainly attributable to the increase sales of
ICON"S a software toolset capable of conversions and migrations from mainframe
legacy systems.
Gross Margins
Gross margins were $0.6 million, or 35.8% of sales, in the first quarter of
fiscal 2000 versus $1.4 million, or 35.6% of sales, in the first quarter of
fiscal 1999. Of the $0.6 million in 2000, $0.3 million was attributable to
services and $0.3 million was due to software sales. Gross margins as a
percentage of sales were 23.1% for professional services and 69.0% for software
sales. In the first quarter of 1999, the Company reported gross margins of
approximately 40.4% for services and (17.5%) for software sales.
Selling, General and Administrative
Selling, general and administrative expenses (SG&A) were $0.6 million, or
33.2% of revenues, in the first quarter of 2000 versus $1.2 million, or 30.9% of
revenues, in the first quarter of 1999, a decrease in expenses of 52.8%. The
decrease is attributable to the Company's elimination of its marketing and
support expenses associated with Year 2000 services and product. The Company
believes that SG&A expenses will decline as a percentage of revenue sales
increases.
17
<PAGE>
Profits
The Company generated an operating profit of $44,105 in the first quarter
of 2000 compared to $105,000 in the first quarter of 1999. In general, the
profit reflected a slight improvement in the overall percentage for gross
margin sales of 0.2%. Because of a net operating loss carryforward, the Company
did not accrue for income taxes in the first quarter of 2000.
Liquidity and Capital Resources
In the first quarter of 2000, the Company completed the second phase of its
December 1999, private placement which raised an additional $125,000 in exchange
for 250,000 shares of common stock and 125,000 five-year warrants, exercisable
at $1.00 per share. The shares and warrants were sold to individual investors.
The Company financed its operations from current collections of receivables, the
private placement and through its bank line of credit. Cash and cash equivalents
at March 31, 2000 were $89,341, compared to $137,280 at March 31, 1999.
The Company and First Virginia Bank currently have a forbearance agreement
in place which effectively extends the line of credit of $1,000,000 to August
29, 2000 at which time it is subject to renewal. 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.
The Company has no material commitments for capital expenditures.
EMPLOYEES
We employ 54 full time and part-time employees. None of the employees is
represented by a union. 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.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings, although we are involved
from time to time in routine litigation incident to our business.
ITEM 18. DESCRIPTION OF PROPERTY
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 19. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 20. MARKET FOR OUR COMMON STOCK
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. However, the market for such shares is limited. As of the date of this
Prospectus, only 9,581,473 shares of our common stock are eligible for public
trading. No assurance can be given that a significant trading market for our
common stock will develop or, if developed, that it will be sustained.
18
<PAGE>
The following table sets forth the range of the high and low closing bid
prices of our common stock during each of the calendar quarters identified
below.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1998
1st Quarter...................... $ 20.75 $11.75
2nd Quarter...................... $16.375 $9.875
3rd Quarter...................... $ 14.50 $1.531
4th Quarter...................... $ 2.438 $1.063
1999
1st Quarter...................... $ 1.593 $0.625
2nd Quarter...................... $ 0.750 $0.375
3rd Quarter...................... $ 0.625 $0.125
4th Quarter...................... $ 1.218 $0.156
</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 markups, mark downs or commissions and may not necessarily
represent actual transactions. From September 8, 1997 to July 28. 1999, the
prices reflect the high and low bid prices as reported by Nasdaq.
As of December 31, 1999, the Company has 111 stockholders of record of our
common stock. As of July 14, 2000, we have 108 stockholders of record.
We have not paid a cash dividend on our common stock for the last two
fiscal years. We presently intend to retain future earnings, if any, to finance
the expansion of our business and do not anticipate that we will pay cash
dividends in the foreseeable future. Our future dividend policy will depend on
our earnings, capital requirements, expansion plans, financial condition and
other relevant factors.
ITEM 21. EXECUTIVE COMPENSATION
The following table provides certain summary information concerning compensation
paid to or accrued by the our Chief Executive Officer and all other executive
officers who earned more than $100,000 (salary and bonus) (the "Named Executive
Officers") for all services rendered in all capacities to IAI during the year
ended December 31, 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
Name and Principal -------------------------------- Securities Underlying
Position Year Salary Bonus Options (#)
-------- ---- ------- ----- ---------------------
<S> <C> <C> <C> <C>
Sandor Rosenberg 1999 $ 76,457 -- --
Chairman of the Board and 1998 $102,083 -- --
Chief Executive Officer 1997 $100,375 -- --
------------------------------------------------------------------------------------------------------------------------------
Richard S. DeRose 1999 $ 97,617 -- 20,000
Executive Vice President 1998 $150,010 -- --
Chief Financial Officer 1997 $110,835 $27,500 5,000
------------------------------------------------------------------------------------------------------------------------------
Stanley A. Reese 1999 $ 97,867 20,000
Senior Vice President and 1998 $135,827 -- 50,000
Chief Operating Officer 1997 $103,382 -- 5,000
</TABLE>
No Named Executive Officer has received any perquisite or benefit, securities,
or property that exceeded the lesser of $50,000 or 10% of the total annual
salary and bonus reported for such executive officer.
19
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth all option grants during 1999 to all
executive officers:
<TABLE>
<CAPTION>
% of Total Options Granted To Exercise
Name Granted Employees in Fiscal Year Price Expiration Date
---- ------- ----------------------------- -------- ---------------
<S> <C> <C> <C> <C>
Richard S. DeRose 20,000 18.6% $0.59 05/11/09
Stanley A. Reese 20,000 18.6% $0.59 05/11/09
</TABLE>
The following table depicts option exercise activity in the last fiscal year and
fiscal year-end option values with respect to each of the Named Executive
Officers. The value of unexercised in-the-money options at December 31, 1999
equals the market value of the underlying common stock at December 31, 1999
minus the option exercise price. The fair market value of the Company's common
stock at December 31, 1999 was $0.844.
Aggregated Option Exercises in Last Fiscal Year and FY End Option Values
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised In-the-
Shares Unexercised Options at 12/31/99 Money Options at 12/31/99
Acquired on Value ------------------------------- -----------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ------------- -------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Richard S. DeRose -- 117,900 $42,438 --
Stanley A. Reese -- 128,750 $ 8,615 --
</TABLE>
ITEM 22. FINANCIAL STATEMENTS.
See Consolidated Financial Statements included herein beginning on page F-1.
ITEM 23. 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.
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.
20
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants............. F-2
Financial Statements
Consolidated Balance Sheets.................................... F-3
Consolidated Statements of Operations.......................... F-4
Consolidated Statement of Stockholders' Deficit................ F-5
Consolidated Statements of Cash Flows.......................... F-6
Notes to Consolidated Financial Statements..................... F-7
Interim Consolidated Balance Sheets............................ F-19
Interim Consolidated Statements of Operations.................. F-20
Interim Consolidated Statements of Cash Flows.................. F-21
Notes to Interim Consolidated Financial Statements............. F-22
</TABLE>
21
<PAGE>
PART II
ITEM 24. INDEMNIFICATION PROVISIONS
Indemnification of Officers and Directors
-----------------------------------------
Section 5 of the Amended and Restated Articles of Incorporation of Information
Analysis Incorporated as filed with the Virginia State Corporation Commission
provides as follows:
5. Officer and Director Liability. In any proceeding brought by or in the
right of the Corporation or brought by or on behalf of a shareholder in the
right of the Corporation, an officer or director of the Corporation shall
not be liable for any damages assessed against such officer or director
arising out of a single transaction, occurrence or course of conduct.
However, the liability of an officer or director shall not be so limited if
the officer or director engaged in willful misconduct or a knowing
violation of the criminal law or of any federal or state securities law,
including, without limitation, any claim of insider trading or manipulation
of the market for any security.
TRANSFER AGENT
The transfer agent for IAI common stock is American Stock Transfer & Trust Co.
LEGAL MATTERS
Certain legal matters in connection with the securities offered hereby will be
passed upon for IAI by Mintz, Levin, Cohn, Ferris, Glovsky & Popeo, Professional
Corporation, Boston, Massachusetts.
EXPERTS
The financial statements of the Company appearing in this Prospectus have been
audited by Rubino & McGeehin, Chtd., independent certified public accountants,
to the extent and for the periods set forth in their report appearing elsewhere
herein, and are included in reliance upon such report given upon the authority
of said firm as experts in accounting and auditing.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<CAPTION>
ITEM COST
---- ----
<S> <C>
SEC Registration fees.......... $ 560.22
Legal fees and Expenses........ 10,000.00
Accounting fees................ 500.00
Miscellaneous.................. 100.00
----------
TOTAL $11,160.22
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
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 125,000 five-year warrants, exercisable at
$1.00 per share. The shares and warrants were sold to individual investors. The
funds will be utilized to finance the operations of the Company. These warrants
are exercisable immediately.
ITEM 27. EXHIBITS
The Exhibit to this Registration Statement are listed in the Index to Exhibits
on Page 26.
22
<PAGE>
ITEM 28. UNDERTAKINGS
A. Rule 415 Offering
-----------------
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of
the 1933 Act;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the SEC pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and price represent
no more than a 20% change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table in the effective
Registration Statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement;
Provided, however, that paragraphs (1)(i) and (1)(ii) do not apply
if the Registration Statement is on Form S-3 or Form S-8, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed by the registrant with or furnished to the
SEC pursuant to Section 13 or Section 15(d) of the 1934 Act that are
incorporated by reference in the Registration Statement.
(2) That, for the purpose of determining any liability under the 1933
Act, each such post-effective amendment shall be deemed to be a new Registration
Statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
B. Filings Incorporating Subsequent Exchange Act Documents by
----------------------------------------------------------
Reference
---------
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the 1933 Act, each filing of the registrant's
annual report pursuant to Section 13(a) or Section 15(d) of the 1934 Act (and,
where applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the 1934 Act) that is incorporated by reference in
the Registration Statement shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
C. Request for Acceleration of Effective Date or Filing of
-------------------------------------------------------
Registration Statement on Form S-8
----------------------------------
Insofar as indemnification for liabilities arising under the Act may
be permitted to directors, officers and controlling persons of the small
business issuer pursuant to any charter provision, by-law, contract
arrangements, statute, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the small business issuer in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the small business
issuer will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
23
<PAGE>
The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sales securities,
a post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Act");
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
Registration Statement;
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Act, to treat each post-
effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering of those securities.
(3) For determining any liability under the Act, to treat the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the registrant under Rule 424(b)(1) or (4), or 497(h)
under the Act as part of this Registration Statement as of the time the
Commission declared it effective.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and has duly caused this
Registration Statement to be signed on our behalf by the undersigned, thereunto
duly authorized, in Fairfax, Virginia on July 17, 2000.
INFORMATION ANALYSIS INCORPORATED
By: /s/ Sandor Rosenberg
--------------------
Sandor Rosenberg
Chairman and President
24
<PAGE>
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Sandor Rosenberg his attorneys-in-fact,
for him in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement (or any other
Registration Statement for the same offering that is to be effective upon filing
pursuant to Rule 462(b) under the Securities Act of 1933), and to file the same,
with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby granting unto said attorney-in-fact
full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as full to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact or his substitute may lawfully do or
cause to be done by virtue of this prospectus.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ Sandor Rosenberg Chairman of the Board July 17, 2000
---------------------------- and President
Sandor Rosenberg (principal executive officer)
/s/ Charles A. May, Jr. Director July 17, 2000
----------------------------
Charles A. May, Jr.
/s/ Bonnie K. Wachtel Director July 17, 2000
----------------------------
Bonnie K. Wachtel
/s/ James D. Wester Director July 17, 2000
----------------------------
James D. Wester
25
<PAGE>
INFORMATION ANALYSIS INCORPORATED
---------------------------------
INDEX TO EXHIBITS FILED WITH
FORM SB-2 REGISTRATION STATEMENT
Exhibit
Number Description
------ -----------
3.1 Amended and Restated Articles of Incorporation of the Registrant
effective March 18, 1997 (incorporated by reference to Exhibit
3.1 to the Registrant's Form 10-KSB/A for the fiscal year ended
December 31, 1996 and filed on July 3, 1997)
3.2 Article of Amendment to Articles of Incorporation of the
Registrant (incorporated by reference to Exhibit 3.2 to the
Registrant's Form 10-KSB/A for the fiscal year ended December 31,
1997 and filed on March 31, 1998)
3.3 Amended By-Laws of the Registrant (incorporated by reference to
Exhibit 3.3 to the Registrant's Form 10-KSB/A for the fiscal year
ended December 31, 1997 and filed on March 31, 1990)
4.1 Copy of Stock Certificate (incorporated by reference to Exhibit
4.1 to the Registrant's Form 10-KSB/A for the fiscal year ending
December 31, 1997 and filed on March 30, 1998
4.2 Form of Warrant issued in December 1999 and January 2000
(incorporated by reference to Exhibit 4.2 to Registrant's Form
10-KSB for the fiscal year ended on December 31, 1999 And filed
on March 30, 2000)
4.3 Common Stock and Warrant Purchase Agreement dated December 31,
1999 (incorporated by reference to Exhibit 4.3 to the
Registrant's Form 10-KSB for the fiscal year ended December 31,
1999 and filed on March 31, 2000)
5 Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.,
with respect to the legality of the securities being registered
(filed herewith)
10.1 Office Lease for 18,280 square feet at 11240 Waples Mill Road,
Fairfax, Virginia 22030 (incorporated by reference to Exhibit
10.1 to the Registrant's Form 10-KSB/A for the fiscal year ending
December 31, 1996 and filed on July 3, 1997)
10.2 Company's 401(k) Profit Sharing Plan through Aetna Life Insurance
and Annuity Company (incorporated by reference to Exhibit 10.2 to
the Registrant's Form 10-KSB/A for the fiscal year ending
December 31, 1996 and filed on July 3, 1997)
10.3 1986 Stock Option Plan (incorporated by reference from the
Registrant's Form S-8 filed on December 20, 1988)
10.4 1996 Stock Option Plan (incorporated by reference from the
Registrant's Form S-8 filed on June 25, 1996)
26
<PAGE>
10.5 Line of Credit Agreement with First Virginia Bank (incorporated
by reference to the Registrant's Form 10-KSB for the fiscal year
ending December 31, 1995 and filed April 15, 1996 (Commission
File No. 33-9390)
10.6 Warrant Agreement between James D. Wester, a director and the
Company dated February 24, 1993 (incorporated by reference from
the Registrant's Form 10-KSB/A for the fiscal year ending
December 31, 1996 and filed on July 3, 1997)
10.7 Royalty Agreement between James D. Wester and the Company in in
exchange for development expense advances (incorporated by
reference from the Registrant's Form 10-KSB/A for the fiscal year
ending December 31, 1996 and filed on July 3, 1997)
10.8 Amended Royalty Agreement between James D. Wester and the Company
in exchange for development expense advances (incorporated by
reference from the Registrant's Form 10-QSB for the period ending
March 31, 1998 and filed on May 15, 1998)
15.1 Letter on unaudited interim financial information (incorporated
by reference to the Registrant's Form 10-QSB for the quarter
ended March 30, 2000 and filed on May 15, 2000)
16.1 Letter on change in certifying accountant (incorporated by
reference to Exhibit 27.1 to the Registrant's Form 8-K filed on
January 12, 1999)
21.1 List of Subsidiaries (incorporated by reference to Exhibit 21.1
to the Registrant's Form 10-KSB for the fiscal year ended
December 31, 1999 and filed on March 31, 2000)
23.1 Consent of Rubino & McGeehin, Chartered (incorporated by
reference to Exhibit 23.1 to the Registrant's Form 10-KSB for the
fiscal year ended December 31, 1999 and filed on March 31, 2000)
23.2 Consent of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
(reference is made to Exhibit 5)
24 Power of Attorney (filed in Part II of this Registration
Statement)
27.1 Financial Data Schedule (incorporated by reference to Exhibit
27.1 to the Registrant's Form 10-QSB for the quarter ended March
30, 2000 and filed on May 15, 2000)
99.1 Form of Warrant (incorporated by reference to Exhibit 99.1 to the
Registrant's Form S-3 filed on January 31, 2000
27
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Information Analysis Incorporated
We have audited the accompanying consolidated balance sheet of Information
Analysis Incorporated and subsidiaries as of December 31, 1999, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the years ended December 31, 1999 and 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion. In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Information
Analysis Incorporated and subsidiaries as of December 31, 1999, and their
consolidated results of operations and cash flows for the years ended December
31, 1999 and 1998, in conformity with generally accepted accounting principles.
/s/ Rubino & McGeehin, Chartered
--------------------------------
February 24, 2000
Bethesda, Maryland
F-1
<PAGE>
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
-------------
<TABLE>
<CAPTION>
December 31, 1999
-----------------
ASSETS
<S> <C>
Current assets
Cash and cash equivalents $ 133,468
Accounts receivable, net of allowance of $466,890 1,902,244
Employee advances 6,230
Prepaid expenses 129,995
Other receivables 97,299
------------
Total current assets 2,269,236
Fixed assets, net of accumulated depreciation and amortization
of $1,940,295 279,787
Equipment under capital leases, net of accumulated amortization
of $63,649 11,553
Capitalized software, net of accumulated amortization of $2,430,737 463,653
Other receivables 28,992
Other assets 58,275
------------
Total assets $ 3,111,496
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,491,179
Accrued payroll and related liabilities 276,871
Other accrued liabilities 727,904
Revolving line of credit 501,500
Current maturities of capital lease obligations 6,936
------------
Total current liabilities 3,004,390
------------
Common stock, par value $0.01, 15,000,000 shares authorized,
10,723,284 shares issued, 9,218,673 shares outstanding 107,233
Additional paid-in capital 13,763,904
Accumulated deficit (12,909,718)
Less treasury stock, 1,504,611 shares, at cost (854,313)
------------
Total stockholders' equity 107,106
------------
Total liabilities and stockholders' equity $ 3,111,496
============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-2
<PAGE>
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------
<TABLE>
<CAPTION>
For the years ended December 31,
----------------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Sales
Professional fees $ 8,259,492 $10,118,435
Software sales 1,326,280 5,213,923
----------- -----------
Total sales 9,585,772 15,332,358
----------- -----------
Cost of sales
Cost of professional fees 5,770,008 9,686,651
Cost of software sales 1,929,496 3,000,639
----------- -----------
Total cost of sales 7,699,504 12,687,290
----------- -----------
Gross profit 1,886,268 2,645,068
Selling, general and administrative expenses 3,842,212 6,974,211
Research and development 60,719 1,680,818
----------- -----------
Loss from operations (2,016,663) (6,009,961)
Other items:
Write-down of capitalized software costs (1,978,362) (3,083,642)
Other (expense) income (129,611) 69,658
----------- -----------
Loss before provision for income taxes (4,124,636) (9,023,945)
Provision for income taxes - -
----------- -----------
Net loss $(4,124,636) $(9,023,945)
=========== ===========
Loss per common share (basic and diluted) $ (0.59) $ (1.35)
Weighted average common shares outstanding
(basic and diluted) 6,988,336 6,665,321
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-3
<PAGE>
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------
<TABLE>
<CAPTION>
Shares of (Accumulated
Common Additional Deficit)
Stock Common Paid-in Retained Treasury
Issued Stock Capital Earnings Stock Total
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances,
December 31, 1997 7,498,430 $ 74,984 $ 6,517,655 $ 238,863 $(854,313) $ 5,977,189
Exercise of stock
options and
warrants 217,684 2,177 453,971 - - 456,148
Stock issued for
private placement 580,155 5,802 5,640,883 - - 5,646,685
Stock issued for
ISSC acquisition 62,515 625 27,157 - - 27,782
Net loss - - - (9,023,945) - (9,023,945)
---------- -------- ----------- ------------ --------- -----------
Balances,
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, 10,723,284 $107,233 $13,763,904 $(12,909,718) $(854,313) $ 107,106
December 31, 1999 ========== ======== =========== ============ ========= ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-4
<PAGE>
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
----------------
<TABLE>
<CAPTION>
For the years ended December 31,
-----------------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Net loss $(4,124,636) $(9,023,945)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 282,966 383,214
Amortization 20,325 38,786
Amortization of capitalized software 1,096,170 1,314,272
Loss on sale of fixed assets 24,923 6,886
Capitalized software write-down 1,978,362 2,902,152
Changes in operating assets and liabilities
Accounts receivable 2,517,551 (1,368,743)
Other receivables and prepaid expenses 3,076 (29,362)
Accounts payable and accrued expenses (1,611,793) 1,814,506
Refundable income taxes - 33,119
----------- -----------
Net cash provided (used) in operating activities 186,944 (3,929,115)
----------- -----------
Cash flows from investing activities
Acquisition of furniture and equipment - (266,036)
Increase in capitalized software (113,555) (3,191,574)
Proceeds from sale of fixed assets 56,665 3,670
----------- -----------
Net cash used in investing activities (56,890) (3,453,940)
----------- -----------
Cash flows from financing activities
Net (payments) borrowing under bank revolving line of credit (1,294,700) 1,196,600
Repayment of long-term debt - (83,346)
Principal payments on capital leases (8,059) (20,386)
Proceeds from private placement of common stock 1,110,000 5,646,685
Proceeds from exercise of stock options and warrants 19,774 456,148
----------- -----------
Net cash (used) provided by financing activities (172,985) 7,195,701
----------- -----------
Net decrease in cash and cash equivalents (42,931) (187,354)
Cash and cash equivalents at beginning of the year 176,399 363,753
----------- -----------
Cash and cash equivalents at end of the year $ 133,468 $ 176,399
=========== ===========
Supplemental cash flow information
Interest paid $ 137,988 $ 44,965
Income taxes paid $ - $ -
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-5
<PAGE>
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------
1. Summary of Significant Accounting Policies
Operations
----------
Information Analysis Incorporated (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 Life Number of Options Average Exercised
Options Price 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>
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
INTERIM CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As Of
March 31, 2000
Unaudited
--------------
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents $ 89,341
Accounts receivable, net 1,903,054
Employee advances 7,451
Prepaid expenses 134,510
Other receivables 50,298
------------
Total current assets 2,184,654
Fixed assets, net 219,952
Equipment under capital leases, net 10,344
Capitalized software, net 470,696
Other receivables 28,992
Other assets 58,275
------------
Total assets $ 2,972,913
============
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,265,904
Accrued payroll and related liabilities 318,108
Other accrued liabilities 417,189
Revolving line of credit 660,600
Current maturities of capital lease obligations 5,478
------------
Total current liabilities 2,667,279
Long-term debt --
------------
Total liabilities 2,667,279
Common stock, par value $0.01, 15,000,000 shares authorized;
11,086,084 shares issued, 9,581,473 outstanding
At March 31,2000 110,861
Additional paid in capital 13,916,902
Retained earnings (12,867,816)
Less treasury stock; 1,504,611 shares at cost (854,313)
------------
Total stockholders' equity 305,634
------------
Total liabilities and stockholders' equity $ 2,972,913
============
</TABLE>
See accompanying notes
F-19
<PAGE>
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the three months ended March 31,
--------------------------------------
2000 1999
Unaudited Unaudited
--------- ---------
<S> <C> <C>
Sales
Professional fees $ 1,221,805 $3,515,958
Software sales 466,512 319,706
----------- ----------
Total sales 1,688,317 3,835,664
Cost of sales
Cost of professional fees 939,154 2,095,509
Cost of software sales 144,514 375,711
----------- ----------
Total cost of sales 1,083,668 2,471,220
----------- ----------
Gross profit 604,649 1,364,444
Selling, general and administrative expenses 560,544 1,186,837
Research & Development 0 72,935
----------- ----------
Income from operations 44,105 104,672
Other (expense) income (2,203) (34,489)
----------- ----------
Gain before provision for income taxes 41,902 70,183
Provision for income taxes 0 0
Net income $ 41,902 $ 70,183
=========== ==========
Earnings per common share
Basic $0.00 $0.01
Diluted $0.00 $0.01
Weighted average common shares outstanding
Basic 9,435,543 6,894,529
Diluted 10,149,573 8,029,979
</TABLE>
See accompanying notes
F-20
<PAGE>
INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
------------------------------------
2000 1999
Unaudited Unaudited
--------- ---------
<S> <C> <C>
Net income $ 41,902 $ 70,183
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 57,352 84,816
Amortization 3,691 5,265
Amortization of capitalized software 38,637 274,174
Loss on sale of fixed assets 0 8,286
Changes in operating assets and liabilities
Accounts receivable (810) 510,428
Other receivables and prepaid expenses 41,265 (77,054)
Accounts payable and accrued expenses (494,752) (981,610)
--------- ---------
Net cash (used) by operating activities $(312,715) $(105,512)
--------- ---------
Cash flows from investing activities
Increase in capitalized software (45,680) 0
Proceeds from sale of fixed assets 0 11,805
--------- ---------
Net cash (used) provided in investing activities (45,680) 11,805
--------- ---------
Cash flows from financing activities
Net borrowing under bank revolving line of credit 159,100 37,000
Principal payments on capital leases (1,458) (2,186)
Net Proceeds from private placement 125,000 0
Proceeds from exercise of stock options and warrants 31,626 19,774
--------- ---------
Net cash provided by financing activities 314,268 54,588
--------- ---------
Net (decrease) in cash and cash equivalents (44,127) (39,119)
Cash and cash equivalents at beginning of the period 133,468 176,399
Cash and cash equivalents at end of the period $ 89,341 $ 137,280
========= =========
Supplemental cash flow Information
Interest paid $ 6,242 $ 38,562
</TABLE>
See accompanying notes
F-21
<PAGE>
INFORMATION ANALYSIS, INCORPORATED
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation
The accompanying consolidated financial statements have been prepared by
Information Analysis Incorporated ("IAI" or the "Company") pursuant to the rules
and regulations of the Securities and Exchange Commission. Financial information
included herein is unaudited, however, in the opinion of management, all
adjustments (which include normal recurring adjustments) considered necessary
for a fair presentation have been made. Certain information and footnote
disclosures normally included in annual financial statements prepared in
accordance with generally accepted accounting principles have been omitted
pursuant to such rules and regulations, but the Company believes that the
disclosures made are adequate to make the information presented not misleading.
For more complete financial information, these financial statements should be
read in conjunction with the audited financial statements and notes thereto for
the year ended December 31, 1999 included in the Company's annual report on Form
10-KSB. Results for interim periods are not necessarily indicative of the
results for any other interim period or for the full fiscal year.
F-22
