-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, A0WLYJj19spo7m+4VKNN+K4WZnVKB3HppGYuQBKTdb3YC7BhrOH9yc5WKAsefLNp RexN0+3DIiZzpNKxyqH1zw== 0000928385-01-502428.txt : 20020410 0000928385-01-502428.hdr.sgml : 20020410 ACCESSION NUMBER: 0000928385-01-502428 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INFORMATION ANALYSIS INC CENTRAL INDEX KEY: 0000803578 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 541167364 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-22405 FILM NUMBER: 1783952 BUSINESS ADDRESS: STREET 1: 11240 WAPLES MILL RD #400 CITY: FAIRFAX STATE: VA ZIP: 22030 BUSINESS PHONE: 7033833000 MAIL ADDRESS: STREET 1: 2222 GALLOWS ROAD STREET 2: SUITE 300 CITY: DUNN LORING STATE: VA ZIP: 22027 10QSB 1 d10qsb.txt INFORMATION ANALYSIS, INC. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended Commission September 30, 2001 File No. 0-22405 ------------------ -------- Information Analysis Incorporated (Exact name of Registrant as specified in its charter) Virginia 54-1167364 -------- ---------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 11240 Waples Mill Road, #400 Fairfax, VA 22030 ----------- ----- (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code) (703) 383-3000 -------------- Indicate by check mark whether the Registrant(1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ______ ---------- State the number of shares outstanding of each of the issuer's classes of common stock, as of October 31, 2001: Common Stock, par value $.01, 10,181,015 shares Transitional small business disclosure format. Yes _______ No x . ---------- INFORMATION ANALYSIS INCORPORATED FORM 10-QSB Index Page PART I. FINANCIAL INFORMATION Number Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000 3 Condensed Consolidated Statements of Operations for the three months ended September 30, 2001 and September 30, 2000 4 Condensed Consolidated Statements of Operations for the nine months ended September 30, 2001 and September 30, 2000 5 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2001 and September 30, 2000 6 Notes to Unaudited Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II OTHER INFORMATION Item 1. Legal Proceedings 11 Item 2. Changes in Securities 11 Item 3. Exhibits and Reports on Form 8-K 11 SIGNATURES 12 Item 4. Index to Exhibits 13 2 Information Analysis Incorporated and Subsidiaries Consolidated Balance Sheets
As of As of September 30, 2001 December 31, 2000 (unaudited) (audited) ------------------ ---------------- ASSETS Current assets: Cash and cash equivalents $ (5,027) $ 42,881 Accounts receivable, net 1,373,714 1,073,941 Prepaid expenses 50,861 174,875 Other receivables 77,428 57,800 ------------ ------------ Total current assets 1,496,976 1,349,497 Fixed assets, net 41,854 96,139 Equipment under capital leases, net -- 6,717 Capitalized software, net 333,789 491,552 Other receivables 11,865 18,142 Other assets 58,275 58,275 ------------ ------------ Total assets $ 1,942,759 $ 2,020,322 ============ ============ LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities: Revolving line of credit $ 609,000 $ 598,591 Accounts payable 1,230,677 1,517,897 Accrued payroll and related liabilities 294,106 211,866 Other accrued liabilities 135,302 208,976 ------------ ------------ Total current liabilities 2,269,085 2,537,330 Long Term liabilities Notes payable 70,000 -- ------------ ------------ Total liabilities 2,339,085 2,537,330 Common stock, par value $0.01, 30,000,000 shares authorized; 11,685,626 and 11,206,084 shares issued, 10,181,015 and 9,701,473 outstanding at September 30, 2001 and December 31, 2000, respectively 116,856 112,061 Additional paid in capital 14,104,269 13,915,702 Accumulated Deficit (13,763,138) (13,690,458) Less treasury stock; 1,504,611 shares at cost (854,313) (854,313) ------------ ------------ Total stockholders' equity (396,326) (517,008) ------------ ------------ Total liabilities and stockholders' equity $ 1,942,759 $ 2,020,322 ============ ============
The accompanying notes are an integral part of the consolidated financial statements. 3 Information Analysis Incorporated and Subsidiaries Consolidated Statements of Operations
Three months ended Sept 30, (unaudited) 2001 2000 ----------- ---------- Net sales: Professional services $ 1,456,079 $1,257,921 Software sales 94,999 127,701 ----------- ---------- Total sales 1,551,078 1,385,622 Cost of goods sold and services provided: Cost of professional services 983,769 854,137 Cost of software sales 101,989 176,788 ----------- ---------- Total cost of goods sold and services provided 1,085,758 1,030,925 Gross margin 465,320 354,697 Operating expenses: Selling, general and administrative 592,638 467,637 ----------- ---------- Total operating expenses 592,638 467,637 Operating loss (127,318) (112,940) Other income (expense) 1,267 (17,255) ----------- ---------- Loss before income taxes (126,051) (130,195) Provision for income taxes -- -- ----------- ---------- Net loss before extraordinary item (126,051) (130,195) Extraordinary gain - settlement of debt with equity 107,883 -- ----------- ---------- Net loss $ (18,168) $ (130,195) =========== ========== Earnings per common share: Basic: Loss from continuing operations before extraordinary gain ($0.01) ($0.01) Extraordinary gain on settlement of debt with equity $0.01 -- ------ ------ Basic net income per common share ($0.00) ($0.01) ====== ====== Diluted: Loss from continuing operations before extraordinary gains ($0.01) ($0.01) Extraordinary gains on settlement of debt with equity $0.01 -- ------ ------ Diluted net income per common share ($0.00) ($0.01) ====== ====== Weighted average common shares outstanding: Basic 10,087,925 9,589,299 Diluted 10,087,925 9,589,299
The accompanying notes are an integral part of the consolidated financial statements. 4 Information Analysis Incorporated and Subsidiaries Consolidated Statements of Operations
Nine months ended Sept 30, (unaudited) 2001 2000 ---------- ---------- Net sales: Professional services $3,700,823 $3,887,652 Software sales 347,712 733,639 ---------- ---------- Total sales 4,048,535 4,621,291 Cost of goods sold and services provided: Cost of professional services 2,639,509 2,792,988 Cost of software sales 405,306 464,948 ---------- ---------- Total cost of goods sold and services provided 3,044,815 3,257,936 Gross margin 1,003,720 1,363,355 Operating expenses: Selling, general and administrative 1,282,539 1,467,263 ---------- ---------- Total operating expenses 1,282,539 1,467,263 Operating (loss) income (278,819) (103,908) Other expense (22,339) (23,960) ---------- ---------- (Loss) Income before income taxes (301,158) (127,868) Provision for income taxes -- -- ---------- ---------- Net (loss) income before extraordinary item (301,158) (127,868) Extraordinary gain - settlement of debt with equity 228,478 -- ---------- ---------- Net (loss) income $ (72,680) $ (127,868) ========== ========== Earnings per common share: Basic: Loss from continuing operations before extraordinary gain ($0.03) ($0.01) Extraordinary gain on settlement of debt with equity $0.02 -- ------ ------ Basic net income per common share ($0.01) ($0.01) ====== ====== Diluted: Loss from continuing operations before extraordinary gains ($0.03) ($0.01) Extraordinary gain on settlement of debt with equity $0.02 -- ------ ------ Diluted net income per common share ($0.01) ($0.01) ====== ====== Weighted average common shares outstanding: Basic 9,865,056 9,535,635 Diluted 9,865,056 9,535,635
The accompanying notes are an integral part of the consolidated financial statements. 5 Information Analysis Incorporated and Subsidiaries Consolidated Statement of Cash Flows
For the nine Months Ended September 30, --------------------------------------- (unaudited) 2001 2000 Cash flows from operating activities: Net (loss) $ (72,680) $ 127,868 Adjustments to reconcile net loss to Net cash provided by operating activities: Extraordinary gain (228,478) Depreciation 57,364 150,334 Amortization 3,627 3,627 Amortization of Capitalized Software 157,763 115,911 Gain on sale of fixed assets (9,353) -- Changes in operating assets and liabilities Accounts receivable (299,773) 434,252 Other receivables and prepaid expenses 110,663 27,416 Accounts payable and accrued expenses 143,186 (703,159) --------- --------- Net cash used by operating activities $(137,681) $ (99,487) --------- --------- Cash flows from investing activities: Acquisition of furniture and equipment -- -- Increase in capitalized software -- (182,447) Proceeds from sale of fixed assets 9,364 -- --------- --------- Net cash provided (used) in investing activities 9,364 (182,447) --------- --------- Cash flows from financing activities: Net borrowing (payments) under bank revolving line of credit 10,409 154,491 Net proceeds from issuance of notes payable 70,000 -- Principal payments on capital leases -- (5,831) Net Proceeds from private placement -- 125,000 Proceeds from exercise of stock options and warrants -- 31,626 --------- --------- Net cash provided (used) by financing activities: 80,409 305,286 --------- --------- Net (decrease) increase in cash and cash equivalents (47,908) 23,352 Cash and cash equivalents at beginning of the period 42,881 133,468 --------- --------- Cash and cash equivalents at end of the period ($5,027) $ 156,820 ========= ========= Supplemental cash flow Information Interest paid $ 37,566 $ 42,617 Non-Cash Financing Activity: Issuance of common stock to settle debt $ 193,362 ========= Non-Cash Operating Activity: Reduction of accounts payable through issuance of equity $ 421,840 =========
The accompanying notes are an integral part of the consolidated financial statements. 6 PART I Item 1. Financial Statements. INFORMATION ANALYSIS, INCORPORATED NOTES TO 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, 2000 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. Cautionary Statement Regarding Forward-Looking Statements This Form 10-QSB contains forward-looking statements regarding the Company's business, customer prospects, or other factors that may affect future earnings or financial results that are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. Such statements involve risks and uncertainties which could cause actual results to vary materially from those expressed in the forward-looking statements. Investors should read and understand the risk factors detailed in the Company's 10-KSB for the fiscal year ended December 31, 2000 and in other filings with the Securities and Exchange Commission. 7 Net Income Per Share Earnings per share are presented in accordance with SFAS No. 128, "Earnings Per Share." This statement requires dual presentation of basic and diluted earnings per share on the face of the income statement. Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The following is a reconciliation of the amounts used in calculating basic and diluted net income per common share.
Income Before Extraordinary Extraordianry Net Per Share Item Item Income Shares Amount ------------- ------------- ------ ------ --------- (dollars in thousands) (except per share amounts) Basic net income per common share for the nine months ended September 30, 2001: Income available to common Stockholders $(301) $228 $ (73) 9,865,056 $(0.01) *Effect of dilutive stock options Diluted net income per common Share for the nine months ended September 30, 2001: $(301) $228 $ (73) 9,865,056 $(0.01) Basic net income per common Share for the nine months ended September 30, 2000: Income available to common Stockholders $(128) $000 $(128) 9,535,635 $(0.01) *Effect of dilutive stock options Diluted net income per common Share for the nine months ended September 30, 2000: $(128) $000 $(128) 9,535,635 $(0.01) Basic net income per common share for the three months ended September 30, 2001: Income available to common Stockholders $(125) $108 $ (17) 10,087,925 $(0.00) *Effect of dilutive stock options Diluted net income per common share for the three months ended September 30, 2001: $(125) $108 $ (17) 10,087,925 $(0.00) Basic net income per common share for the three months ended September 30, 2000: Income available to common stockholders $(130) $000 $(130) 9,589,299 $(0.01) *Effect of dilutive stock options Diluted net income per common share for the three months ended September 30, 2000: $(130) $000 $(130) 9,589,299 $(0.01) * All Stock Options/Warrants are Anti-Dilutive.
8 Item 2. Management's Discussion and Analysis of Financial Condition or Plan of Operation. Three Months Ended September 30, 2001 Versus Three Months Ended September 30, 2000 Revenue IAI's revenues in the third quarter of fiscal 2001 were $1,551,078, compared to $1,385,622 in the third quarter of fiscal 2000, an increase of 12.0%. Professional services revenues were $1,456,079 versus $1,257,921, an increase of 15.8%, and product revenues were $94,999 versus $127,701 a decrease of 25.6%. Gross margin Gross margins were $465,320 or 30% of sales, in the third quarter of fiscal 2001 versus $354,697, or 25.6% of sales, in the third quarter of fiscal 2000. Of the $465,320 in 2001, $472,310 was attributable to professional services and ($6,990) was attributable to software sales. Gross margins as a percentage of sales were 32.4% for professional services and (7.3%) for software sales. In the third quarter of 2000, the Company reported gross margins of approximately 32.1% for professional services and (38.4%) for software products. Selling, General & Administrative Selling, General & Adminsitrative expenses totaled $592,638, or 38.2% of revenues, in the third quarter of 2001 versus $467,637, or 33.7% of revenues, in the third quarter of 2000, an increase in expenses of 26.7%. The increase is attributable to the Company's taking a bad debt provision for a doubtful account. Profit The Company reported an operating loss of $126,051, before an extraordinary gain in the third quarter of 2001 compared to an operating loss of $130,195 in the third quarter of 2000. 9 Nine Months Ended September 30, 2001 Versus nine Months Ended September 30, 2000 Revenue IAI's revenues in the first nine months of fiscal 2001 were $4,048,535, compared to $4,621,291 in the first nine months of fiscal 2000, a decrease of 12.4%. Professional services revenues were $3,700,823 versus $3,887,652, a decrease of 4.8%, and product revenues were $347,712 versus $733,639, a decrease of 52.6%. The decrease in software sales was mainly attributable to no sales of the Company's ICONS software tool for the first nine months of 2001, versus the first nine months of 2000. ICONS is a software toolset that is used in connection with conversions and migrations from mainframe legacy systems. Gross margin Gross margins were $1,003,720 or 24.8% of sales, in the first nine months of fiscal 2001 versus $1,363,355, or 29.5% of sales, in the first nine months of fiscal 2000. Of the $1,003,720 in 2001, $1,061,314 was attributable to professional services and $(57,594) was due to software sales. Gross margins as a percentage of sales were 28.7% for professional services and (16.5%) for software sales for 2001, versus 28.2% for professional services and 36.6% for software sales in 2000. The decrease in gross margin as a whole is attributable to no sales of the Company's ICONS software tool. Selling, General & Administrative Selling, General & Adminsitrative expenses totaled $1,282,539, or 31.7% of revenues, for the nine months ending September 30, 2001 versus $1,467,263, or 31.8% of revenues, for the nine months ending September 30, 2000, a decrease in expenses of 12.6%. The decrease is attributable to the Company's continued commitment to align Selling, General & Administrative costs to the level of its professional services and software business. Profit The Company reported an operating loss of $301,158 before an extraordinary gain in the first nine months of fiscal 2001 compared to an operating loss of $127,868 for the first nine months of 2000. In general, the net operating loss is a result of lower software sales during the first nine months of 2001, and accounting for a bad debt provision as a result of a doubtful account. Liquidity and Capital Resources Through the first nine months of 2001, the Company financed its operations from current collections and through its bank line of credit. Cash and cash equivalents at September 30, 2001 were ($5,027) compared to $156,820 at September 30, 2000. As of September 30, 2001 the Company had an outstanding balance on its line of credit of $609,000. The Company is in default with its line of credit with First Virginia Bank as a result of the Company's failure to meet certain financial tests. However, a forbearance agreement between the Company and First Virginia Bank is in effect which effectively extends the line of credit of $800,000 to November 27, 2001. The Company is in negotiations with various organizations to obtain a new line of credit. If revenue continues at curent levels the Company believes that it will derive sufficient cash flow to continue to pay all essential expenses which are required to operate the business. Any material reduction in revenue could have a material adverse effect on the Company's operational capabilities. Current operations, however, are insufficient to provide the additional working 10 capital that is necessary to repay approximately $500,000 of past due payables. The Company is in the process of negotiating with past due creditors to obtain concessions on their claims. Three creditors accepted 222,448 shares of common stock and one creditor accepted warrants for 12,000 shares of common stock in satisfaction of their claims in the amount of $187,558. The Company received $70,000 from various investors and issued three year convertable notes at 12% APR, with a conversion price of $.25 per share. The Company cannot be certain that there will not be a need for additional cash resources at some point in fiscal 2001. 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. PART II - OTHER INFORMATION Item 1. Legal Proceedings The Company is not aware of any legal proceedings against it at this time. Item 2. Changes in Securities Between July 25, 2001 and August 9, 2001 the Company issued 222,448 shares of common stock to three trade creditors, and warrants, expiring 5 years from issuance date, for 12,000 shares of common stock to one trade creditor to satisfy their claims in the aggregate amount of $187,558. The Company relied upon section 4(2) in issuing these securities without registration under the Securities Act of 1933. The Company also issued to three acredited investors $70,000 of 3 year 12% convertible notes, having a conversion price of $.25 per share. No commissions were paid in connection with the issuance of these notes. The Company relied upon section 4(2) in issuing these notes without registration under the Securities Act of 1933. Item 3. Exhibits and Reports on Form 8-K (a) See the Index to Exhibits attached hereto. (b) No reports on Form 8-K were filed for the quarter for which this report is filed. 11 SIGNATURES In accordance with the requirements of the Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Information Analysis Incorporated - --------------------------------- (Registrant) Date: November 12, 2001 By: /s/Sandor Rosenberg ----------------- ------------------- Sandor Rosenberg, Chairman of the Board and President By: /s/Richard S. DeRose -------------------- Richard S. DeRose, Executive Vice President and Treasurer 12 INDEX TO EXHIBITS
Exhibit Description Location No. 4.1 Form of 12% 3 year convertible note Filed with this Form 10-QSB 4.2 Form of Warrant issued to trade creditors Filed with this Form 10-QSB who exchanged claims for warrants.
13 EX-4.1 3 dex41.txt EXHIBIT 4.1 Exhibit 4.1 THIS NOTE, AND THE SECURITIES ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE. THIS NOTE AND ANY OF SUCH SECURITIES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT RELATING TO SUCH TRANSACTION UNDER THE ACT AND ALL OTHER APPLICABLE SECURITIES LAWS, OR PURSUANT TO AN EXEMPTION FROM THE REGISTRATION PROVISIONS OF THE ACT AND OTHER APPLICABLE SECURITIES LAWS. CONVERTIBLE SUBORDINATED NOTE $__________ September ___ , 2001 FOR VALUE RECEIVED, INFORMATION ANALYSIS INCORPORATED (the "Company"), a Virginia corporation, hereby promises to pay to the order of _________________ (the "Holder") the sum of _______________dollars ($ ). All payments to be made by the Company in repayment of principal and interest hereunder shall be made in currency of the United States of America which at the time of payment shall be legal tender for the payment of public or private debts. 1. THE NOTE. 1.1 Related Transactions. This Note is one of a duly authorized series of -------------------- Notes in the aggregate principal amount of up to $500,000 due on September 30, 2004 (the "Notes"). For purposes of this Note, the Noteholder Majority shall mean those holders of the Notes representing more than fifty percent (50%) of the outstanding balances then due under the Notes. 1.2 Place of Payment. Principal on this Note shall be payable at the offices ---------------- of the Company at 11240 Waples Mill Road, Fairfax, Virginia 22030 or at such other place as the Holder may from time to time designate in writing to the Company. 2. PAYMENTS OF PRINCIPAL AND INTEREST. 2.1 Rate of Interest. For the period from the date hereof until all sums due ---------------- hereunder, whether principal, interest, charges, fees or other sums, have been paid in full, interest shall accrue on the unpaid principal balance of this Note at the simple rate of twelve percent (12.0%) per annum. Interest on the outstanding principal balance of the Note will be computed on the basis of a 360-day year comprised of twelve 30 day months. 2.2 Mandatory Principal and Interest Payment. Commencing on March 31, 2002, ---------------------------------------- interest hereunder shall be paid semi-annually on March 31 and September 30 of each calendar year. Unless converted into shares of the Company's common stock, par value $.01 per share (the "Common Stock"), in accordance with Section 4 hereof, the total amount of principal due under this Note and all accrued and unpaid interest thereon shall be paid in a single lump sum on September 30, 2004 (herein referred to as the "Repayment Date"). 3. CONVERSION OF NOTE. 3.1 Conversion Privilege. Subject to and upon compliance with the provisions -------------------- hereof, at the option of the Holder, any or all of the principal amount and/or accrued and unpaid interest owing under this Note may be converted, in whole or in any part, into fully paid and non-assessable shares of Common Stock (the "Shares") at the Conversion Price (as defined in Section 4.2 below). 3.2 Conversion Price. The price at which shares of Common Stock shall be ---------------- issuable upon conversion of this Note (the "Conversion Price") shall be $.25 per share. 3.3 Manner of Exercise of Conversion Privilege. In order to exercise the ------------------------------------------ conversion privilege under Section 3.1 above, the Holder of this Note shall give written notice to the Company (in the form of the Conversion Notice attached hereto) that the Holder elects to convert all or a portion of this Note which notice shall also specify the amount of principal to which such conversion relates. Any such notice of conversion shall supersede the actual payment of the amount against which the conversion is to occur if such notice is received by the Company prior to 2 the actual receipt by the Holder of the payment. The conversion shall become effective on the date the notice of conversion is received by the Company, and the person or persons in whose name or names any certificate for the Shares shall be issuable upon such conversion shall be deemed to have become on said date the holder or holders of record of the Shares represented by that certificate and the Note shall be deemed cancelled as of that date. 3.4 Reorganization, Reclassification, Consolidation, Merger or Sale. If any --------------------------------------------------------------- capital reorganization or reclassification of the capital stock of the Company, or any consolidation or merger of the Company with another corporation, or the sale of all or substantially all of the assets of the Company to another corporation, or any exchange of capital stock of the Company for cash or any other securities or assets, shall be effected in such a way that holders of Shares shall be entitled to receive stock, securities, cash or assets with respect to or in exchange for Shares, then, as a condition of such reorganization, reclassification, consolidation, merger, sale or exchange, lawful and adequate provisions shall be made whereby the Holder hereof shall thereafter have the right to purchase and receive, upon the basis and upon the terms and conditions specified in this Note and in lieu of the Shares immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby, such shares of stock, securities, cash or assets as may be issued or payable with respect to or in exchange for a number of outstanding Shares equal to the number of Shares immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby had such reorganization, reclassification, consolidation, merger, sale or exchange not taken place. In any such case, appropriate provision shall be made with respect to the rights and interests of the Holder of this Note to the end that the provisions hereof (including, without limitation, provisions for adjustments of the Conversion Price) shall thereafter be applicable, as nearly as may be practicable, in relation to any shares of stock, securities, cash or assets thereafter deliverable upon the exercise hereof. 3.5 Subdivision or Combination of Stock. In case the Company shall at any ------------------------------------ time subdivide its outstanding shares of Common Stock into a greater number of shares, the Conversion Price in effect immediately prior to such subdivision shall be proportionately reduced, and conversely, in case the outstanding shares of Common Stock of the Company shall be combined into a smaller number of shares, the Conversion Price in effect immediately prior to such combination shall be proportionately increased. 3.6 Other Notices. In case at any time after the issuance of this Note: ------------- (a) the Company shall declare any dividend upon its Shares payable in shares of capital stock or make any special dividend or other distribution (other than regular cash dividends) to the holders of its Shares; (b) the Company shall offer for subscription pro rata to the holders of its Shares any additional shares of stock of any class or other rights; (c) there shall be any capital reorganization or reclassification of the capital stock of the Company, or any consolidation or merger of the Company with, or sale of all or substantially all of its assets or the sale of the patent to, another corporation; or (d) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company; then, the Company shall give, by first-class mail, postage prepaid, addressed to the Holder of this Note at the address of such Holder as shown on the books of the Company, (i) at least ten (10) days prior written notice of the date on which the books of the Company shall close or a record shall be taken for determining the holders of Shares entitled to receive a dividend, distribution or subscription right or the right to vote in respect of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, and (ii) as to (c) and (d), above, at least ten (10) days prior written notice of the date when any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up shall take place. Such notice in accordance with the foregoing clause (ii) shall specify the date on which the holders of Shares shall be entitled to exchange their shares for 3 securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, as the case may be. 3.7 Company to Provide Stock. The Company shall at all times reserve and ------------------------ keep available out of the aggregate of its authorized but unissued capital stock or its issued capital stock held in its treasury, or both, for the purpose of effecting the conversion of this Note, such number of shares of Common Stock or as shall then be issuable upon the conversion of this Note under Section 3.1, 3.3 and 3.4 hereof. The Company covenants that all shares of Common Stock issued on conversion of this Note shall be duly and validly issued and fully paid and nonassessable and free from all taxes, liens and charges with respect to the issue thereof. 3.8 Fractional Shares. No fractional Shares shall be issued upon conversion ----------------- of this Note. Instead of any fractional share which would otherwise be issuable upon conversion of this Note, the Company shall pay a cash adjustment in respect of such fractional interest in an amount equal to the portion of the then applicable Conversion Price for each share. 4. SUBORDINATION. 4.1 Subordination. The Company, for itself and its successors and ------------- assigns, covenants and agrees, and the Holder by its acceptance hereof likewise covenants and agrees, that notwithstanding any other provision of this Note, the indebtedness evidenced by this Note and the payment of the principal and interest on this Note shall be subordinated in right of payment, to the extent and in the matter hereinafter set forth, to the prior payment in full of all Senior Indebtedness (as hereinafter defined) at any time outstanding. The provisions of this Section 5 shall constitute a continuing obligation in favor of all persons who become the holders of or continue to hold Senior Indebtedness and such provisions are made for the benefit of the holders of Senior Indebtedness and such holders of Senior Indebtedness are hereby made obligees hereunder the same as if their names were written hereinafter as such and they or any of them may proceed to enforce such provisions against the Company and the Holder. 4.2 Definition of Senior Indebtedness. The term "Senior Indebtedness" --------------------------------- shall mean all (i) indebtedness of the Company for money borrowed from a bank or other commercial lender, (ii) obligations of the Company as lessee under leases of real or personal property and, in each case with respect to indebtedness under (i) or (ii), whether outstanding on the date hereof or hereafter created, or to any entity which refinances, restructures or acquires, in whole or in part, any such indebtedness of the Company, including, without limitation, all obligations of the Company for principal, interest (including post-petition interest, whether or not allowable), fees, penalties, indemnities, reimbursement obligations and expenses (including reasonable attorneys' fees) and any other amounts owing in respect of such indebtedness, for the payment of which the Company is responsible or liable as an obligor, guarantor, indemnitor, or otherwise (including, without limitation, all amounts committed or permitted to be advanced pursuant to agreements in respect of such indebtedness under which the Company is responsible or liable) and all deferrals, renewals, extensions, amendments, modifications and refundings thereof and (iii) any other indebtedness of the Company which the Company and the Noteholder Majority may hereafter agree in writing shall constitute Senior Indebtedness. Notwithstanding the foregoing, "Senior Indebtedness" shall not include indebtedness of the Company evidenced by any other notes which shall rank equally and ratably with this Note. 4.3 Payment of Senior Indebtedness. In the event of any insolvency or ------------------------------ bankruptcy proceedings under federal or state bankruptcy statutes or any receivership, liquidation, reorganization, or other similar proceedings in connection therewith, relative to the Company, or, in the event of any proceedings for voluntary liquidation, dissolution, or other winding up of the Company or distribution or marshaling of its assets or any composition with or assignment for the benefit of all or substantially all of the creditors of the Company, then and in any such event all Senior Indebtedness shall be paid in full before any payment or distribution of any character, whether in cash, securities, or other property, shall be made on account of this Note and any such payment or distribution, except for payment by means of the transfer of securities which are subordinate and junior in right of payment to the payment of all Senior Indebtedness then outstanding on terms of substantially the same tenor as this Section 5, which would, but for the provisions hereof, be payable or deliverable in respect of this Note, shall be paid or delivered directly to the 4 holders of Senior Indebtedness (or their duly authorized representatives), in the proportions in which they hold the same, until all Senior Indebtedness shall have been paid in full and the Holder, by becoming a Holder, shall have designated and appointed the holder or holders of Senior Indebtedness (and their duly appointed representatives) as its agent and attorney-in-fact to file any necessary proof of claim not otherwise filed. The original and each successor Holder of this Note, by its acceptance hereof, agrees to execute, at the request of the Company, a separate agreement with any holder of Senior Indebtedness on the terms set forth in this Section 5. 4.4 No Payment on Note under Certain Circumstances. In the event that: ---------------------------------------------- i. Any default occurs in the payment of the principal of or interest on any Senior Indebtedness and during the continuance of such default until such payment has been made or such default has been cured or waived in writing by such holder of Senior Indebtedness; ii. Any other default occurs with respect to any Senior Indebtedness and during the continuance of such default for a period of up to one hundred and twenty (120) days thereafter and thereafter if the maturity of such Senior Indebtedness has been accelerated by the holder thereof, until such acceleration has been rescinded or such default has been cured or waived; or iii. The maturity of any Senior Indebtedness is accelerated by any holder thereof because of a default with respect thereto and until such acceleration has been rescinded or said Senior Indebtedness has been paid; then, during the continuance of any of such events, the Company shall not, directly or indirectly, make any payment on account of, or transfer any collateral for, any part of the Note, and the Holder shall not demand or accept from the Company or any other person any such payment or collateral or cancel, set off or otherwise discharge any part of the Note, and neither the Company nor the Holder shall otherwise take or permit any action in violation of the terms of this subordination. Notwithstanding anything to the contrary herein, nothing herein shall be deemed at any time to delay or prohibit (a) the tender to the Company of all or a portion of the principal amount plus accrued interest of the Note to purchase equity securities of the Company, or (b) the Company from converting the principal plus accrued interest on the Note any time into equity securities of the Company. 4.5 Payments Held in Trust. In case any payment or distribution shall be ---------------------- paid or delivered to any Holder in violation or contravention of the terms of this subordination, such payment or distribution shall, upon such Holder's receipt of notice of such violation or contravention, be held in trust for and paid and delivered ratably to the holders of Senior Indebtedness. 4.6 Subrogation. Subject to the payment in full of all Senior ----------- Indebtedness and until this Note shall be paid in full, the Holder shall be subrogated to the rights of the holders of Senior Indebtedness (to the extent of payments or distributions previously made to such holders of Senior Indebtedness pursuant to the provisions of Subsections (b) and (d) of this Section 4) to receive payments or distributions of assets of the Borrower applicable to the Senior Indebtedness. No such payments or distributions applicable to the Senior Indebtedness shall, as between the Company and its creditors (other than the holders of Senior Indebtedness and the Holder), be deemed to be a payment by the Company to or on account of this Note and, for purposes of such subrogation, no payments or distributions to the holders of Senior Indebtedness to which the holder of this Note would be entitled except for the provisions of this Section 4 shall, as between the Company and its creditors (other than the holders of Senior 5 Indebtedness and the holder of this Note), be deemed to be a payment by the Company to or on account of the Senior Indebtedness. 4.7 Scope of Section. The provisions of this Section 4 are intended ---------------- solely for the purpose of defining the relative rights of the Holder, on the one hand, and holders of the Senior Indebtedness, on the other hand. Nothing contained in this Section 4 or elsewhere in this Note is intended to, or shall impair, as between the Company and its creditors (other than the holders of Senior Indebtedness and the Holder), the obligation of the Company, which is unconditional and absolute, to deliver to the Holder the principal and accrued and unpaid interest on this Note as and when the same shall become due and payable in accordance with the terms hereof, or to affect the relative rights of the Holder of this Note and creditors of the Company other than the holders of the Senior Indebtedness, nor shall anything herein prevent, as between the Company and its creditors (other than the holders of Senior Indebtedness and the Holder), the Holder from accepting any payment with respect to this Note or exercising all remedies otherwise permitted by applicable law upon default under this Note. 4.8 Survival of Rights. The right of any present or future holder of ------------------ Senior Indebtedness to enforce subordination of this Note pursuant to the provisions of this Section 5 shall not at any time be prejudiced or impaired by any act or failure to act on the part of the Company or any such holder, including, without limitation, any forbearance, waiver, consent, compromise, amendment, extension, renewal, or taking or release of security of or in respect of any Senior Indebtedness or noncompliance by the Company with the terms of such subordination regardless of any knowledge thereof such holder may have or otherwise be charged with. 4.9 Amendment or Waiver. The provisions of this Section 4 shall not be ------------------- amended or waived in any manner without the consent of the Company and of the holders of all Senior Indebtedness. 4.10 Company to Make Payment of Principal and Accrued and Unpaid Interest. -------------------------------------------------------------------- Except as provided in this Section 4, the Company shall make payment of principal and accrued and unpaid interest on this Note in accordance with its tenor. Upon any payment or distribution of assets of the Company referred to in Section 5(b), the Holder shall be entitled to rely upon a certificate of the receiver, trustee in bankruptcy, liquidating trustee. agent, or other person making any such payment or distribution for the purpose of ascertaining the person entitled to participate in such distribution, the holders of Senior Indebtedness and other indebtedness or the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon, and all other facts pertinent thereto or to this Section 5. 5. EVENTS OF DEFAULT. 5.1 Events of Default Defined. The principal and interest due and owing on ------------------------- this Note will become immediately due and payable, at the option of the Holder, if the Company shall (i) fail to make any payment of principal or interest due under this Note within forty-five (45) days when due; (ii) admit in writing its inability to pay its debts generally as they become due, (iii) file a petition in bankruptcy or petition to take advantage of any insolvency act, (iv) make an assignment for the benefit of its creditors, (v) consent to the appointment of a receiver of itself or of the whole of any substantial part of its property, (vi) on a petition in bankruptcy filed against it, be adjudicated as a bankrupt, (vii) file a petition or answer seeking reorganization or arrangement under the federal bankruptcy laws or any other applicable law or statute of the United States of America or any state thereof, or (viii) distribute any of its assets upon any dissolution, winding up, liquidation or reorganization of the Company. For purposes hereof, each of the above events is hereafter referred to as a "Event of Default". 5.2 Notification. If an Event of Default as defined above shall occur ------------ without the Holder's knowledge, the Company will notify the Holder promptly in writing by mail of the Event of Default describing it in reasonable detail, including a statement of the nature and length of existence thereof, and what action the Company proposes to take with respect thereto. 6 6. SUITS FOR ENFORCEMENT UPON DEFAULT. If an Event of Default shall have occurred, then and in any such event the Holder may, at any time at its option, declare the principal of and the accrued interest due under this Note to be due and payable, whereupon the same shall forthwith mature and become due and payable without demand, protest, notice of protest and notice of default, presentment for payment and diligence in collection, all of which are hereby expressly waived by the Company. In case any Event of Default shall occur, the Holder may proceed to protect and enforce its rights hereunder by a suit in equity, action at law or other appropriate proceeding. The Company covenants that if default be made in any payment of any principal or interest on this Note, it will pay to the Holder, to the extent permitted under applicable law, such further reasonable amount as shall be sufficient to cover the cost and expenses of collection, including reasonable compensation to the attorneys of the Holder hereof and any court costs incurred for all services rendered in that connection. In addition, until all amounts are paid in respect of a Note, interest will accrue, to the extent permitted under applicable law, on any such unpaid amounts at the rate specified herein as the rate of interest on the Note. No course of dealing and no delay on the part of the Holder in exercising any rights shall operate as a waiver thereof or otherwise prejudice its rights and no consent or waiver shall extend beyond the particular case involved. During any period of default, the conversion price set forth in Section 3.2 shall be reduced to $.10 per share. 7. NOTICES. Any request, demand, authorization, direction, notice, consent, waiver or other document permitted by this Note to be made upon, given or furnished to, or filed with the Company or the Holder shall be sufficient for every purpose hereunder if in writing and mailed to the Company, addressed to it at 11240 Waples Mill Road, Suite 400, Fairfax, Virginia 22030 (or such subsequent address as the Company shall advise the Holder hereof in writing) and if to the Holder at the address for the Holder reflected in the Company's records (or at such further address as the Holder hereof shall advise the Company in writing). All notices required hereunder shall be deemed to have been given or made when actually delivered to or received by the party to which the notice is addressed at its respective address. 8. MUTILATION, DESTRUCTION, LOSS, OR REISSUANCE. 8.1 Mutilation. This Note, if mutilated, may be surrendered and thereupon the ---------- Company shall execute and deliver in exchange therefor a new Note of like tenor and principal amount. 8.2 Destruction, Loss, Etc. If there is delivered to the Company (i) evidence ---------------------- of the destruction, loss, or theft of this Note and (ii) such security or indemnity as may be required by it to save it harmless, then, in the absence of notice to the Company that this Note has been acquired by a bona fide purchaser, the Company shall execute and deliver in lieu of such destroyed, lost or stolen Note, a new Note of like tenor and principal amount. 9. SUCCESSORS. All of the covenants, stipulations, promises and agreements in this Note contained by or on behalf of the Company shall bind and inure to the benefit of its successors whether so expressed or not and also to the benefit of the Holder and its successors. 7 10. AMENDMENT. The Noteholder Majority shall have the right to amend the provisions of all the Notes; provided, however, no such amendment shall be binding on the Holder if such amendment adversely changes the terms of payment to the Holder or reduces the rate of interest hereunder. 11. LAWS OF VIRGINIA TO GOVERN. This Note shall be deemed to be a contract made under the laws of the Commonwealth of Virginia and for all purposes shall be construed in accordance with the laws of such State. 12. TRANSFERABILITY OF NOTE. This Note and the Shares issuable upon conversion hereof are not transferable except pursuant to an effective registration statement under the Securities Act of 1933, as amended, or unless an exemption from the registration provisions of such Act is applicable. 13. HOLDER REPRESENTATION. The Holder named in this Note hereby represents and warrants to the Company that (i) such Holder is an "accredited investor" within the meaning of Regulation D under the Securities Act of 1933, as amended, (ii) no other person has a direct or indirect beneficial interest in this Note and (iii) this Note and any shares issued upon conversion hereof is being and will be acquired for investment only and not with a view to or for sale in connection with a distribution thereof and not with a view to resale. IN WITNESS WHEREOF, the Company has caused this Note to be executed in its corporate name by its duly authorized officers and to be dated as of the day and year first above written. ATTEST: INFORMATION ANALSYIS INCORPORATED __________________________ By:____________________________________ Secretary President 8 CONVERSION NOTICE ----------------- Dated: ____________ Pursuant to that certain Convertible Subordinated Note, dated ___________, 2001 in the principal amount of $__________________, the undersigned hereby irrevocably elects to exercise its right to purchase ______________ shares of the $.01 par value Common Stock of Information Analysis Incorporated, such right being and as issued to the undersigned by Information Analysis Incorporated, by converting $_____________ principal and/or interest amount under the Convertible Subordinated Note in payment for same in accordance with the Conversion Price specified in Section 3.2 of said Convertible Subordinated Note. INSTRUCTIONS FOR REGISTRATION OF STOCK Name ____________________________________________ Address ____________________________________________ ____________________________________________ (Please typewrite or print in block letters) ________________________________________ Signature 9 EX-4.2 4 dex42.txt EXHIBIT 4.2 Exhibit 4.2 THESE WARRANTS AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE. SUCH SECURITIES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED IN THE ABSENCE OF REGISTRATION UNDER SAID ACT AND ALL OTHER APPLICABLE SECURITIES LAWS, OR INFORMATION ANALYSIS INCORPORATED RECEIVES A SATISFACTORY OPINION OF COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED. WARRANT CERTIFICATE ------------------- WARRANTS TO PURCHASE SHARES OF COMMON STOCK OF INFORMATION ANALYSIS INCORPORATED Date of Issuance: __________ THIS CERTIFIES that, for value received, ________________ (the "Holder") will be entitled to purchase, subject to the provisions of this Warrant Certificate ("Warrant"), from INFORMATION ANALYSIS INCORPORATED, a Virginia corporation (the "Company"), at the price hereinafter set forth, ________ shares of the Company's $0.01 par value Common Stock as determined pursuant to Section 8 below. (All of the Company's shares of Common Stock are being hereafter referred to as "Common Stock"). This Warrant Certificate is hereinafter referred to as the "Warrant" and the shares of Common Stock issued or then issuable pursuant to the terms hereof are hereinafter sometimes referred to as "Warrant Shares". This Warrant is subject to the following terms and conditions: Section 1. Exercise: Issuance of Certificates; Payment for Shares; -------------------------------------------------------- Conversion Right. - ---------------- 1.1 Duration of Exercise of Warrant. This Warrant is exercisable at the ------------------------------- option of the Holder at any time or from time to time but not later than 5:00 p.m. (Washington, DC Time) on the Expiration Date (as set forth in Section 14) for all or a portion of the Warrant Shares which may be purchased hereunder. Such exercise shall be made by presentation to the Company of the Purchase Notice in the form attached hereto as Exhibit A along with payment of the aggregate Exercise Price for all Warrant Shares being purchased. The Company agrees that the Warrants Shares purchased under this Warrant shall be and are deemed to be issued to Holder as the record owner of such shares as of the close of business on the date on which this Warrant shall have been surrendered and payment made for such shares. Certificates for the Warrant Shares so purchased, together with any other securities or property to which Holder is entitled upon such exercise, shall be delivered to Holder by the Company's transfer agent at the Company's expense within a reasonable time after the rights represented by this Warrant have been exercised. Each stock certificate so delivered shall be in such denominations as may be requested by Holder and shall be registered in the name of Holder or such other name as shall be designated by Holder. If, upon exercise of this Warrant, fewer than all of the Warrant Shares evidenced by this Warrant are purchased prior to the Expiration Date of this Warrant, one or more new warrants substantially in the form of, and on the terms in, this Warrant will be issued for the remaining number of Warrant Shares not purchased upon exercise of this Warrant. 1.2 Conversion Right. In lieu of the payment of the Exercise Price, the ---------------- Holder shall have the right (but not the obligation), to require the Company to convert this Warrant, in whole or in part, into shares of Common Stock (the "Conversion Right") as provided for in this Section 1.2. Upon exercise of the Conversion Right, the Company shall deliver to the Holder (without payment by the Holder of any of the Exercise Price) that number of shares of Common Stock equal to the quotient obtained by dividing (x) the value of the Warrant at the time the Conversion Right is exercised (determined by subtracting the aggregate Exercise Price in effect immediately prior to the exercise of the Conversion Right from the aggregate Market Price (as hereinafter defined) for the Warrant Shares issuable upon exercise of this Warrant immediately prior to the exercise of the Conversion Right) by (y) the Market Price of one share of Common Stock immediately prior to the exercise of the Conversion Right. "Market Price" shall mean the Stock Price (as defined below) obtained by taking the average over a period of thirty consecutive trading days ending on the second trading day prior to the date of determination. As used in this paragraph, the term Stock Price shall mean (A) the mean, on each such trading day, between the high and low sale price of a share of Stock or if no sale takes place on any such trading day, the mean of the closing bid and lowest closing asked prices therefor on any such trading day, in each case as officially reported on all national securities exchanges on which the Common Stock is then listed or admitted to trading, or (B) if the Common Stock is not then listed or admitted to trading on any national securities exchange, the closing price of the Common Stock on such date, or (C) if no closing price is available on any such trading day, the mean between the highest and lowest closing bid prices thereof on any such trading date in the over-the-counter market as reported by NASDAQ, (D) if the Common Stock is not then quoted in such system, the mean between the highest and lowest bid prices reported by the market makers and dealers for the Common Stock listed as such by the National Quotation Bureau, Incorporated or any similar successor organization, or (E) the higher of the last bona fide sale made by the Company and the fair market value of the Common Stock as determined by the Board of Directors in its good faith judgment. 1.3 Exercise of Conversion Right. The conversion rights provided under ---------------------------- Section 1.2 hereof may be exercised in whole or in part and at any time and from time to time while any Warrants remain outstanding. In order to exercise the conversion privilege, the Holder shall surrender to the Company, at its offices, this Warrant accompanied by a duly completed Notice of Conversion in the form attached hereto as Exhibit B. The presentation and surrender shall be deemed a waiver of the Holder's obligation 2 to pay all or any portion of the aggregate Exercise Price payable for the Warrant Shares issuable upon exercise of this Warrant. This Warrant (or so much thereof as shall have been surrendered for conversion) shall be deemed to have been converted immediately prior to the close of business on the day of surrender of such Warrant for conversion in accordance with the foregoing provisions. As promptly as practicable on or after the conversion date, the Company shall issue and shall deliver to the Holder (i) a certificate or certificates representing the largest number of whole shares of Common Stock to which the Holder shall be entitled as a result of the conversion and (ii) if the Warrant is being converted in part only, a new warrant in principal amount equal to the unconverted portion of this Warrant. If this Warrant is executed in whole, in lieu of any fractional shares of Common Stock to which the Holder shall be entitled, the Company shall pay to the Holder the cash equivalent thereof based upon the Market Price. Section 2. Reservation of Shares. The Company hereby covenants that at all --------- --------------------- times during the term of this Warrant there shall be reserved for issuance such number of shares of its Common Stock as shall be required to be issued upon exercise of this Warrant. Section 3. Fractional Shares. This Warrant may be exercised only for a whole --------- ----------------- number of shares of Common Stock, and no fractional shares or scrip representing fractional shares shall be issuable upon the exercise of this Warrant. Section 4. Assignment of Warrant. This Warrant, any of the Warrants, and the --------- --------------------- shares of Common Stock issuable hereunder shall not be sold, offered for sale, pledged, hypothecated, or otherwise transferred in the absence of registration under the Act and other applicable securities laws or the Company's receipt of an opinion of counsel satisfactory to the Company that such registration is not required. Upon such transfer or assignment of this Warrant, the Holder shall surrender this Warrant to the Company with the Assignment Form in the form annexed hereto duly executed and with funds sufficient to pay any transfer taxes, and the Company shall cancel this Warrant, and without charge, shall execute and deliver a new Warrant of like tenor in the name of the assignee entitling such assignee to all rights and interests of its assignor at the time of assignment of this Warrant. Section 5. Loss of Warrant. Upon receipt by the Company of evidence --------- --------------- satisfactory to it of the loss, theft, or destruction of this Warrant, and of indemnification satisfactory to it, or upon surrender and cancellation of this Warrant, if mutilated, the Company will execute and deliver a new Warrant of like tenor and date. Section 6. Rights of the Holder. No provision of this Warrant shall be --------- -------------------- construed as conferring upon the Holder hereof the right to vote, consent, receive dividends or receive notice other than as herein expressly provided in respect of meetings of stockholders for the election of directors of the Company or any other matter whatsoever as a stockholder of the Company. No provision hereof, in the absence of affirmative action by the Holder hereof to purchase Warrant Shares, and no enumeration herein of the rights or privileges of the Holder hereof, shall give rise to any liability of such Holder for the purchase price 3 of any Warrant Shares or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company. Section 7. Exercise Price. The Exercise Price for each Warrant Share shall --------- -------------- be $______ per share; provided if the Company shall subdivide by stock split or stock dividend its outstanding shares of Common Stock, the Exercise Price then existing hereunder shall proportionately decrease and if the Company shall combine its outstanding shares of Common Stock, the Exercise Price then existing hereunder shall proportionately increase. Section 8. Number of Warrant Shares. This Warrant shall be exercisable, in --------- ------------------------ accordance with the terms hereof, for ______ shares of Common Stock; provided if the Company shall subdivide by stock split or stock dividend its outstanding shares of Common Stock, the Warrant Shares then issuable hereunder shall proportionately increase and if the Company shall combine its outstanding shares of Common Stock, the Warrant Shares then issuable hereunder shall proportionately decrease. Section 9. Certain Distributions. In case the Company shall, at any time, --------- --------------------- prior to the Expiration Date set forth in Section 14 hereof, make any distribution of its assets to holders of its Common Stock as a partial liquidation distribution or by way of return of capital, other than as a dividend payable out of earnings or any surplus legally available for dividends, then the Holder upon the exercise of this Warrant in whole or in part in accordance with its terms and prior to such distribution, as herein provided, after the date of record for the determination of those holders of Common Stock entitled to such distribution of assets, shall be entitled to receive, in addition to the shares of Common Stock issuable on such exercise, the amount of such assets (or at the option of the Company a sum equal to the value thereof at the time of such distribution to holders of Common Stock as such value is determined by the Board of Directors of the Company in good faith), which would have been payable to the Holder had it been the holder of record of such shares of Common Stock on the record date for the determination of those holders of Common Stock entitled to such distribution. 4 Section 10. Dissolution or Liquidation. In case the Company shall, at any ---------- -------------------------- time prior to the Expiration Date set forth in Section 14 hereof, dissolve, liquidate or wind up its affairs, the Holder shall be entitled, upon the exercise of this Warrant in whole or in part in accordance with its terms and prior to any such distribution in dissolution or liquidation, to receive on such exercise, in lieu of the shares of Common Stock which the Holder would have been entitled to receive, the same kind and amount of assets as would have been distributed or paid to the Holder upon any such dissolution, liquidation or winding up, with respect to such shares of Common Stock had the Holder been the holder of record of such share of Common Stock on the record date for the determination of those holders of Common Stock entitled to receive any such liquidation distribution. Section 11. Reclassification, Reorganization or Merger. In case of any ---------- ------------------------------------------ reclassification, capital reorganization or other change of outstanding shares of Common Stock of the Company (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of an issuance of Common Stock by way of dividend or other distribution or of a subdivision or combination), or in case of any consolidation or merger of the Company with or into another corporation (other than a merger with a subsidiary in which merger the Company is the continuing corporation or which does not result in any reclassification, capital reorganization or other change of outstanding shares of Common Stock of the class issuable upon exercise of this Warrant), the Company shall cause effective provision to be made so that the Holder shall have the right thereafter by exercising this Warrant in accordance with the terms hereof, to purchase the kind and amount of shares of stock and other securities and property receivable upon such reclassification, capital reorganization or other change, consolidation or merger, by a holder of the number of shares of Common Stock which might have been purchased upon exercise of this Warrant immediately prior to such reclassification, change, consolidation or merger. Any such provision shall include provision for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Warrant. The foregoing provisions of this Section 11 shall similarly apply to successive reclassifications, capital reorganizations and changes of shares of Common Stock and to successive consolidations and mergers. In the event that in any such capital reorganization or reclassification, consolidation or merger, additional shares of Common Stock shall be issued in exchange, conversion, substitution or payment, in whole or in part, for or of a security of the Company other than Common Stock, any amount of the consideration received upon the issue thereof being determined by the Board of Directors of the Company shall be final and binding on the Holder. Section 12. Incidental ("Piggyback") Registration Rights. ---------- -------------------------------------------- 12.1 Notice and Participation. If the Company at any time proposes to ------------------------ register any of its Common Stock for sale to the public (except with respect to registration statements on Forms S-4, S-8, any forms replacing such forms, or any other form not available for registering shares of Common Stock for sale to the public), each such time it will give written notice to the Holder of its intention so to do. Upon the written request of the Holder, given within 15 days after receipt of any such notice, to register any of 5 the Holder's shares (the "Shares") of Common Stock purchased upon exercise of this Warrant (which request shall state the intended method of disposition thereof), the Company will use its best efforts to cause the Shares as to which registration shall have been so requested to be included in the securities to be covered by the registration statement proposed to be filed by the Company, all to the extent requisite to permit the sale or other disposition by the Holder (in accordance with its written request) of such Shares so registered. No request shall be made under this Section 12 in connection with any registration of Common Stock in connection with a merger or acquisition transaction unless such transaction is accompanied by an offering through which the Company is seeking to obtain cash proceeds through the sale of Common Stock or other securities convertible or exercisable for Common Stock. In the event that any registration pursuant to this Section 12 shall be, in whole or in part, an underwritten public offering of Common Stock, any request by the Holder pursuant to this Section 12 to register Shares shall specify that either (i) such Shares are to be included in an underwriting on the same terms and conditions as the shares of Common Stock otherwise being sold through underwriters under such registration, or (ii) such Shares are to be sold in the open market without any underwriting, on terms and conditions comparable to those normally applicable to offerings of common stock in reasonably similar circumstances. If, in connection with any registration under this Section 12, the managing underwriters advise the Company in writing that in their opinion the number of securities requested to be included in such registration exceeds the number which can be sold in an orderly manner in such offering within a price range acceptable to the Company, the Company will include in such registration (i) first, the securities the Company proposes to sell, (ii) second, the Restricted Stock (as such term is defined in that certain Registration Rights Agreement, dated February 27, 1997, by and between the Company and the Investors named therein), requested to be included in such registration, pro rata among the holders of such Restricted Stock on the basis of the number of shares requested to be registered by each such holder, (iii) third, the Shares requested to be registered by the Holder, and (iv) fourth, other securities requested to be included in such registration. Notwithstanding anything to the contrary contained in this Section 12, in the event that there is a firm commitment underwritten offering of securities of the Company pursuant to a registration covering any shares of Common Stock and the Holder does not sell the Holder's Shares to the underwriters of the Company's securities in connection with such offering, the Holder shall refrain from selling such Shares so registered pursuant to this Section 12 during the period of distribution of the Company's securities by such underwriters and the period in which the underwriting syndicate participates in the after market; provided, -------- however, that the Holder shall, in any event, be entitled to sell its Shares in - ------- connection with such registration or otherwise commencing on the 180th day after the effective date of such registration statement. The Company agrees to keep any registration statement filed under this Section 12 current and effective for a period of not less than nine (9) months. 12.2 Expenses. All expenses incurred by the Company in complying with -------- Section 12 hereof, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of 6 counsel and independent public accountants for the Company, fees of the National Association of Securities Dealers, Inc., transfer taxes, fees of transfer agents and registrars, costs of insurance and the fees and expenses of counsel for the Company, but excluding any Selling Expenses, are herein called "Registration Expenses". All underwriting discounts and selling commissions applicable to the sale of Shares are herein called "Selling Expenses". The Company will pay all Registration Expenses in connection with each registration statement filed pursuant to Section 12 hereof. In connection with each registration statement filed pursuant to Section 12 hereof, the Holder will pay all Selling Expenses directly related to the Holder's Shares. Section 13. Notices to Warrant Holder. In case the Company shall, at any ---------- ------------------------- time prior to the Expiration Date set forth in Section 14 hereof, (i) pay any dividend or make any distribution upon the shares of its Common Stock, or (ii) offer to the holders of Common Stock for subscription or purchase by them any shares of stock of any classes or any other rights, or (iii) if any capital reorganization of the Company, reclassification of the Common Stock of the Company, consolidation or merger of the Company with or into another corporation, or voluntary or involuntary dissolution, liquidation or winding up of the Company shall be affected, then, in any such case, the Company shall cause to be delivered to the Holder, at least 10 days prior to the date specified in (a) or (b) below, as the case may be, a notice containing a brief description of the proposed action and stating the date on which (a) a record is to be taken or the stock transfer books of the Company are to be closed for the purpose of determining the stockholders entitled to receive such dividend, distribution or rights, or (b) a record is to be taken or the stock transfer books of the Company are to be closed for the purpose of determining the stockholders entitled to exchange their shares of Common Stock for securities or other property deliverable upon such reclassification, reorganization, consolidation, merger, dissolution, liquidation or winding up. Section 14. Expiration Date. The Warrant shall terminate on the Expiration ---------- --------------- Date and may not be exercised on or after such date. The Expiration Date shall be five years from the issuance date of this Warrant. 7 Section 15. Applicable Law. This Warrant shall be construed in accordance ---------- -------------- with the laws of the Commonwealth of Virginia. Attest: INFORMATION ANALYSIS INCORPORATED _________________________ By:___________________________ Richard S. DeRose, Secretary Sandor Rosenberg, President 8 ASSIGNMENT FORM --------------- Dated:__________________ For value received_____________________ hereby sells, assigns and transfers unto Name____________________________________________________________ (Please typewrite or print in block letters) Address_____________________________________________________ and appoints________________________________________________________________________ Attorney to transfer the said Warrant on the books of the within named Company with full power of substitution in the premises. Signature________________________________ 9 PURCHASE NOTICE --------------- The undersigned hereby irrevocably elects to exercise its right to purchase _________ shares of the $0.01 par value Common Stock of Information Analysis Incorporated, such right being pursuant to a Warrant dated _____________, 200_, and as issued to the undersigned by Information Analysis Incorporated, and remits herewith the sum of $_________ in payment for same in accordance with the Exercise Price specified in Section 7 of said Warrant. INSTRUCTIONS FOR REGISTRATION OF STOCK Name___________________________________________________________ Address________________________________________________________ (Please typewrite or print in block letters) Signature_______________________________ EXHIBIT A 10 EXHIBIT B NOTICE OF CONVERSION (To be executed upon exercise of Warrant pursuant to Section 1.3) The undersigned hereby irrevocably elects to surrender its Warrant for such Warrant Shares pursuant to the conversion right provisions of the within Warrant, as provided for in Section 1 of such Warrant. Please issue a certificate or certificates for such Warrant Shares in the name of, and pay cash for fractional shares pursuant to Section 4.3 of the Warrant. Name:___________________________________________ (Please Print Name, Address and Social Security No.) Address:________________________________________ ________________________________________ ________________________________________ Social Security No.:____________________________ Signature:______________________________________ NOTE: The above signature should correspond exactly with the name on the first page of this Warrant or with the name of the assignee appearing in the assignment form below. And if said number of shares shall not be all the shares exchangeable or purchasable under the within Warrant, a new Warrant is to be issued in the name of the undersigned for the balance remaining of the Warrant Shares purchasable thereunder. 11 -----END PRIVACY-ENHANCED MESSAGE-----