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DRAFT JULY 20, 1999
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 28594
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS
UNDER SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
H-Quotient, Inc.
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(Name of Small Business Issuer in its charter)
Virginia 54-1947753
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(State of jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
12030 Sunrise Valley Drive, Suite 205, Reston, VA 20191
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (703) 716-0100
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Securities to be registered under Section 12(b) of the Act;
Title of each class Name of each exchange on which
to be so registered each class is to be registered
_____________________________________ ______________________________
_____________________________________ ______________________________
Securities to be registered under Section 12(g) of the Act:
Common Stock
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(Title of class)
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(Title of class)
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TABLE OF CONTENTS
PART I
PAGE
Item 1 Description of Business 4
Item 2 Management's Discussion and Analysis
of Financial Condition and Results of Operations 30
Item 3 Description of Property 39
Item 4 Security Ownership of Certain Beneficial Owners and Management 40
Item 5 Directors, Executive Officers, Promoters and Control Persons 41
Item 6 Executive Compensation 43
Item 7 Certain Relationships and Related Transactions 44
Item 8 Description of the Company's Securities 44
PART II
Item 1 Market Price of and Dividends on the Registrant's
Common Equity and Other Shareholder Matters 48
Item 2 Legal Proceedings 49
Item 3 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 51
Item 4 Recent Sales of Unregistered Securities 51
Item 5 Indemnification of Directors and Officers 55
FINANCIAL STATEMENTS
See attached Financial Statements
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EXHIBIT INDEX
All of the exhibits marked with an asterisk are incorporated herein by reference
to a Regulation Form 1-A Offering Statement of the Integrated Healthcare
Systems, Inc. (our predecessor corporation) filed on Form 1-A under the
Securities Act of 1933 (File No. 24 3450).
Exhibit
Number Description
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3.1* Copy of the Certificate of Incorporation of the predecessor
corporation under the name of Travel Technologies International,
Inc.
3.2* Copy of Restated Certificate of Incorporation of the predecessor
corporation, which among other things changes its name to Traverse
Technologies, Inc.
3.3* Copy of Amendment to the Restated Certificate of Incorporation,
which among other things changes the name of the predecessor
corporation to Integrated Healthcare Systems, Inc.
3.4 Copy of the Certificate of Renewal of Integrated Healthcare
Systems, Inc. as filed with the State of Delaware
3.5* Copy of the By-Laws of the predecessor corporation
3.6 Copy of the Certificate of Incorporation of IHS of Virginia, Inc. a
wholly owned subsidiary.
3.7 Copy of the Certificate of Renewal of the IHS of Virginia, Inc as
filed with the State of Delaware
3.8 Copy of the By-Laws of IHS of Virginia, Inc.
3.9 Copy of the Articles of Incorporation our Company as filed with the
State of Virginia on May 20, 1999
3.10 Plan of Merger between IHS and the Company effective June 14, 1999.
3.11 Articles of Merger effective June 14, 1999 as filed with the State
of Virginia
3.12 Agreement of Merger as filed with State of Delaware
3.13 Copy of the By-Laws of the Company
4.1 Form of Certificate evidencing shares of Common Stock of the
Company.
4.2 Warrant Certificate for 325,000 warrants issued to the Steven W.
Bingaman 1996 Trust.
4.3 Warrant Certificate for 40,000 warrants issued to Asset Growth
Partners, Inc.
4.4 Warrant Certificate for 50,000 warrants issued to Mark Wachs
4.5 Warrant Certificate for 1,190,000 warrants issued to Aesop Financial
Corporation together with Assignment thereof to Appleby Partners,
Ltd.
4.6 Form of 1995 Redeemable Bridge Warrants
4.7 Form of Warrant Certificates issued to Investors, Placement Agents
and Investment Banker in 1997 and 1998
4.8 Form of Warrant Certificates issued to management executives, and
consultants
4.9 Form of Class A Redeemable Common Stock Purchase Certificate
4.10 Warrant Agreement between the Company and the Warrant Agent covering
the Class A Common Stock Warrants
10.1 Form of Software License and Support Agreement
10.2 Form of Licensed Software Agreement
10.3 Form of Software Maintenance Agreement
10.4 Form of DataQual(R) for Windows and I-Link(sm) Upgrade Addendum
10.5 (a) Form of Executive Employment Agreement
(b) Forms of Employment for key Employees
10.6 Sublease Agreement dated as of May 21, 1999
21.1 Subsidiaries of Registrant
23.1 Consent of Kaufman Davidson PC
27.1 Financial Data Schedule (To be prepared by Company and accountants
according to Regulation SB, Item 601(C) (3) Appendix A)
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Organization and Historical Background
H-Quotient, Inc. is a Virginia corporation, incorporated on May 20,
1999, and is the successor by merger to Integrated Healthcare Systems, Inc.
("IHS") which was a Delaware corporation organized in 1993 under the name of
Travel Technologies International, Inc. Our business, which we acquired from IHS
through the merger, is the designing, development, selling and maintenance of
computer software systems for the monitoring of patient care in hospitals.
Our business and assets were owned and operated by IHS until June 14,
1999 the effective date of the merger. Our principal products consist of
DataQual(R), which includes I-Link(sm) and I-Link(sm) Enterprise, which includes
the Central Data Repository. DataQual is a software system designed to capture
information on quality of care, risk management, costs and other aspects
relating to the management of patients in hospitals. DataQual's companion
product, I-Link(sm), an interface engine, is designed to interconnect and
extract data from any and all hospital information systems in the hospitals.
I-Link(sm) Enterprise is a system of servers installed on a hospitals local area
network (LAN), which acts as an intelligent node on a wide area network, to
extract, cleanse, group and map hospital wide data. This data is then
transmitted over an Intranet/Virtual Private Network to a Central Data
Repository. We believe there is a great need in the healthcare industry for
products of this type, and we intend to exploit that need.
Industry Background
Managed healthcare is having a significant impact on the $1 trillion
healthcare industry, and this impact will, in our view, increase in the coming
years. There is tremendous ongoing pressure to contain costs, which is changing
the structure of healthcare payment from traditional fee for service
reimbursement to contract care reimbursement such as "capitation". This, in
turn, is creating a demand for the continuing analysis and reporting of clinical
treatments and their expected outcomes.
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To implement a program of payment based on medical outcomes, patients
must be tracked on a continuous basis, and data must not be just stored in a
folder, but be available in a readily available, flexible digital form. This
permits monitoring of procedures used in patient treatment and the costs and
results of those procedures. While the last ten years has brought a dramatic
improvement in medical technology, there has yet to emerge a comprehensive
electronic information system providing a single accessible set of records of a
patient's care to the hospital. The result is inefficiency, lack of coordination
and, at times, danger to the patient.
Information on patient treatments must be made accessible to doctors,
nurses and other medical decision-makers in a format that will help them to do
their jobs. This kind of clinical decision support requires the compilation and
integration of data from many sources within and outside the hospital. We
believe that this need will move hospitals to turn to more sophisticated and
comprehensive computer-based solutions to assist in the medical management
process.
The increased demand for integrated information concerning patient care
has already made itself felt. The Joint Commission on Accreditation of
Healthcare Organizations ("JCAHO"), the principal national accreditation
organization for hospitals, and other private and government accrediting
organizations is requiring increased availability of information on such matters
as the verification of physician credentials, quality improvement, risk
management, access to medical records and infection control. The JCAHO has
coupled these increasingly stringent quality control standards with a demand for
delivery of information through electronic filings. To meet these demands,
hospitals are being forced to devote far greater attention and resources to
their data gathering and reporting programs concerning the delivery of quality
care than they have in the past.
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According to the American Hospital Association, there are now
approximately 5,200 hospitals in the United States, which represents our primary
market focus.
Our Business Strategy
We hope to capitalize on the ever-increasing demand in the healthcare
industry for improved patient information by becoming a leading provider of
software information products and services to the industry. We intend to
concentrate at this time on the acute care hospital market, which constitutes
over 60% of the existing market for patient care information delivery software.
Our strategy includes the following key elements:
o Continue sales and installation of DataQual with the I-Link interface
engine and provide enhancements of those products through additional
research and development.
o Continue sales and installation of I-Link Enterprise and the Central Data
Repository and enhancements of this product through additional research and
development.
o Expanded marketing of these products through direct implementation
contracts and joint marketing agreements with additional hospital
associations and others, as well as the expansion of our direct sales
efforts focused on individual and groups of hospitals.
o Maintenance of our existing client base by providing support, software
upgrades and consulting services.
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o Expansion of our operations through strategic merger and acquisitions.
In our attempts to implement this business strategy, we are presently
forced to operate at a substantial disadvantage through our lack of resources.
We have a small staff, consisting of only 15 persons, to perform all of the
varied functions in our operations, including the continued development of
DataQual with I-Link interface engine and I-Link Enterprise with its Central
Data Repository, as well as our other software products. We additionally must:
continue the marketing of these products to existing customers and future
customers; the installation of the products in newly licensed facilities; and,
the maintenance and updating of systems already installed.
We also are suffering from a severe working capital shortage, amounting
to a negative working capital position of $3,744,699 at March 31, 1999. This has
resulted in delays in the full implementation of our marketing, design and
development and installation activities and will continue to do so until such
time as additional funds can be provided.
Notwithstanding these drawbacks, we feel that we have a great
opportunity to rapidly expand our operations if we can find the additional
financing and resources needed to do so.
Products
DataQual
DataQual is a modular healthcare system that can supply many of a
hospital's quality and risk management and analytical and reporting needs. Built
around the DataQual Data Repository, a relational database that runs stand-alone
or on local area networks (LANs) at the hospital, the system can gather data
from all information systems in a hospital, via the I-Link interface engine.
DataQual then integrates this data with pertinent quality and risk management
data, does sophisticated analysis, and provides reports on hospital performance
and improvement issues, in either paper or electronic form.
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The DataQual System runs on an included Windows NT PC server in a stand
alone or networked mode. This Windows NT PC server can be supplied in various
configurations, allowing it to economically meet the hospital quality
improvement and risk management needs of many different size institutions.
DataQual's modular technology allows smaller hospitals to buy the sub-systems or
modules they need and add more as their needs change or their budget allows. The
system is an integrated, standards-based technology highly adaptable to changing
demands.
Additionally, the DataQual system can take the hospitals sophisticated
quality and risk information that has been privacy formatted and send it, using
I-Link Enterprise, over a private Internet/Intranet/Virtual Private Network to a
our Central Data Repository at their affiliated healthcare group, to a
state-wide healthcare association and/or to an insurance company for performance
measurement and statistical analysis purposes.
The DataQual system is composed of several modular systems and sub-systems:
DataQual - Quality Improvement System (QIS)
DataQual - Risk Management System (RMS)
I-Link interface engine
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DataQual - (QIS)
DataQual QIS is a Windows-based, fully integrated software system,
which gathers and reports data on the quality of care delivered. The system
automates one of the most labor-intensive aspects of a hospital's operation:
data collection, assessment, tracking and reporting. DataQual QIS tracks the
entire quality improvement process from data collection, through data analysis
and problem identification to final problem resolution. The major modules
available with the DataQual QIS System are:
Quality Improvement
Staff Credentialing
Utilization Management
Infection Control
Each module is priced and installable independently. This allows a
hospital to configure the system according to their initial quality improvement
requirements and then add other function system modules as they grow or as the
need arises. The system provides vital quality of care data to hospital
management and affiliated outside organizations for comparative analysis of
quality against costs in an era of great concern for the total quality of the
delivery of healthcare.
DataQual - (RMS)
Tracking, comparing, reporting and evaluating the factors related to a
liability risk occurrence, incident or claim within or across hospitals is the
function performed by the DataQual Risk Management System (RMS). RMS brings
integrated occurrence, incident and claims tracking from hospital or groups of
hospitals through insurance carrier. RMS integrates into one unified risk
management system: risk management, staff credentialing, worker's compensation
features, quality monitoring and adjustment, and a risk data repository. By
capturing and tracking occurrences and incidents prior to becoming claims, a
hospital and its insurance carrier can identify the steps needed to improve the
quality of care delivered and, therefore, reduce risk occurrences and costs.
This process improvement can have dramatic effects on the delivery of healthcare
and provide significant cost savings.
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After risk related data capture at the hospital, DataQual- RMS can
feed information, using I-Link Enterprise, via an Internet/Intranet/Virtual
Private Network into a Central Data Repository focused on risk, where risk
information analysis and reporting is performed. This analysis can incorporate
other hospitals privatized data and be shared with the hospitals to additionally
reduce the risks associated with delivering cost-effective, quality healthcare.
The DataQual Risk Management System runs on an included Windows NT PC
server in a stand-alone or networked mode. It also is available with the I-Link
interface engine, which provides non-invasive data connectivity and data
interchange with any number of disparate hospital information systems available
in the hospital. With I-Link in place, the entire spectrum of staff, patient and
visitor information is made available for context analysis and reporting by the
Risk Management System. The RMS thus provides a unified and cost effective
hospital Risk Management System.
I-Link interface engine
I-Link interface engine connects the DataQual quality and risk hospital
based data repositories with the disparate mainframe and client/server systems
in most hospitals, including the new automated patient records systems. This
recently redesigned interface engine is a non-invasive, intelligent software
module adhering to and complying with the healthcare industry standards for
electronic data interchange. I-Link is a sophisticated data capture tool, which
transfers data between disparate software applications, regardless of software
languages, operating systems or hardware platforms to the DataQual System.
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We can customize I-Link to automatically query any hospital system for
the specific data required and then send that data to the hospital DataQual data
repository. I-Link creates an interface link without invading or altering host
applications and without the need to know an application's software source code,
file layouts or structures. The use of parameter driven tools improves the
interface engine ease of configuration and use when compared with other
interface systems available in the market. I-Link is designed to fully address
and resolve a broad range of real-time interface requirements within a hospital
environment.
We believe that if combined, DataQual QMS, DataQual RMS, and the I-Link
interface engine can meet the overall quality and risk data analysis and
reporting needs of hospitals and affiliated organizations.
I-Link Enterprise
The I-Link Enterprise system automates the collection of real time
hospital clinical information, including DataQual quality and risk information,
and sends it via an Internet/Intranet based "virtual private network", to a
Central Data Repository healthcare database. This virtual network, which uses an
expanded version of our I-Link interface engine, changes manual service bureau
healthcare systems, which only collect hospital billing data, into on-line,
source data collection systems for groups of hospitals, hospital association
members or insurance company client hospitals.
In-patient and outpatient clinical and quality and risk data is
collected, corrected, encrypted and sent, using I-Link Enterprise, to a client
Central Data Repository. Access to the data is then provided to affiliated
hospital to facilitate performance improvement and measurement strategies. Prior
information collection methods utilized billing data, which are many months to
years old. This timely, very accurate tactical information, which has not yet
been transmuted into billing data, then becomes extremely useful strategic
information for all of the affiliated hospitals to use.
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-I-Link Enterprise's- Central Data Repository
I-Link Enterprise is used to first gather, cleanse and map data and
then populate remote Central Data Repositories with this hospital information
via a private and secure Internet/Intranet/Virtual Private Network. The
sophisticated, detailed and timely hospital information is privacy formatted
prior to sending to the Central Data Repository. These repositories can be
configured to contain information as simple as liability risk incidents, up to
one containing timely, complete detailed hospital clinical, administrative and
financial information, including the DataQual quality and risk data. These
I-Link Enterprise Central Data Repositories are used by hospital groups,
affiliated statewide hospital organizations including hospital associations and
insurance carriers, for performance improvement measurement and statistical
analysis purposes.
Installation and Training
Installation includes system design, file creation, system
implementation, training, consulting and system start-up. Our installation and
training procedures are designed to instruct the hospital client in data entry,
report generation and retrieval. Our operations group finalizes the testing and
system acceptance by the client. Client training is conducted at the client site
and includes up to a proportionate number of initial product training days,
depending on the system and modules purchased.
Support and Maintenance
We provide software maintenance, system design, consulting,
installation, training and support for all of our software products. Support
teams, which include quality improvement nurses, registered nurses,
communications and software technicians and program developers assist customers
throughout the course of their relationship with us. We also provide toll free
telephone and on-site support. Software maintenance is provided to all of our
customers. Along with telephone and on-site support, software enhancements are
included under license contracts. Customer support personnel are available to
answer questions and solve operational difficulties, the customer support group
works closely with the field support personnel to solve client problems on-site.
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Sales and Marketing
We generate sales opportunities through referrals, direct association
marketing, industry specific seminars, and trade conventions. Our sales staff
calls on potential clients to demonstrate the system and attempts to bring
software sales to closure.
To date, we have focused our marketing efforts on hospital associations
in the United States, and selected referral opportunities. We intend to continue
our current marketing efforts, however, no assurance can be given that we will
be able to generate sufficient funds from our operations to enable us to
undertake such activities on an expanded basis.
Management believes, based upon information received from JCAHO, that
healthcare providers' aims for continuous quality improvement and total quality
management increasingly will not be limited to hospitals. Given this market
trend, management intends, given appropriate resources, to market the DataQual
System to not only the hospital market segment but also to ambulatory care
centers, healthcare networks, in-home care agencies, independent practice
associations and clinics and long-term care facilities. We have in the past,
sponsored an annual national user conference, which includes seminars and
training for DataQual System users. Management believes it will continue
sponsoring these conferences.
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Customers
We have installed the DataQual System in over 100 public and privately
owned hospitals and currently support approximately 40 hospitals that use our
systems. In addition, we have installed DataQual Systems in 29 states including
Puerto Rico. Our client base ranges in bed size from 30 to over 1,500 beds.
We market our products and services to substantially all major
hospitals, regardless of specialties. We believe that the DataQual System,
including the I-Link interface engine and the I-Link Enterprise system,
including the Central Data Repository, provides the flexibility required for
installation in most hospitals. We further believe that increasing portions of
our sales are likely to be made in hospitals with 400 beds or less and to
hospital networks, both urban and rural. Our customers include medical teaching
centers, government hospitals and large hospital groups.
Recent Large Contract Awards
In the first quarter of 1999 we were awarded a number of contracts to
automate the collection of clinical healthcare information from hospitals
throughout a state. The largest is a statewide, five-year $3.1 million contract
with the Ohio Hospital Association ("OHA") to automate the collection, by OHA's
The Association for Hospitals and Health Systems, of its 1999 hospital clinical
information via an Internet/Intranet based "virtual private network", to a
statewide Central Data Repository healthcare database. I-Link Enterprise, which
uses this virtual private network, changes a batch hospital service bureau
system, collecting billing data, into an on-line, data collection system for 189
statewide member hospitals.
In-patient and outpatient clinical data is collected, corrected,
encrypted and sent, using I-Link Enterprise, to a Central Data Repository server
at OHA. Access to the data is then provided by OHA to its hospital members to
facilitate performance measurement strategies. Prior information collection
methods utilized billing data, which were many months to years old. This timely,
very accurate tactical information, which has not yet been transmuted into
billing data, then becomes extremely useful strategic information for all of the
hospitals in the state to use.
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This agreement followed two other contracts with OHA. One to conduct
the pilot phase of the 1999 Data Collection System, which was successfully
completed, and one to process their 1998 data, which is currently in process.
The second contract awarded, projected to be in excess of $1 million,
is to automate the collection of hospital risk incidents and to then implement a
centralized risk management and quality improvement system for the member
hospitals of the Alabama Hospital Association Trust (AHAT).
This project creates an Internet/Intranet/Virtual Private Network based
risk management and quality improvement healthcare data collection system for 85
statewide hospitals. This will create the first statewide, Internet-based
healthcare risk and quality data collection and management system of its kind.
With this system, we are transforming a statewide manual, risk data submission
process into a fully automated one, extending on into a system utilizing
DataQual to provide full quality improvement and measurement.
The AHAT system uses I-Link Enterprise to collect hospital wide data
along with DataQual risk and quality data, encrypt the data and then transmit
the data to a Central Data Repository used as a management data warehouse. This
system utilizes the processes and technology developed for the OHA system to
create a unified approach to data collection and information integration. By
providing AHAT and its member hospitals with Internet access to a statewide,
central source of timely risk event and quality improvement information, we are
producing a significant increase in the hospitals querying, tracking, reporting
and improvement capabilities. This combination of I-Link Enterprise and the
DataQual System gives the AHAT members extensive tools to improve the delivery
of healthcare throughout the State of Alabama.
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We also have signed two comprehensive marketing agreements with state
hospital associations. The first is with the Center for Health Affairs, Inc., a
wholly owned subsidiary of the New Jersey Hospital Association. Under the
agreement, the Princeton-based Center for Health Affairs will market DataQual,
Quality and Risk Management Systems, along with the new I-Link interface engine
to the 84 acute care members of the New Jersey Hospital Association ("NJHA").
DataQual will be the tactical, quality improvement engine providing
NJHA's hospital members with staff credentialing, utilization review, risk
management and infection disease control functions, which are so integral to a
hospital's quality management activities. The joint marketing plan is to extend
the DataQual System into a statewide total quality improvement program for the
members of NJHA's Center for Health Affairs.
The second is a comprehensive marketing agreement with AIH Services,
Inc., a division of the Association of Independent Hospitals. Under the
agreement, AIH Services will market DataQual Quality Improvement and Risk
Management systems, along with the new I-Link interface engine, to its member
hospitals. AIH is a not-for-profit organization, founded in 1984, whose members
include 55 hospitals in the states of Missouri and Kansas.
Together with AIH, we plan to connect the AIH hospital clients
utilizing I-Link Enterprise, the same Internet/Intranet/Virtual Private Network
developed and deployed under the other contracts listed above. This will provide
timely, very accurate tactical data for an AIH Services, client-wide Central
Data Repository healthcare database.
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Competition
The market for healthcare information systems is highly competitive. We
believe the principal competitive factors include the breadth and quality of
system and product offerings, access to proprietary data, the proprietary nature
of methodologies and technical resources, price and the effectiveness of
marketing and sales efforts.
We compete with larger vendors such as McKesson HBOC, Inc., HCIA and
Eclipsys, Inc., and with vendors whose size are similar to ours, such as Medical
Information Data Systems, Inc. ("MIDS"), Cantor and Associates and LANDACORP.
DataQual competitors include McKesson HBOC, Inc., offering a quality and risk
overview only DataQual competing system; and MIDS, Cantor and Associates and
LANDACORP offering similar, but non-modular systems. I-Link Enterprise
competitors include HCIA offering batch data collection services to hospital
associations and state governments; Eclipsys providing central data repositories
along with a DataQual competing product.
Some of the our existing and potential competitors have significantly
greater research, development, financial, technical, marketing and personnel
resources and more extensive business experience than we do. As the market for
our products and services further develops, additional competitors may enter the
market and competition may intensify. There can be no assurance that we will be
able to maintain the quality of our software information products and services
relative to those of our competitors or continue to develop and market our
systems and services effectively or to compete successfully in new markets. We
are not aware of any recent announcements made on behalf of any of our
competitors or recent entrants into the healthcare information systems market,
which, in either case, would have a material adverse impact on our operating
results or financial position. "See Risks of Our Business - Increasing
Competition."
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Software Research and Development
We conduct research and development to enhance and expand our existing
product offerings. The open, modular design of the DataQual System allows us to
develop additional features rapidly and to modify the system to accommodate
customers in different environments. I-Link Enterprise development utilizes
similar modularity and object oriented programming strategies.
Our research and development expenditures for December 31, 1997 and
1998 were $136,330 and $214,681, respectively, which constituted approximately
44% and 90% of total revenues for such periods, respectively.
Research and development priorities are derived from a combination of
strategic marketing requirements and customers' requests for additional
capabilities. New modules and enhancements are coordinated to optimize the
system as a whole and to ensure complete integration of the various
applications. We plan to continue development of the DataQual System with the
I-Link interface engine and I-Link Enterprise, with the Central Data Repository
by continuing to expand the system's capabilities and information monitoring
capabilities. This research and development effort is focused on both existing
products and new product offerings. Although most of our products have been
developed internally, we believe that we can respond to changing market
requirements more quickly by acquiring complementary products or by licensing
them for distribution either as elements of our developed products or under
private labels.
The healthcare software industry is subject to rapid technological
advances and changes in client requirements. Our future success will depend to a
substantial degree upon our ability to enhance our current products and develop
and introduce new products that keep pace with technological developments,
respond to evolving client requirements, and continue to achieve market
acceptance. See "Risks of Our Business - Dependence on Limited Number of
Products--Need for New Technology" and "Risks of Our Business - New and
Uncertain Markets."
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Intellectual Property
We regard the technology incorporated in our products as proprietary.
However, like many other software companies, we do not hold any patents and rely
upon a combination of copyright, trademark and trade secret laws and contractual
restrictions to protect our rights in the software products. To date, our policy
has been to pursue copyright protection for the software and related
documentation. We have a trademark registration in the United States for
"DataQual" and "I-Link". In addition, our key employees and independent
contractors and distributors are required to sign nondisclosure and secrecy
agreements. Despite our efforts to protect these proprietary rights,
unauthorized parties may attempt to copy aspects of our products or to obtain
and use information that we regard as proprietary. Policing unauthorized use of
our products is difficult, and we may not be able to determine whether or the
extent, if any to which piracy of our software products may exist.
It may be possible for unauthorized third parties (including
competitors) to copy aspects of our products, whether or not in violation of our
rights. We believe that because of the complexity of the technical know-how
accumulated and possessed by us, our software management, key personnel, and the
rapid pace of technological change in the healthcare software industry, legal
protection is a less significant factor in our success than the knowledge,
ability and experience of our employees, the frequency of product enhancements
and the timeliness and quality of support services that we provide. See "Risks
of Our Business-Dependence on Limited Number of Products -- Need for New
Technology."
DataQual and I-Link Enterprise generally are sold pursuant to software
license agreements, which, in most cases, grant customers a nonexclusive,
nontransferable license to use our products at a specified site and contains
terms and conditions prohibiting the unauthorized reproduction or transfer of
our products.
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We do not believe that our products infringe upon the proprietary
rights of third parties and no infringement notices have been received from any
third parties. However, there can be no assurance that one or more third parties
will not make a contrary assertion with respect to current or future products.
Software product developers will increasingly be subject to infringement claims
as the number of products and competitors in the healthcare industry grows and
the function of various products in different industry segments overlaps. The
cost of responding to any assertion may be material to us, whether or not the
assertion is validated.
Government Regulation
Our products and services are not currently subject to government
regulation per se. However, the United States Food and Drug Administration
("FDA") has promulgated a draft policy for the regulation of certain computer
products as medical devices under the 1976 Medical Device Amendments to the
Federal Food, Drug and Cosmetic Act. To the extent that computer software is
considered a medical device under the policy, computer software manufacturers
could be required, depending on the product, to (i) register and list their
products with the FDA, (ii) notify the FDA of, and demonstrate to the FDA, the
product's substantial equivalence to other products on the market before
marketing such product, and/or (iii) obtain FDA approval of such product by
demonstrating safety and effectiveness before marketing the product. In
addition, such products would be subject to other statutory controls, including
those relating to good manufacturing practices and adverse experience reporting.
Although it is not possible to anticipate the final form of the FDA's policy
with regard to computer software, we expect that, whether or not the draft is
finalized, the FDA is likely to become increasingly active in the regulation of
computer software intended for use in clinical settings.
The United States healthcare industry is subject to extensive
government regulation relating to such matters as facility expansion, capital
expenditures and reimbursement policies. There can be no assurance that
reimbursement for our systems and services will be or continue to be available
or that future
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reimbursement policies of Medicare, the Healthcare Maintenance Organizations
("HMO") and other third party payers will not adversely affect our ability to
sell our systems and services on a profitable basis. The effect of future
legislation and government regulation upon prospective clients may, in certain
circumstances, have a material adverse effect upon our business. Conversely,
changes in the regulatory environment have increased, and may continue to
increase, the needs of healthcare organizations for cost-effective information
management, thereby increasing the demand for our products and services. In
addition, comprehensive federal healthcare reform legislation could, depending
on the form in which such legislation may in the future, be enacted, have a
substantial impact on our business. We cannot predict the impact, if any, of
future legislation and government regulation on our business. See "Risks of Our
Business - Government Regulation"
Product Warranty
We provide a limited warranty for a period of 90 days that our software
is free from defects in material and workmanship and operates substantially in
accordance with functional specifications. We are not responsible for any defect
caused by the user having made any changes or misused or damaged its programs or
for damages in excess of amounts paid by the user to us. To date we have not
experienced any financial loss due to our warranties and, to our knowledge,
there have been no warranty claims filed or threatened. See "Risks of Our
Business - Risk of Product Defects; Product Liability"
Compliance with Environmental Laws
We have had no need to spend monies on compliance with local, state or
federal environmental laws.
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Number of Employees
H-Quotient has 15 full time employees:
Department Number of Employees
---------- -------------------
Sales and Marketing 2
Operations and Product Development 10
Administration 3
Cautionary Factors That May Affect Future Results
This report contains some forward-looking statements. "Forward-looking
statements" describe our current expectations or forecasts of future events.
These statements do not relate strictly to historical or current facts. In
particular, these include statements relating to future actions, prospective
products, future performance or results of current and anticipated products,
sales efforts, the outcome of contingencies and financial results. Any or all of
the forward-looking statements we make may turn out to be wrong. They can be
affected by inaccurate assumptions we might make or by known or unknown risks
and uncertainties. Many factors, such as product acceptance, competition and
marketing capabilities will be important in determining future results.
Consequently, no forward-looking statements can be guaranteed. Actual future
results may vary materially.
We undertake no obligation to publicly update any forward-looking
statements, whether as a result of new information, future events or otherwise.
You are advised, however, to consult any future disclosures we make on related
subjects in our 10-QSB, 8-KSB, and 10-KSB reports to the SEC.
We provide the following cautionary discussion of risks, uncertainties
and possible inaccurate assumptions relevant to our business and our products.
These are factors that we think could cause our actual results to differ
materially from expected results. Other factors besides those listed here could
adversely affect us.
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Risks of Our Business
Company in Initial Stages
While we have been in existence for over five years, we are still in
the initial stages of development and commercial exploitation of our principal
products, DataQual and I-Link Enterprise. To continue to grow and become
profitable: we must promptly complete the upgrade installation of DataQual in
the remaining licensed locations while continually adding new licensees; through
the assistance of our marketing partners, sell and install new DataQual Systems;
complete the installation of I-Link Enterprise for the Ohio Hospital Association
and Alabama Hospital Association Trust; and, all this while adding new hospital
association clients. This will be a formidable task for us because we have
limited personnel and resources available.
Small Staff
We now have only 15 employees. We estimate that to complete the work on
hand to install DataQual in existing client hospitals, add new DataQual clients
under our joint marketing agreements with the New Jersey Hospital Association
and Association of Independent Hospitals and finish deployment of the two I-Link
Enterprise contracts listed above, we will have to add substantially to this
staff. This will be either through hiring more employees and/or by entering into
alliances with other companies who can assist in these tasks. There can be no
assurance that we will be able to do so.
Dependence on Key Personnel.
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As a small company, we are highly dependent on certain key employees,
in particular on Michael J. Black, its Chairman and Chief Executive Officer, and
Alan W. Grofe, its President and Chief Operating Officer. The loss of either of
them would have a material adverse effect on our ability to conduct operations.
We have not purchased "key man" insurance policies on either of them
History of Losses and Negative Working Capital
We have had continuous losses from operations and negative cash flow
for our entire history, as shown below:
Years Ended Three Months Ended
12-31-97 12-31-98 3-31-98 3-31-99
-------- -------- ------- -------
Loss from Operations $(3,148,673) $(1,684,388) $(447,535) $(80,815)
These losses have resulted in a negative working capital position of
$3,744,699 at March 31, 1999.
Past Due Payables, Accrued Expenses, Claims and Judgments.
We presently have past due obligations for which there are claims and
judgments totaling over $1,672,000. Deferred payment terms have been negotiated
with many of these creditors and critical services have not been suspended, nor
has there been cancellation of orders due to delays in product delivery as a
result. We intend to use the cash generated from operations to pay our trade and
creditors. We may have an opportunity to discount or reduce some of the trade
and other creditor debts. We, in all likelihood, will need to raise additional
funds either from loans or additional equity and/or debt offerings during the
next twelve months; however; no plans have been made. As of the date of this
registration statement, we do not now have the funds to pay these claims. See
"Liquidity and Capital Resources" at page 35 and "Legal Proceedings" at page 49.
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Need for Additional Financing.
To continue and expand our operations, we must find new sources of both
short and long term financing. Up to now, we have largely depended on private
placements of our securities and the forgiveness of debt in exchange for stock
to provide the funds needed to operate. There can be no assurance that these
sources will continue to be available or will be adequate to give us the cash we
require to meet our past, present and future needs. Our ability to continue and
expand could be curtailed if capital investment cannot be obtained on
satisfactory terms.
Dependence on Limited Number of Products--Need for New Technology
Our business is almost exclusively dependent at this time on two
products, the DataQual System, with its I-Link interface engine and I-Link
Enterprise, with its Central Data Repository. Although we plan to diversify our
product line for the healthcare industry by developing new software applications
to market to existing and new customers, the bulk of our sales during the next
few years will come from DataQual and I-Link Enterprise. In evaluating the
DataQual and I-Link Enterprise systems, investors and shareholders should also
be aware that we have a registered copyright on the DataQual System and a
registered service market on I-Link.
We have taken steps to protect DataQual and I-Link Enterprise as trade
secrets by entering into contracts with our employees, consultants and licensees
in which they acknowledge our exclusive ownership of the Systems and agree to
maintain their unique design features in confidence. There can be no assurance
that these steps will be adequate to prevent the misappropriation of our
technology or proprietary rights of the products.
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As advances occur generally in the fields of networking of computers
and integration of database information, we will need to keep pace by continuing
to enhance DataQual and its I-Link interface engine and I-Link Enterprise with
its Central Data Repository to accommodate these developments. There can be no
assurance that we will succeed in doing so.
New and Uncertain Markets
The markets for healthcare software and services are relatively new,
and it is difficult to predict the rate at which these markets will grow or
whether new or increased competition will result in market saturation. If demand
for healthcare software products fails to grow, or grows more slowly than
anticipated, or if the market becomes saturated with competitors, our operations
will be materially and adversely affected.
Increasing Competition
There are limited barriers to entry in the healthcare software industry
in which we operate. This market is extremely competitive and can be
significantly influenced by the product developments and pricing decisions of
its largest participants. We have already at least three active competitors that
are now selling patient information management systems similar to DataQual and
competitors selling statewide patient hospital billing information systems and
services similar to I-Link Enterprise. Others may well appear in the future as
the advantages of this kind of healthcare patient information database
aggregation and integration and reporting system become apparent to hospitals
and others in the healthcare management field. Many of our potential competitors
are large software development and marketing companies who are fully capable of
developing new software products that would offer substantial competition to
DataQual and I-Link Enterprise. There can, therefore, be no assurance that we
will have the financial resources, technical expertise marketing and support
capabilities to continue to compete successfully in this market.
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Changes in the Healthcare Industry
The healthcare industry is subject to changing political, economic and
regulatory influences that may affect its procurement practices and the
operation of healthcare industry participants. During the past several years,
the industry has seen a substantial increase in the efforts of government
regulators and private health maintenance organizations to limit reimbursement
rates and capital expenditures. Reimbursement rates may continue to decline
along with capital expenditures, which could affect the hospital capital
available to acquire our systems and services and, therefore, may have an impact
on the prices at which we need to sell our systems and services profitably.
Government Regulation
The confidentiality of patient records and the circumstances under
which these records may be released are subject to substantial governmental
regulation governing both the disclosure and use of this information. While we
believe that the DataQual and I-Link Enterprise Systems comply with existing
rules in substantially all jurisdictions, additional, more restrictive rules
governing the dissemination of medical record information may require
substantial changes in the Systems in the future and result in substantial costs
to us. In addition, the U.S. Food and Drug Administration (the "FDA") has
promulgated a draft policy for the regulation of certain computer products as
medical devices. It is not possible at this time to anticipate the final form of
the FDA's policy with regard to computer software, but we expect that, whether
or not this draft policy is finalized, the FDA is likely to become increasingly
active in regulating software intended for use in the healthcare industry.
Our products could become subject to extensive regulation by the FDA.
Except for the OHA, AHAT, NJHA and AIH contracts described above (See
"Description of Business Organization and Historical Background - Recent Large
Contract Awards") we have not had significant sales. We expect the growth in our
sales to come primarily from others, such as independent
27
<PAGE>
representatives, joint marketing organizations and accessing existing
distribution and fulfillment systems. We cannot be certain about our ability to
attract and retain representatives and organizations until we have had greater
experience with these groups and organizations. We also are uncertain about
their sales effectiveness for our products.
Risk of Product Defects: Product Liability.
Software products as complex as those offered by us might contain
undetected errors or failures when first introduced or when new versions are
released. Although we have not experienced material adverse effects resulting
from any errors to date, there can be no assurance that, despite testing by us
and by current and potential customers, errors will not be found in new versions
of our products after commencement of shipments, resulting in loss of or delay
in market acceptance, which could have a material adverse effect upon our
business, operating results and financial condition. Although we do not maintain
an "errors and omissions" insurance policy, our license agreements with our
customers typically contain limited warranty provisions designed to limit our
exposure to potential product liability claims. While we have not experienced
product liability claims to date, the license and maintenance of our software
products may entail the risk of successful claims. A successful product
liability claim brought against the Company could have a material adverse effect
on our business, operating results and financial condition.
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<PAGE>
Potential Fluctuations in Periodic Results.
Our revenues may be subject to significant variation from period to
period due to the discretionary nature of healthcare software purchases and will
be difficult to predict. Further, although our product line includes products
with sales prices from $30,000 to over $2,000,000, the majority of our revenue
is expected to be derived from products with sales prices from $60,000 to
$1,000,000. As a result, the timing of the receipt and shipment of a single
order can have a significant impact on our revenues and results of operations
for a particular period. It also is expected that for the foreseeable future a
relatively small number of customers will account for a significant percentage
of our revenues. We anticipate that revenues in any quarter will be
substantially dependent on orders booked and installed in that quarter and
revenues for any future quarter will not be predictable with any significant
degree of certainty. Product revenues also are difficult to forecast because the
market for business healthcare software products is evolving, and our sales
cycle may vary substantially with each customer. As our product develops, it is
anticipated that we will operate with limited order backlog because our software
products will typically be shipped shortly after orders are received. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Limitation on Net Operating Loss Carry Forward.
We estimate that at December 31, 1998 and March 31, 1999 for United
States federal income tax purposes, we had tax benefits attributable to net
operating loss tax credit ("NOL") carryforwards of $7,900,000 and $8,300,000
(unaudited) respectively, available to offset future federal taxable income and
tax. These NOL carry forwards expire at various dates through the years 20009
and 2018. We also have a capital loss carryforward of $1,560,000 which expires
in 2001. The availability of the NOL to reduce or offset our taxable income is
subject to various limitations under Section 382 of the Internal Revenue Code of
1986, as amended (the "Code"). In particular, our ability to utilize the NOL
carryforward would be restricted upon the occurrence of an "ownership change"
within the meaning of Section 382 of the Code. Although the determination of
whether an ownership change has occurred is subject to factual and legal
uncertainties, we believe that an ownership changes occurred upon the completion
of previous financings and such "ownership change" will materially limit our
ability to utilize our NOL carryforward. As a result of the "ownership change,"
we will generally be permitted to utilize NOL carryforward (available on the
date of such change) in any year thereafter to reduce our income to the extent
that the amount of such taxable income does not exceed the product of (i) the
fair market value of our outstanding equity at the time of the ownership change
(reduced by the amount of certain capital contributions) and (ii) a long-term
tax-exempt rate published by the Internal Revenue Service.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the financial statements and related notes contained elsewhere in this
document. The discussion contained herein relates to the financial statements,
which have been prepared in accordance with GAAP.
Summary of Financial Data
The following summary financial data should be read together with this
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements included elsewhere in this Registration
Statement.
<TABLE>
<CAPTION>
Statement of Operations
Years Ended December 31, 3 Months Ended March 31,
1997 1998 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues 307,458 239,139 72,604 227,462
Cost of sales and services 226,939 307,537 95,351 38,960
Selling and marketing 118,413 244,182 61,085 45,942
General and administrative 1,679,035 1,155,631 330,223 192,582
Profit (Loss) from operations (1,716,929) (1,468,211) (414,055) (50,022)
Non recurring items, net (1,398,000)
Interest expense, net 183,546 157,970 21,477 29,833
Other expense (income) (149,802) 58,207 12,003 960
Net Profit (loss) (3,148,673) (1,684,388) (447,535) (80,815)
Net loss per common share and
Common share equivalents (0.88) (0.34) (0.09) (0.01)
Weighted average number of common shares
and common share equivalents outstanding (1) 3,578,054 4,936,915 4,812,779 6,028,047
Balance Sheet Data
3 Months Ended
Years Ended December 31, March 31,
1997 1998 1999
---- ---- ----
Working capital (deficiency) (3,028,460) (4,318,026) (3,744,699)
Total assets 317,846 226,037 1,034,256
Total liabilities 3,230,139 4,400,119 4,503,614
Accumulated deficit (9,612,760) (11,297,148) (11,377,963)
Shareholders' equity (deficit) (2,912,283) (4,174,082) (3,469,358)
</TABLE>
(1) See Note No. I of Notes to Consolidated Financial Statements for a
description of the computation of net loss per share.
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<PAGE>
OVERVIEW
We are organized as a Virginia corporation to design, develop, market
and maintain software systems for hospitals. These systems collect, analyze and
report on a range of data relating to patient care and are fully compatible with
a wide range of different computer systems and networks used by these hospitals.
Our main product line of systems consists of DataQual and I-Link Enterprise.
DataQual constitutes two separate sub-systems fulfilling different functions in
the hospital management and measurement of its operations. Each of these
subsystems is tied together by our I-Link interface engine, which gathers
information from many different hospital computer systems and integrates the
gathered information with the information entered into the various subsystems of
the DataQual System. I-Link Enterprise consists of a system of PC servers
installed on local area networks at hospital sites, which extract, cleanse,
group and map hospital wide data. This data, which can be combined with DataQual
data, is then transmitted over an Intranet/Virtual Private Network to our
Central Data Repository.
We have incurred losses since our incorporation. At December 31, 1998,
we had an accumulated deficit of $(11,297,148). We have financed our ongoing
research and development program and business activities through a combination
of sales, equity financing, and debt.
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THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
"SUMMARY FINANCIAL DATA" IN THIS REGISTRATION STATEMENT. THE DISCUSSION IN THIS
SECTION AND OTHER PARTS OF THIS REGISTRATION STATEMENT CONTAINS CERTAIN
FORWARD-LOOKING STATEMENTS SUCH AS STATEMENTS OF THE COMPANY'S PLANS,
OBJECTIVES, EXPECTATIONS AND INTENTIONS. THESE STATEMENTS INVOLVE RISKS AND
UNCERTAINTIES INCLUDING THOSE DISCUSSED IN "RISKS OF OUR BUSINESS," AND
ELSEWHERE IN THIS REGISTRATION STATEMENT. THEY ARE MADE AS OF THE DATE OF THIS
REGISTRATION STATEMENT, AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE THEM.
Results of Operations
Year ended December 31, 1998 Compared With Year Ended December 31, 1997
Revenues for the year ended December 31, 1998 decreased to $239,139
from $307,458 for the year ended December 31, 1997. The decrease of $68,319, is
a result primarily from a decrease in software sales and a decrease offset in
service income.
The cost of sales and services for the year ended December 31, 1998
increased to $307,537 from $226,939 for the year ended December 31, 1997. The
increase of $80,598 resulted primarily from increased costs incurred to staff
for software support obligations and research and development costs, which were
not capitalized.
Selling and marketing expenses for the year ended December 31, 1998
increased to $244,182 from $118,413 for the year ended December 31, 1997. This
increase of $125,769 is a result from increased costs associated with the direct
marketing of our healthcare related software products and increased expenses
incurred for sales representatives including salaries, benefits, travel and
promotion activities.
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General and administrative expenses for the year ended December 31,
1998 decreased to $1,155,631 from $1,679,035 for the year ended December 31,
1997. The decrease of $523,404 primarily resulted from a decrease in
amortization and legal expenses as well as more efficient use of the staff and
associated costs, which were partially offset by increased expense from
contingent liabilities.
Interest expense, net, for the year ended December 31, 1998 was
$157,970, as compared to $183,546 for the year ended December 31, 1997. The
decrease in interest expense of $25,576, resulted primarily from conversion of
debt instruments and repayment of notes payable.
We had non-recurring charges for the year ended December 31, 1998 of $
- -0- as compared to $1,398,000 for the year ended December 31, 1997. The
non-recurring items resulted from the write-off of acquired technology costs.
Other income (expense), net for the year ended December 31, 1998
increased to $58,207 in expenses from $149,802 in income for the year ended
December 31, 1997. The increase of $208,009 in expense resulted primarily from a
decrease in debt forgiveness and an increase in prior period charges taken in
the current year.
Net loss for the year ended December 31, 1998 and the year ended
December 31, 1997 were $(1,684,388) and $(3,148,673), respectively.
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Three Months ended March 31, 1999
Compared With Three Months Ended March 31, 1998
Revenues for the three months ended March 31, 1999 increased to
$227,462 from $72,604 for the three months ended March 31, 1998. The increase of
$154,858, resulted primarily from revenue generated by performance under
contracts recently signed.
The cost of sales and services for the three months ended March 31,
1999 decreased to $38,960 from $95,351 for the three months ended March 31,
1998. The decrease of $56,391 resulted primarily from an increase in capitalized
research and development costs.
Selling and marketing expenses for the three months ended March 31,
1999 decreased to $45,942 from $61,085 for the three months ended March 31,
1998. This decrease of $15,143 resulted primarily from reallocating personnel
from marketing to costs of sales and services.
General and administrative expenses for the three months ended March
31, 1999 decreased to $192,582 from $330,223 for the three months ended March
31, 1998. The decrease of $137,641 resulted primarily from a decrease in expense
from contingent liabilities which were offset by increased legal costs related
to a canceled tender offer.
Interest expense, net, for the three months ended March 31, 1999 was $
29,833, as compared to $21,477 for the three months ended March 31, 1998. The
increase of $8,356 in interest expense resulted primarily from prepayment of a
note payable, which was partially offset by reduced credit line borrowings from
our secured lender.
Other income (expense), net for the three months ended March 31, 1999
decreased to $960 in expense from $12,003 in expense for the three months ended
March 31, 1998. The decrease of $11,043 resulted primarily from a reduction in
prior period adjustments made in the current period.
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Net loss for the three months ended March 31, 1999 and the three months
ended March 31, 1998 were $(80,815) and $(447,535), respectively.
Liquidity and Capital Resources
Working capital (deficit) at March 31, 1999 was $ (3,744,699) as
compared to $(4,318,026) at December 31, 1998 and $(3,028,460) at December 31,
1997.
We have funded our operations and working capital needs through a
series of private equity and debt offerings including Regulation D and
Regulation A private placements, loans and the factoring of our accounts
receivable.
Cash and cash equivalents at March 31, 1999 were $ 565,270, an increase
of $553,590 from March 31, 1998. During the three months ended March 31, 1999,
we generated $98,836 net cash in our operating activities as compared to using
$146,698, for the three months ended March 31, 1998. This increase of cash
generated from operations of $245,534 was the result of an increase in accounts
receivable, deferred revenues, prepaid expenses, accounts payable and accrued
expenses.
During the three months ended March 31, 1999, we used $140,504 for
investing activities as compared to $-0-, for the three months ended March 31,
1998. The increased use of cash for investing activities resulted from an
increase in the acquisition of computer equipment.
During the three months ended March 31, 1999, we generated net cash of
$605,162 from financing activities as compared to $160,206 for the three months
ended March 31, 1998. The increase of $444,956 resulted from funds raised in a
Regulation D, Rule 504 private placement of common stock.
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<PAGE>
We lease office space on a two-year sub-lease basis and could be
required to move and/or add more space after this two-year period. The major
capital expenditures we may incur are for computers and related local area
network hardware and software and travel for sales representatives and key
support and installation personnel. Our recent upgrade of the DataQual software
is being initially marketed to our existing hospital customers. We also intend
to invest approximately $250,000 in personnel to expand and enhance sales,
software development and customer support, as well as associated office support
staff. . See "Description of Business - Our Business Strategy" and " Description
of Business - Software Research and Development."
We have frequently not been able to make timely payments to our trade
and other creditors. As of March 31, 1999, we had past due obligations for which
there were claims and judgments of approximately $1,672,000. Deferred payment
terms have been negotiated with many of our vendors and critical services have
not been suspended, nor has there been cancellation of orders due to delays in
product delivery as a result. We intend to use the cash generated from
operations, if any, to pay our trade and other creditors. We may have an
opportunity to discount or reduce some of the trade and other creditor's debts.
We, in all likelihood, will need to raise additional funds either from loans or
additional equity and/or debt offerings during the next twelve months; however,
no plans have been made as of this date.
We have the ability to factor certain of our accounts receivable with a
finance company. The factoring arrangement, for which borrowings were charged at
12% per annum, which can be cancelled at any time by us or the finance company,
and is collateralized by contracts receivable and all other assets we have. We
plan to replace this financing arrangement as soon as practically possible.
However, there can be no assurance we can obtain any new financing or line of
credit on terms acceptable to us, or at all.
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<PAGE>
From June 1996 to September 1997, we issued 1,095,800 shares of our
common stock under terms of a Regulation A offering at a price of $2.00 per
share in exchange for cash and debt repayment totaling $2,200,000.
From September to January 1997, we issued 900,000 shares of our common
stock under the terms of a Regulation A offering of our common stock at $2.00
per share and 300,000 shares of our common stock subject to the restrictions of
Rule 144 of the Securities Exchange Act of 1934 to a financial institution as
part of a transaction in which we purchased certain assets from the financial
institution. In July 1997, we issued 100,000 shares of our common stock in
exchange as partial payment for the lease of certain assets by our subsidiary.
In November 1997, we issued 1,143,175 shares of our common stock in
exchange for $366,100 in convertible notes, plus accrued interest of $66,808.
Also, in November 1997, the holder of a warrant exercised 135,209 warrants to
purchase 135,029 shares of our common stock at $2.00 per share in exchange for
the repayment of a promissory notes with the unpaid face amount of $161,543,
accrued interest of $39,535, cash and other expenses of $68,980.
From October 1997 through August 1998 we issued 460,000 warrants at
an exercise price of $0.75 per share in exchange for warrants at $1.00 per
share, to subscribers of a Regulation D, Rule 506 offering. These warrants are
exercisable from October 1997 to September 2000.
In August 1998, we issued 297,926 shares of our common stock in
exchange for $202,589 in cash, debt repayment and other expenses at the issuance
price of $.68 per share.
From January 1999 to March 1999 we issued 1,481,800 shares of our
common stock in exchange for $517,706 in cash and $267,833 in debt repayment and
other expenses at the issuance price of $.50 per share.
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<PAGE>
In May and June 1999 we issued 460,000 shares of our common stock to
holders of warrants issued in the Regulation D, Rule 506 offering upon exercise
of 460,000 warrants at an issuance price of $0.25 per share, pursuant to an
agreement to reduce the excessive price to the market from $.75 to $.25 for a
period of 60 days.
In June 1999 we issued 99,000 shares of our common stock to holders of
warrants issued as payment of fees at an issuance price of $0.50 per share and
30,000 shares of our common stock to a holder of warrants issued as payment of
fees at an issuance price of $0.75 per share.
We had, at March 31, 1999, a working capital (deficit) of $(3,744,699).
We believe that cash generated from operations will not be totally sufficient to
fund our current and past due cash requirements. We anticipate that it will be
likely that we will raise additional funds either by loan and/or additional
equity offerings. We have no plans at the present time to raise additional
funds. Management believes, however, that our current operational plans for the
next twelve months will not be curtailed or delayed because of the lack of
sufficient financing. It is possible that we may have to curtail our current
operations and delay and/or cancel our business plans (See "Business -
Strategy"). If additional financing is required, there can be no assurances that
we will be able to obtain such additional financing, on terms acceptable to us
and at the times required by us, or at all. See "Risks of Our Business - Need
for Additional Financing."
During the years 1998 and 1997, we experienced significant difficulty
in implementing our business strategy of supplying information management
software to the hospital marketplace. Much of the difficulty experienced by us
was a result of the transition to our current version of our DataQual(R) system
and general technology changes being implemented in the commercial healthcare
market. We canceled a tender offer in February 1999 and during the first quarter
of 1999 expensed the cost associated with the cancelled tender.
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<PAGE>
We believe that our current staffing, cost structure, and current
operating plans will allow us an opportunity to compete effectively as a
supplier of information management software to the hospital market and possibly
attain profitability in future periods.
Net Operating Loss
For federal income tax purposes, we have net operating loss
carryforwards of approximately $7,900,000 as of December 31, 1998 and $8,300,000
(unaudited) as of March 31, 1999. These carryforwards expire in the years 2009
and 2018, respectively. We also have a capital loss carryforward of
approximately $1,560,000 which expires in 2001. The use of our net operating
loss carryforwards to offset taxable income, if achieved, may be subject to
specified annual limitations (see "Risks of Our Business - Limitations on Net
Operating Loss Carry Forward").
ITEM 3. DESCRIPTION OF PROPERTY
At present, we lease a 3,682 square feet of office space, located at
12030 Sunrise Valley Drive, Suite 205, Reston, Virginia 20191. We currently have
a two-year sub-lease, which ends on May 21, 2001. The rent is $8,898 a month.
These premises should suffice for our administrative offices for the foreseeable
future.
We lease most of the equipment and furniture currently at the premises,
which consists of computers, computer accessories, telephones, office furniture,
file cabinets and miscellaneous equipment.
39
<PAGE>
ITEM 4. SECURITY OWNERSHIP OF CERTIN BENEFICIAL OWNERS AND MANAGMENT
Principal Stockholders
The following table sets forth information, to the best knowledge of
the Company, as of March 31, 1999, regarding Common Stock and warrants that are
beneficially owned by each person known to us to beneficially own more than 5%
of our outstanding Common Stock, each of our directors and executive officers,
and all officers and directors as a group.
Security Ownership of Management
<TABLE>
<CAPTION>
Amount Beneficially Number of Percentage of
Name and Address Owned Shares(1) Warrants(2) Shares Owned(3)(4)
- ---------------- ------------------- ------------ ------------------
<S> <C> <C> <C>
Michael Black 867,666 750,000 10.62%
12030 Sunrise Valley Dr.
Reston, VA 20191
Alan Grofe 812,334 750,000 9.95%
12030 Sunrise Valley Dr.
Reston, VA 20191
Roger Doermann 75,000 75,000 0.92%
37901 Greenwood Farm Lane
Purceville, VA 20132
--------- --------- ------
All officers and directors as 1,755,000 1,575,000 21.49%
a group
Security Ownership of Certain Beneficial Owners
Leonard A. Rodes, Trustee 1,829,773 325,000 22.25%
Steven W. Bingaman 1996 Trust
545 Fifth Avenue
New York, NY 10017
Appleby Partners, Ltd. 1,704,971 1,304,971 20.74%
551 Fifth Avenue
New York, NY 10017(4)
</TABLE>
- ---------------
(1) Securities listed as "beneficially owned" by a person or entity who
directly or indirectly holds or shares power to vote or dispose of the
securities, whether or not the person or entity has an economic interest in
the securities. In addition a person or entity is deemed a beneficial owner
if he, she or it has the right to acquire beneficial ownership within 60
days, whether upon the exercise of a stock option, warrant or otherwise.
(2) For a description of the terms of these warrants, see "Description of the
Company's Securities" at page 44.
(3) Unless otherwise indicated below, the individual or entities identified
herein each own their respective securities and sole investment powers
regarding their disposition. The percentages are based upon 6,692,505
shares outstanding as of March 31, 1999 and are computed in accordance with
Rule 13d-3 of the Securities Exchange Act of 1934, as amended.
(4) Represents 1,704,971 shares beneficially owned by Appleby Partners, Ltd.
("Appleby"), assuming exercise of the outstanding warrants exercisable by
Appleby within 60 days from the date of this Registration Statement. Mr.
Leonard A. Rodes, the Trustee of the Steven W. Bingaman 1996 Trust for the
benefit of the children of Steven W. Bingaman. Mr. Rodes is a director of
Appleby and the Trust is a 50% stockholder of Appleby. Mr. Rodes disclaims
beneficial ownership of the shares held by Appleby, except to the extent of
his or the Trust's pecuniary interest therein.
40
<PAGE>
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
The positions held by each of our Executive Officers and Directors as
of March 31, 1999 are shown on the following table and biographical information
of each follows the table. Each Director serves for a one-year term and until a
successor is elected and qualified. At present none of the Directors are
compensated for their services, although they are reimbursed for expenses for
attending meetings.
Name Age Position
---- --- --------
Michael J. Black 46 Chairman, Treasurer,
Chief Executive
Officer, Chief
Financial and
Accounting Officer,
Secretary and Director
Alan W. Grofe 54 President, Chief
Operating Officer
and Director
Roger J. Doermann 44 Director
Michael J. Black has been employed as a key executive of the Company
since September 1994. He has been Chairman since May 15, 1996. From 1991 to
September 1994, Mr. Black was a consultant for Asset Growth Partners, Inc., an
investment banking firm, working on mergers and acquisitions, equity and debt
financing and strategic planning, primarily for technology companies. From 1989
to 1991 he served as vice president of finance for NMI Network Systems, Inc./The
Account Data Group before that as president and founder of The Account Data
Group. Both of these companies were involved in various aspects of computer
systems integration.
41
<PAGE>
Alan W. Grofe has been President of the Company since May 15, 1996,
Secretary and a director of the Company since April 1996. From March 1993 to
March 1997, Mr. Grofe was President and Chief Executive Officer of MarketLink,
Inc., a direct marketing software company not affiliated with the Company. From
1991 to 1993, Mr. Grofe served as President of CCS, Inc., a direct marketing
service bureau, and from 1989 to 1991, as Vice President and Chief Operating
Officer of Warren & Lewis, a venture capital firm. Prior to that time, he
managed the Federal Computer Conferences; a series of computer industry trade
shows, for Information Development Corporation from 1988 to 1989. And from 1980
to 1987, he was account manager and later Director of Federal Systems Operations
for Motorola Computer Systems, for whom he worked in both the healthcare
industry and in computer sales to the federal government.
Roger J. Doermann has been a Director of the Company since January
1996. Mr. Doermann has served in a number of capacities in technology industries
with expertise in healthcare applications, international telecommunications
consulting and electronic commerce. He is currently a Senior Consultant with
IBM. From April 1991 to April 1994. Mr. Doermann was president of Enterprise
Systems, an independent consulting firm, which assisted various companies in the
LAN integration and telemedicine field. From February 1984 to April 1991, he was
Senior Vice President of The Account Data Group/NMI Network Systems, Inc.
There are no committees of the Board of Directors. Directors hold their
offices until the next annual meeting of the stockholders and thereafter until
their successors have been duly elected and qualified. Executive officers are
elected by the Board of Directors on an annual basis and serve at the pleasure
of the Board. All executive officers devote their full time to the business
affairs of the Company.
42
<PAGE>
ITEM 6. EXECUTIVE COMPENSATION
Messrs. Black and Grofe hold two-year employment's with us under which
they each receive a salary of $145,000 per year. The agreements also provide
that they are to receive stock options under a Company stock option plan or, if
there is no such plan, they will be granted warrants, exercisable for 60 months,
to purchase a minimum of 100,000 and a maximum of 250,000 shares of common Stock
at an exercise price of not less than the most recently issued warrants. The
agreements contain covenants restricting competition with us or solicitation of
our employees or customers for 24 months following the termination of their
employment.
The following table sets forth, for the year ended December 31, 1998,
the cash compensation paid by us to our executive officers.
Name Principal Position Salary Bonus Other
---- ------------------ ------ ----- -----
Michael J. Black Chairman and CEO $145,0000 0 0
Alan Grofe President and COO $145,0000 0 0
Mr. Black holds warrants covering 750,000 shares of Common Stock, and
Mr. Grofe, holds warrants covering 750,000 shares. For a description of the
terms of these warrants, see "Description of the Company's Securities" at page
___.
43
<PAGE>
Directors' Compensation
- -----------------------
We do not pay director's fees, but reimburses them for expenses
incurred in attending meetings. We have granted Mr. Doermann warrants covering
75,000 shares of Common Stock. For a description of the terms of these warrants,
see "Description of the Company's Securities" at page 44.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The only transactions during the last two years between the Company and
any of its officers, directors, principal stockholders or their affiliates are
the issuance of common stock to certain of the Company's officers described in
"Recent Sales of Unregistered Securities", described at page 51, the issuance of
warrants to certain of the Company's officers, described in "Executive
Compensation" at page 43, the issuance of warrants to a certain director of the
Company described in "Executive Compensation" at page 43 and the issuance of
warrants to Aesop Financial Corporation, described in "Description of the
Company's Securities" at page 44, the lease of computer equipment from Aesop,
described in "Description of Properties" at page 39. Aesop Financial Corporation
is a wholly owned subsidiary of Appleby Partners, Ltd. which is a principal
stockholder as set forth in "Principal Stockholders" at page 40.
ITEM 8. DESCRIPTION OF THE COMPANY'S SECURITIES
CAPITAL STRUCTURE
Our authorized capital structure consists of shares of Preferred Stock
and Common Stock. No shares of the Preferred Stock have been issued or are
outstanding. When issued, the Board of Directors determines the amount of the
par value of the Preferred Stock. Common Stock issued and outstanding has a par
value of $0.0001 per share. There were Common Stock Purchase Warrants
outstanding covering a total of 5,084,971 at March 31, 1999 (12,066,755 at June
30, 1999) shares of Common Stock. The following table sets forth our
capitalization at March 31, 1999.
<TABLE>
<CAPTION>
Years Ended December 31, 3 Months Ended
March 31,
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Short term debt
Notes payable 1,176,854 1,337,130 1,156,754
Total short term debt
Long-term 0 0 0
Convertible subordinated promissory notes 0 0 0
Shareholders' equity (deficit) (9,612,760) (11,297,148) (11,377,963)
Preferred stock authorized, 10,000,000 shares -
none outstanding 0 0 0
Common stock, $.0001 par value, authorized 483 511 659
50,000,000 shares: 4,812,779, 5,110,705, and
6,592,505 issued and outstanding at December 31,
1997 and 1998 and March 31, 1999, respectively.
Additional paid-in capital 6,699,994 7,122,555 7,907,946
Accumulated deficit (9,612,760) (11,297,148) (11,377,963)
Total shareholders' equity (deficit) (2,912,283) ( 4,174,082) (3,469,358)
Total Capitalization (2,912,283) ( 4,174,082) (3,469,358)
---------- ----------- ----------
</TABLE>
44
<PAGE>
Preferred Stock
The 10,000,000 shares of Preferred Stock authorized as of June 14, 1999
are undesignated as to par value, preferences, privileges and restrictions. As
the shares are issued, the Board of Directors must establish a "Series" of the
shares to be issued and designate the par value preferences, privileges and
restrictions applicable to that series. To date, the Board of Directors has
designated no series of Preferred Stock.
Common Stock
Our authorized Common Stock consists of 50,000,000 shares, par value
$.0001 per share, of which 6,592,505 shares were issued and outstanding at March
31, 1999 (7,526,784 shares issued and outstanding at June 30, 1999). There are
5,961 holders of record of our Common Stock, but the number of record holders is
not representative of the number of beneficial holders since many shares are
held by depositories, brokers and other nominees.
The holders of Common Stock are entitled to one vote for each share
held of record on all matters to be voted on by stockholders. There is no
cumulative voting with respect to the election of directors with the result that
the holders of more than 50% of the shares of Common Stock can elect all of the
directors. Dividends are payable on the Common Stock only when, as and if,
declared by the Board of Directors out of funds legally available. We have never
paid a dividend on our Common Stock and we do not expect to do so in the
foreseeable future. In the event of the liquidation, dissolution or winding up
of the Company, the holders of Common Stock are entitled to share ratably in all
assets remaining available for distribution to them after payment of liabilities
and after provision has been made for each class of stock, if any, having
preference over the Common Stock. There are presently no such preference shares
outstanding. The Common Stock carries no conversion, preemptive or other
subscription rights.
45
<PAGE>
Dividend Policy.
We have never had net profits on operations and therefore are currently
proscribed under Virginia Code from declaring dividends. We have not paid any
cash dividends on our Common Stock or our Preferred Stock. Moreover, our Board
of Directors has no present intention of declaring any cash dividends, as we
expect to re-invest all profits in the business for additional working capital
for continuity and growth. Our Board of Directors considering the conditions
then existing, including our earnings, financial condition, capital
requirements, and other factors will determine the declaration and payment of
dividends in the future.
Warrants
We had outstanding warrants covering a total of 5,084,971 shares of
Common Stock at March 31, 1999 (12,066,755 as of June 30, 1999). These warrants
have generally been issued to persons who have provided financing to us or have
performed services in placing such financing. Present officers and directors of
the Company hold some of the warrants. A summary of the terms of the warrants is
as follows:
Employee and Director Warrants
Number of Shares Exercise Price
Name of Holder Covered Per Share Expiration Date
- -------------- ---------------- -------------- ---------------
Michael J. Black 500,000/125,000 $0.75/1.50 February 2003/June 2003/
75,000/50,000 2.00/3.00 February 2003/June 2003
Alan W. Grofe 500,000/125,000 $0.75/1.50 February 2003/June 2003/
75,000/50,000 2.00/3.00 February 2003/June 2003
Roger J. Doermann 75,000 $0.75 February, 2003
________________________________________________________________________________
All Warrants Outstanding
<TABLE>
<CAPTION>
Number of Exercise Price
Date of Issue Shares Covered Per Share Expiration Date
- ------------- -------------- -------------- ---------------
<S> <C> <C> <C>
July 1995 325,000 $2.00 7-01-00
May to November 1995 (1) 850,500 $7.00 60 months after
August 1995 40,000 $2.00 8-01-00
March 1996 50,000 $2.00 3-01-01
August 1997 114,971 $2.00 6-30-00
August 1997 575,000 $1.00 6-30-00
August 1997 200,000 $1.50 6-30-00
August 1997 180,000 $2.00 6-30-02
October 1997 to August 1998 460,000 $0.75 36 months after
January 1998 100,000 $0.75 36 months after
January 1998 30,000 $0.75 36 months after
January 1998 325,000 $0.75 12-00-02
February 1998 1,050,000 $0.75 1-31-03
June 1998 25,000 $0.75 5-30-03
June 1998 250,000 $1.50 5-30-03
June 1998 150,000 $2.00 5-30-03
June 1998 100,000 $3.00 5-30-03
November 1998 250,000 $0.80 10-31-03
January 1999 10,000 $1.00 12-31-04
</TABLE>
46
<PAGE>
(1) These warrants are redeemable by the Company at $.10 per warrant if the
market price for our Common Stock exceeds $8.50 per share for 20 trading
days within a period of 30 consecutive trading days.
(2) These warrants were issued to investment banking groups for services in
placing financing for us.
(3) These warrants were issued to Aesop Financial Corporation, in consideration
for its contribution of certain assets it acquired in foreclosure of a
former subsidiary of the Company. Aesop is an affiliate of the Steven W.
Bingaman 1966 Trust, a principal stockholder of the Company.
In addition to the above, we authorized the issuance of 7,526,784 Class
A Redeemable Common Stock Purchase Warrants to stockholders as of June 14, 1999.
These Class A Warrants expire June 11, 2004 and entitle the holder of each
Warrant for the period commencing June 14, 1999 to June 11, 2004 to purchase one
share of Common Stock at a purchase price of $5.00 per share. We may redeem the
Class A Warrants at any time at $.10 per Warrant during the exercise period if
the market price for the shares equals or exceeds $6.00 per share during any
five (5) trading days within a period of thirty consecutive trading days prior
to such redemption.
47
<PAGE>
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY
AND OTHER SHAREHOLDER MATTERS
(a) Our Common Stock is traded on the NASDAQ Bulletin Board.
(b) Our Common Stock was listed on the NASDAQ Bulletin Board on
approximately April 16 of 1996.
(c) Our Common Stock is approved for trading on the NASDAQ Over the Counter
Bulletin Board, trading under the stock symbol "HQNT". The chart below
breaks down the high bid and the low bid prices for each of the last 8
quarters (as reported by NASDAQ Trading & Market Services) which
quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not reflect actual transactions.
During 1996, 1997 and 1998, our high and low prices were as follows:
HIGH LOW
---- ---
1996
----
2nd Quarter (from 4-16-96) 10.00 4.00
3rd Quarter 9.125 4.125
4th Quarter 3.50 1.875
1997
----
1st Quarter 2.875 1.50
2nd Quarter 3.625 4.125
3rd Quarter 2.50 1.625
4th Quarter 3.00 1.50
1998
----
1st Quarter 1.40 1.25
2nd Quarter 1.40 .59
3rd Quarter 2.00 .94
4th Quarter 2.75 .60
1999
----
1st Quarter 1.06 .50
On July 20, 1999 the closing prices of our Common Stock were $.96875
bid and $1.0625 asked, as quoted on the NASDAQ OTC Bulletin Board.
To date no dividends have been declared or paid on the Common Stock.
(See part I Item 8, "Dividend Policy").
H-Quotient, Inc. was formed on June 7, 1999 under the laws of the State
of Virginia. The Articles of Incorporation authorize the issuance of 100,000,000
shares consisting of 90,000,000 shares of Common stock and 10,000,000 shares of
series Preferred Stock. The Common Stock has a par value of $0.0001 per share
and the series Preferred Stock shall have such par value, as the Board of
Directors shall determine.
At the time of the merger, June 14, 1999, the Predecessor Corporation,
Integrated Healthcare Systems, Inc., formed in March of 1993 authorized the
issuance of 50,000,000 shares of common stock having a par value of $0.0001 per
share.
There are approximately 594 holders of record of our Common Stock.
48
<PAGE>
Dividend
We have never had net profits on operations and therefore are currently
proscribed under the Virginia Code from declaring dividends. We have not paid
any cash dividends on our Common Stock. Our Board of Directors has no present
intention of declaring any cash dividends, as we expect to re-invest all profits
in the business for additional working capital for continuity and growth. Our
Board of Directors considering the conditions then existing, including our
earnings, financial condition, capital requirements, and other factors will
determine the declaration and payment of dividends in the future.
ITEM 2. LEGAL PROCEEDINGS
We currently have judgments entered against it by various creditors. Of
these judgments, seven are uncontested and are immediately due and payable in
the aggregate amount of $325,000 plus accrued interest of approximately $70,000
The other judgment, for $162,147 plus accrued interest, was entered in
March 1998 in Integrated Healthcare Systems, Inc. v. Gaskell, et al, (Docket No.
98-1480), a case in the United States District Court Eastern District of
Virginia. The judgment was granted to a former owner of a former operating
subsidiary of the Company and was based on the indemnification provision in the
stock purchase agreement by which he sold his interest in that subsidiary to the
Company. The Company appealed that judgment and, on June 14, 1999, the United
States Court of Appeals for the Fourth Circuit vacated the judgment. However,
the appeals court also remanded the case back to district court for further
proceedings as to whether sanctions against the Company should be imposed.
49
<PAGE>
In addition, our former accountant sued us in April 1997 for collection
of $365,833 in fees. The case, M.R. Weiser & Co., LLP v. Integrated Healthcare
Systems, Inc., (Index No. 601937/97). is presently pending in the United States
District Court for the Southern District of New York. We have answered the
complaint and asserted various affirmative defenses, among them claims that the
plaintiff has not given us full credit for payments made and that plaintiff's
charges were excessive and unreasonable. This action is pending and is in the
discovery phase.
On January 10, 1997 the Internal Revenue Service ("IRS") filed in the
Circuit Court for the County of Fairfax, Virginia a Notice of Federal Tax Lien
in the amount of $386,234.73 against us for employment withholding tax
liabilities of Integrated Systems Technology, Inc. ("IST") formerly a wholly
owned subsidiary of ours acquired in 1995. It is the opinion of our special
counsel, Carr Goodson Lee & Warner P.C., Washington D.C.; that there is no
"alter ego" liability on the part of us and that the lien filed against us is
wrongful and should be released. We have made efforts to get the lien released
but the IRS has refused. In the meantime, the IRS since the filing of the
Notice, has not made any effort to enforce it against us. In the event the lien
is not released, we may have to bring a suit against the IRS in the Federal
courts for wrongful levy.
Other suits arising in the ordinary course of business are pending
against us. We believe the ultimate outcome of these actions will not result in
a material adverse effect on our consolidated financial position, results of
operations or cash flows.
50
<PAGE>
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
We have selected Kaufman Davis, PC, CPA's with offices at 7475
Wisconsin Avenue, Suite 700, Bethesda, Maryland 20814-9802, as our independent
accountants and auditors, for the audit of our financial statements for 1997 and
1998. We have included in this filing our audited financial statements for the
fiscal years ended December 31, 1997 and December 31, 1998, in reliance on the
report of that firm and upon the authority of that firm as expert in auditing
and accounting
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
Calendar Year 1996
During March of 1996 pursuant to Rule 504 of Regulation D we issued
500,000 shares of our Common Stock at $2.00 per share to subscribing holders of
certain bridge notes in exchange for 80.08% of the outstanding bridge notes and
accrued interest thereon in the aggregate amount of $1,000,000.
On or about March of 1996 we issued Warrants to purchase 50,000 shares
of our Common Stock, at $2.00 per share, to a consultant as compensation for
services rendered. This issuance is considered exempt from registration by
reason of Section 4(2) of the Securities Act, but are "restricted securities" as
that term is defined by Rule 144 ("Rule 144") of the Securities Act ("Restricted
Securities).
During the period of June 1996 to January 1997 pursuant to Regulation A
of the Securities Act, we issued 1,995,800 shares of our Common Stock at $2.00
per share in exchange for cash, assets and/or, debt repayment all totaling
$4,000,000 to subscribers of the Regulation A offering.
51
<PAGE>
In December of 1996 we issued 300,000 shares of our Common Stock to a
finance company as part of a transaction pursuant to which we purchased certain
assets from the purchaser. This issuance is considered exempt from registration
by reason of Section 4(2) of the Securities Act, but the shares issued are
Restricted Securities as defined by Rule 144.
Calendar Year 1997
In January of 1997, we issued 250,000 Warrants at an exercise price of
$2.00 per share; 200,000 Warrants at an exercise price of $1.50 per share; and
575,000 Warrants at an exercise price of $1.00 per share to a finance company as
part of the consideration for certain intangible assets possessed by the finance
company from Integrated Systems Technology, Inc. a former subsidiary, upon its
default in the repayment of certain advances made to IST. These issuances are
considered exempt from registration by reason of Section 4(2) of the Securities
Act but the Warrants and/or any shares issued upon the exercise thereof are
Restricted Securities, as defined by Rule 144.
Also in January of 1997, we issued 180,000 Warrants at an exercise
price of $2.00 per share to a financial company as part of the consideration for
certain assets purchased from the finance company. This issuance is considered
exempt from registration by reason of Section 4(2) of the Securities Act, but
these Warrants and any shares issued upon the exercise thereof are Restricted
Securities as defined above by Rule 144.
In July 1997, we issued 100,000 shares of Common Stock in partial
payment for the lease of certain equipment by our wholly owned subsidiary. This
issuance is considered exempt from registration by reason of Section 4(2) of the
Securities Act, but the shares are Restricted Securities as defined above by
Rule 144.
From September through November 1997, we issued 1,143,175 shares of
Common Stock upon the conversion of certain convertible notes in the principal
amount of $366,100 and accrued interest of $66,808. These issuances are
considered exempt from registration by reason of Section 3(a) (g) of the
Securities Act, but the shares are Restricted Securities as defined above.
52
<PAGE>
In November 1997, a Warrant holder exercised 135,029 Warrants to
purchase 135,029 shares of Common Stock at $2.00 per share in exchange for the
repayment of a promissory notes in the principal amount of $161,543 and accrued
interest of $39,535 and cash and other expenses of $68,980.00. This issuance is
considered exempt from registration by reason of Section 4.(2) of the Securities
Act, but the shares are Restricted Securities as defined by Rule 144.
Calendar Year 1998
During the period beginning October 1997 through January 1998 we issued
pursuant to Rule 506, Regulation D of the Securities Act 365,000 Warrants to
purchase the Common Stock at an exercise price of $0.75 per share. The purchase
price was $1.00 per Warrant. The Warrants and the underlying warrant shares when
issued are Restricted Securities as defined by Rule 144.
In January of 1998 we issued Warrants at an exercise price of $0.75 per
share to two investment banking firms to purchase 325,000 shares of Common Stock
and 130,000 shares of Common Stock respectively as payment for services. These
issuances are considered exempt from registration by reason of Section 4(2) of
the Securities Act, but the Warrants and the underlying Warrant shares are
Restricted Securities as defined by Rule 144.
In February 1998, we issued 35,000 warrants at an exercise price of
$0.75 per share as an agreed adjustment to the purchase price for the $1.00 per
Warrants purchased by subscribers of a Regulation D, Rule 506 offering. This
issuance is considered exempt from registration by reason of an exemption under
Rule 506 of Regulation D, but the Warrants and when exercised the underlying
Warrant shares are Restricted Securities as defined by Rule 144.
53
<PAGE>
In February 1998, we issued 50,000 Warrants at an exercise price of
$0.75 per share to one of our directors for a period of five years. These
Warrants were issued to the director in lieu of compensation for serving as a
director for calendar years 1996 and 1997. We issued 1,000,000 Warrants to
certain officers at an exercise price of $0.75 per share. These Warrants were
issued to the officers in lieu of implementing an executive management stock
option program. These issuances are considered exempt from registration but the
Warrants and when exercised the underlying warrant shares are Restricted
Securities as defined by Rule 144.
In March 1998 we issued 10,000 Warrants at an exercise price of $0.75
per share as an agreed to adjustment to the purchase price for the $1.00 per
Warrant purchased by subscribers of a Regulation D, Rule 506 offering. This
issuance is considered exempt from registration by reason of Rule 506 but the
Warrants and when exercised the underlying warrant shares are Restricted
Securities as defined by Rule 144.
In June 1998, we issued 25,000 Warrants at an exercise price of $0.75
per share to a one of our directors. These Warrants were issued to the director
in lieu of compensation for serving as a director for calendar year 1998. We
issued 250,000 Warrants at an exercise price of $1.50 per share, 150,000
Warrants at an exercise price of $2.00 per share and 100,000 Warrants at an
exercise price of $3.00 per share to certain officers. These warrants were
issued to the officers in lieu of implementing an executive management stock
option program. These issuances are considered exempt from registration but the
Warrants and when exercised the underlying warrant shares are Restricted
Securities as defined by Rule 144.
In August 1998, we issued 297,924 shares of Common Stock in
consideration for $202,588 in cash, debt repayment and other expenses. This
issuance is considered exempt from registration by reason of Section 4(2) of the
Securities Act, but the shares are Restricted Securities as defined by Rule 144.
In August 1998 we issued 50,000 Warrants at an exercise price of $0.75
per share in an agreed to adjustment to the purchase price for $1.00 per
Warrants purchased by subscribers of a Regulation D, Rule 506, offering. These
considered exempt from registration by reason of Rule 506 but the Warrants and
when exercised the underlying warrant shares are Restricted Securities as
defined by Rule 144.
In November 1998 we issued 250,000 Warrants at an exercise price of
$0.80 per share. This issuance is considered exempt from registration by reason
of Section 4(2) of the Securities Act, but the shares are Restricted Securities
as defined by Rule 144.
In December 1998 we issued 10,000 Warrants at an exercise price of
$1.00 per share as partial consideration for a loan. The issuance is considered
exempt from registration by reason of Section 4(2) of the Securities Act, but
the shares are Restricted Securities as defined by Rule 144.
Calendar Year 1999
We authorized by action of the Board of Directors the issuance of
7,530,984 Class A Redeemable Common Stock Purchase Warrants exercisable for a
period of five years at $5.00 per share to the shareholders of Integrated
Healthcare Systems, Inc. on June 14, 1999.
54
<PAGE>
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
CODE OF VIRGINIA
Sections 13.1 - 697,13.1-699 13.1-701 and 13.1 - 702 of the Code of
Virginia contain provisions authorizing our indemnification of directors.
officers, employees or agents against certain liabilities and expenses which
they may incur as director, officers, employees or agents of the Company or of
certain other entities. The law also provides that such indemnification may
include payment by the Company of expenses incurred in defending a civil or
criminal action or proceeding in advance of the final disposition of such action
or proceeding upon receipt of an undertaking by the person indemnified to repay
such payment if he or she shall be ultimately found not to be entitled to
indemnification. Indemnification may be provided even though the person to be
indemnified is no longer a director, officer, employee or agent of the Company
or such other entities. Section 13.1-703 also contains provisions authorizing
the Company to obtain insurance on behalf of any such director, officer employee
or agent against liabilities, whether or not we would have the power to
indemnify such person against such liabilities under the provisions of the
Section.
The indemnification and advancement of expenses provided pursuant to
Section 3 13.1-699,13.1-701, 13.1-702 and 13.1-703 of the Code of Virginia are
not exclusive. Because our Articles of Incorporation, as amended, do not
otherwise provide, notwithstanding our failure to provide indemnification and
despite a contrary determination by the Board of Directors or our shareholders
in a specific case, a director, officer, employee or agent of the Company who is
or was a party to a proceeding may apply pursuant to Section 13.1-700.1 to a
court of competent jurisdiction for indemnification or advancement of expenses
or both, and court may order indemnification and advancement of expenses or
both, and the court may order indemnification and advancement of expenses,
including expenses incurred in seeking court-ordered indemnification or
advancement of expenses if it determines that the petitioner is entitled to
mandatory indemnification pursuant to Section 13.1-698 because he has been
successful on the merits, or because the Company has the power to indemnify on a
discretionary basis pursuant to Section 13.1-697, 13.1-701 and 13.1-702 or
because the court determines that the petitioner is fairly and reasonably
entitled indemnification or advancement of expenses or both in view of all the
relevant circumstances.
ARTICLES OF INCORPORATION AND BY-LAWS
The Articles of Incorporation and By-laws of the Company, as
amended, empower us to indemnify our current or former directors, officers,
employees or capacities in such capacities in any other enterprise to the full
extent permitted by the laws of the State of Virginia
LIMITATION ON LIABILITY
Our Articles of Incorporation limit directors' and officers'
liabilities to the maximum permitted under Virginia Law. Thus, even if such an
officer or director loses a lawsuit, it is possible, if such officer or director
was acting in good faith, acting in the best interests of the Company or had no
reasonable cause to believe his conduct was unlawful in the performance of
his/her duties, that we or our insurance carrier; if any, will pay the amount of
such judgment or settlement and reasonable legal fees.
OFFICERS AND DIRECTORS LIABILITY INSU7RANCE
At present, we do not maintain Officers and Directors Liability
Insurance.
55
<PAGE>
INDEMNITY AGREEMENTS
At present, we do not have indemnity agreement in place with any of our
current officers or directors.
SEC POSITION ON INDEMNIFICATION FOR SECURITY ACT LIABILITTY
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions, or otherwise, the
Company has been advised that is the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933, as amended, and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Company of expenses incurred or paid by a director, officer or
controlling person of the Company in the successful defense of any action, suite
or proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company 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 of whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933, as amended, and will be governed by the final adjudication of such
issue.
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its half by
the undersigned, thereunto duly authorized.
H-Quotient, Inc.
(Registrant)
Date July 23, 1999 By s/ Michael J. Black
----------------------------------
Michael J. Black, CEO
Chairman and Chief Executive Officer
By s/ Alan W. Grofe
----------------------------------
Alan W. Grofe, President
56
<PAGE>
INTEGRATED HEALTHCARE
SYSTEMS, INC. AND SUBSIDIARY
Consolidated Financial Statements
Years ended December 31, 1998
and 1997 with Report of
Independent Auditors
F-1
<PAGE>
INTEGRATED HEALTHCARE SYSTEMS, INC. AND SUBSIDIARY
Consolidated Financial Statements
Years ended December 31, 1998 and 1997
Contents
Page Number
-----------
Report of Independent Auditors.......................................... 1
Financial Statements:
Consolidated Balance Sheets.......................................... 2
Consolidated Statements of Operations................................ 3
Consolidated Statements of Shareholders' Accumulated Deficit......... 4
Consolidated Statements of Cash Flows................................ 5
Notes to Consolidated Financial Statements...................... 6 - 21
F-2
<PAGE>
Report of Independent Auditors
To the Board of Directors
Integrated Healthcare Systems, Inc.
Reston, Virginia
We have audited the accompanying consolidated balance sheets of Integrated
Healthcare Systems, Inc. and Subsidiary (the "Company") as of December 31, 1998
and 1997, and the related consolidated statements of operations, shareholders'
accumulated deficit, and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 financial position of the Integrated
Healthcare Systems, Inc. and Subsidiary as of December 31, 1998 and 1997, and
the results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 3 to the
consolidated financial statements, the Company's significant recurring losses,
operation history and significant working capital deficiency, including
significant amounts of past due payables, raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also discussed in Note 3. The consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amounts and classification of
liabilities that might result from the outcome of this uncertainty.
KAUFMAN DAVIS, PC
Certified Public Accountants
June 11, 1999
F-3
<PAGE>
INTEGRATED HEALTHCARE SYSTEMS, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
March 31,
1998 1997 1999 1998
------------ ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash $ 1,776 $ -- $ 565,270 $ 11,680
Contracts receivable, less allowance for
doubtful accounts of $10,000 and $0, respectively 70,332 141,070 106,039 89,439
Due from officers 9,985 9,700 20,985 10,522
Other current assets -- 50,899 66,621 50,899
------------ ------------ ------------ ------------
Total current assets 82,093 201,669 758,915 162,540
------------ ------------ ------------ ------------
Property and equipment, net 67,776 90,204 70,748 80,427
Capitalized software, net of accumulated
amortization of 0 in 1998 69,308 -- 194,733 --
Intangibles, net -- 19,113 -- 10,920
Deposits 6,860 6,860 9,860 6,860
------------ ------------ ------------ ------------
Total assets $ 226,037 $ 317,846 $ 1,034,256 $ 260,747
============ ============ ============ ============
Liabilities and Shareholders' Accumulated Deficit
Current liabilities:
Accounts payable 923,306 628,990 848,333 725,783
Accrued expenses 1,901,458 1,350,797 1,719,803 1,463,529
Short-term debt 1,337,130 1,176,854 1,156,754 1,192,060
Deferred revenues 238,225 73,488 778,724 94,193
------------ ------------ ------------ ------------
Total current liabilities 4,400,119 3,230,129 4,503,614 3,475,565
------------ ------------ ------------ ------------
Commitments and contingencies -- -- -- --
Shareholders' accumulated deficit:
Common stock, $.0001 par value authorized
50,000,000 shares; 5,110,705, 4,812,779
6,592,505 and 4,812,779 shares issued and
outstanding at December 31, 1998, and 1997
and at March 31, 1999 (unaudited) and
1998 (unaudited), respectively 511 483 659 483
Additional paid-in capital 7,122,555 6,699,994 7,907,946 6,844,994
Accumulated deficit (11,297,148) (9,612,760) (11,377,963) (10,060,295)
------------ ------------ ------------ ------------
Total shareholders' accumulated deficit (4,174,082) (2,912,283) (3,469,358) (3,214,818)
------------ ------------ ------------ ------------
Total liabilities and shareholders' accumulated
deficit $ 226,037 $ 317,846 $ 1,034,256 $ 260,747
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
INTEGRATED HEALTHCARE SYSTEMS, INC. AND SUBSIDIARY
Consolidated Statements of Operations
Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Three months ended
March 31,
1998 1997 1999 1998
----------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
Software sales $ -- $ 41,479 $ 29,900 $ --
Service income 239,139 265,979 197,562 72,604
----------- ----------- ----------- -----------
Total revenues 239,139 307,458 227,462 72,604
----------- ----------- ----------- -----------
Operating expenses:
Cost of sales and services 307,537 226,939 38,960 95,351
Selling and marketing 244,182 118,413 45,942 61,085
General and administrative 1,155,631 1,679,035 192,582 330,223
----------- ----------- ----------- -----------
Total operating expenses 1,707,350 2,024,387 277,484 486,659
----------- ----------- ----------- -----------
Operating loss (1,468,211) (1,716,929) (50,022) (414,055)
Other expense/(income):
Interest expense 157,970 183,546 29,833 21,477
Other expense/(income) 58,207 (149,802) 960 12,003
----------- ----------- ----------- -----------
Total other expense/(income) 216,177 33,744 30,793 33,480
----------- ----------- ----------- -----------
Loss before income taxes and nonrecurring item (1,684,388) (1,750,673) (80,815) (447,535)
Provision for income taxes -- -- -- --
----------- ----------- ----------- -----------
Loss before nonrecurring item (1,684,388) (1,750,673) (80,815) (447,535)
Nonrecurring item -- (1,398,000) -- --
----------- ----------- ----------- -----------
Net loss $(1,684,388) $(3,148,673) $ (80,815) $ (447,535)
=========== =========== =========== ===========
Earnings per common share:
Basic and diluted:
Operating loss before nonrecurring item $ (.34) $ (.49) $ (.01) $ (.09)
Nonrecurring item -- (.39) -- --
----------- ----------- ----------- -----------
Net loss $ (.34) $ (.88) $ (.01) $ (.09)
=========== =========== =========== ===========
Weighted average number of outstanding
common shares 4,936,915 3,578,054 6,028,047 4,812,779
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
INTEGRATED HEALTHCARE SYSTEMS, INC. AND SUBSIDIARY
Consolidated Statements of Shareholders' Accumulated Deficit
Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Common Stock Additional Total
------------------ paid in Accumulated shareholders'
Shares Amount capital deficit deficit
--------- ------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
December 31, 1996 3,162,591 $ 316 $ 5,104,137 $ (6,464,087) $ (1,359,634)
Issuance of common stock:
Regulation A offering 271,984 28 543,940 543,968
Stock issuance @ $0.84 100,000 10 83,893 83,903
Sale of stock for notes
@ $0.33 per share 1,065,747 107 354,590 354,697
Sale of stock for notes
@ $1.01 per share 77,428 8 78,202 78,210
Stock issuance - Rule 144 37,594 4 75,184 75,188
Stock issuance - Rule 144 97,435 10 194,860 194,870
Warrants (Regulation D offering) -- -- 265,188 265,188
Net loss for 1997 (3,148,673) (3,148,673)
--------- ------ ----------- ------------ ------------
December 31, 1997 4,812,779 $ 483 $ 6,699,994 $ (9,612,760) $ (2,912,283)
========= ===== =========== ============ ============
Issuance of common stock:
Regulation D offering (unaudited) -- -- 145,000 145,000
Net loss for the three months ended
March 31, 1998 (unaudited) (447,535) (447,535)
--------- ------ ----------- ------------ ------------
March 31, 1998 (unaudited) 4,812,779 $ 483 $ 6,844,994 $(10,060,295) $ (3,214,818)
========= ===== =========== ============ ============
Issuance of common stock:
Regulation D offering 75,000 75,000
Stock issuance - Rule 144 297,926 28 202,561 202,589
Net loss for the nine months ended
December 31, 1998 (1,236,853) (1,236,853)
--------- ------ ----------- ------------ ------------
December 31, 1998 5,110,705 $ 511 $ 7,122,555 $(11,297,148) $ (4,174,082)
========= ===== =========== ============ ============
Issuance of common stock:
Regulation D offering
@ $0.60 per share (unaudited) 446,389 45 267,788 267,833
Regulation D offering
@ $0.50 per share (unaudited) 1,035,411 103 517,603 517,706
Net loss for the three months ended
March 31, 1999 (unaudited) (80,815) (80,815)
--------- ------ ----------- ------------ ------------
March 31, 1999 (unaudited) 6,592,505 $ 659 $ 7,907,946 $(11,377,963) $ (3,469,358)
========= ===== =========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
INTEGRATED HEALTHCARE SYSTEMS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Three months ended
March 31,
1998 1997 1999 1998
----------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $(1,684,388) $(3,148,673) $ (80,815) $ (447,535)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 39,761 23,614 12,108 9,777
Amortization 19,113 921,893 -- 8,192
Nonrecurring charges, net -- 1,398,000 -- --
Changes in operating assets and liabilities:
(Increase)/Decrease in:
Contracts receivable 70,738 (2,554) (35,707) 51,631
Due from affiliate 50,899 (50,899) -- --
Due from officers (285) -- (11,000) (822)
Prepaid expenses and other current assets -- -- (66,621) --
Deferred charges and other assets -- (6,860) (3,000) --
Increase/(Decrease) in:
Accounts payable 296,145 13,167 (74,973) 98,621
Accrued expenses 550,660 197,454 (181,655) 112,733
Deferred revenues 164,737 (41,789) 540,499 20,705
----------- ----------- ----------- -----------
Net cash (used in) provided by operating
activities (492,620) (696,647) 98,836 (146,698)
----------- ----------- ----------- -----------
Cash flows from investing activities:
Additions to property and equipment (17,333) (97,475) (16,629) --
Disposals of property and equipment, net -- -- 1,549 --
Capitalized software (69,308) -- (125,424) --
Additions to intangibles -- (25,000) -- --
----------- ----------- ----------- -----------
Net cash used in investing activities (86,641) (122,475) (140,504) --
----------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from sale of common stock 422,589 1,596,024 785,539 145,000
Proceeds from notes payable 155,000 35,000 -- 90,000
Proceeds from related parties 115,376 -- -- 35,206
Repayment of notes payable (20,000) (370,416) (65,000) (20,000)
Repayment of convertible debt -- (366,100) -- --
Repayment of related parties (90,100) (65,784) (115,377) (90,000)
----------- ----------- ----------- -----------
Net cash provided by financing activities 582,865 828,724 605,162 160,206
----------- ----------- ----------- -----------
Net increase in cash 3,604 9,602 563,494 13,508
Cash at beginning of period (1,828) (11,430) 1,776 (1,828)
----------- ----------- ----------- -----------
Cash at end of period $ 1,776 $ (1,828) $ 565,270 $ 11,680
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
INTEGRATED HEALTHCARE SYSTEMS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
1. Organization
Integrated Healthcare Systems, Inc. and Subsidiary (the "Company"), incorporated
in Delaware on March 5, 1993, was organized to develop, market, install and
maintain integrated software and hardware systems. The Company markets its
products to private and public healthcare facilities throughout the United
States.
2. Summary of Significant Accounting Policies
Basis of Presentation - The consolidated financial statements of the Company
include the accounts of its wholly owned subsidiary, IHS of Virginia, Inc. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Unaudited Interim Financial Information - The consolidated financial statements
as of March 31, 1998 and 1999 are unaudited and include, in the opinion of
management, all adjustments which the Company considers necessary to present
fairly the financial position, results of operations and cash flows of the
Company for the interim periods. The operating results for the three months
ended March 31, 1998 and 1999 are not necessarily indicative of the results that
may be expected for the full fiscal year.
Accounting Estimates - The preparation of financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial
statements and the associated amounts of revenues and expenses during the period
reported. Actual results could differ from the estimates.
Revenue Recognition and Deferred Revenue - The Company recognizes revenue
derived from software system sales that require significant modification or
customization based upon the percentage of completion method of accounting for
contracts using labor costs as the basis. Revenues from software system sales
with little or no modification or customization are recognized upon delivery of
the software.
Revenues from consulting services are recognized as performed. Revenues derived
from maintenance contracts are initially deferred and subsequently recognized as
revenue ratably over the terms of the contracts, which are typically from one to
two years.
Deferred revenues represent either billings related to, or payments received
from customers, for software system sales prior to customer delivery and
acceptance, and maintenance service fees billed in advance.
Cash Equivalents - For the purposes of the consolidated statements of cash
flows, the Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
F-8
<PAGE>
INTEGRATED HEALTHCARE SYSTEMS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
2. Summary of Significant Accounting Policies (continued)
Concentrations of Credit Risk - Financial instruments that potentially subject
the Company to a concentration of credit risk consist principally of temporary
cash investments and contracts receivable. The Company has cash investment
policies that restrict placement of these investments to financial institutions
evaluated as highly creditworthy. The Company generally does not require
collateral on contracts receivable as the Company's customer base consists of
large, well established companies and governmental entities. The carrying amount
of the accounts receivable approximates their net realizable value.
Property and Equipment - Property and equipment are stated at cost. Depreciation
of property and equipment is determined using the straight-line method over the
estimated useful lives of the assets, as follows:
Office and computer equipment........................2-5 years
Furniture and fixtures...............................3-7 years
Capitalized Software Costs - The capitalized costs of acquired technology and
software development are amortized using the greater of the ratio of current
gross revenues to total current and anticipated revenues or the straight-line
method over its estimated useful life of four years on a product by product
basis. The carrying amount of acquired technology and software development is
periodically reviewed by the Company for impairment. Impairment is recognized
when the future gross revenues from products, reduced by the estimated future
costs of completing and disposing of that product, including the costs of
maintenance and customer support required at the time of sale, is less than the
carrying amount of that product.
Research and development costs consist principally of salaries and benefits paid
to the Company's employees. The Company's policy is to expense all research and
development costs as incurred until technological feasibility is established.
Commencing with the establishing of technological feasibility and concluding at
the time the product is ready for release, software development costs are
capitalized. Technological feasibility is defined as being established when
product design and a working model of the software product has been completed
and tested. The Company's products have met technological feasibility criteria
and, accordingly, the Company has capitalized these costs.
Intangible Assets - Amortization of intangible assets is determined using the
straight-line method over the estimated useful lives of the assets, as follows:
Financing costs...................................... 5 years
Maintenance contracts................................ 2 years
Customer lists....................................... 2 years
Copyrights........................................... 4 years
Annually, the Company makes an assessment of the remaining fair market value of
intangible assets. Declines in fair market value considered to be other than
temporary are expensed immediately.
F-9
<PAGE>
2. Summary of Significant Accounting Policies (continued)
Income Taxes - Income taxes are provided for the tax effects of transactions
reported in the financial statements and consist of taxes currently due plus
deferred taxes. Deferred taxes are recognized for differences between the basis
of assets and liabilities for financial statement and income tax purposes. The
differences relate primarily to depreciable assets (use of different
depreciation methods and lives for financial statement and income tax purpose),
and officers salary and legal contingencies accrued but not paid (deductible for
financial statement purpose but not for income tax purpose). Deferred tax assets
and liabilities represent the future tax return consequences of those
differences, which will either be deductible or taxable when the assets and
liabilities are recovered or settled. Deferred taxes are also recognized for
operating losses and tax credits that are available to offset future taxable
income.
Dividend Policy - The Company has not paid any dividends since its inception and
does not anticipate paying any dividends in the foreseeable future. The payment
of dividends other than stock dividends, is restricted by covenants included in
the Company's convertible subordinated promissory notes. When such convertible
subordinated promissory notes are either paid or converted, the payment of
dividends is within the discretion of the Board of Directors of the Company.
Earnings Per Share - Basic earnings per share is computed by dividing net income
by the weighted average number of shares outstanding for the period. Diluted
earnings per share include the dilutive effect of warrants and contingent
shares.
3. Going Concern
The accompanying consolidated financial statements have been prepared on a going
concern basis which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. Since inception, the Company
has suffered significant losses from operations and, as of December 31, 1998,
the Company has a working capital deficiency of $4,318,026 ($3,028,460 as of
December 31, 1997). Additionally, almost all accounts payable are past due and
short-term debt is in default. These factors raise substantial doubt about the
Company's ability to continue as a going concern. The consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amounts and classification of
liabilities that might be necessary should the Company be unable to continue in
existence.
The Company's ability to continue as a going concern is dependent on obtaining
funds in order to repay its obligations. Management intends to raise additional
capital through the exercise of 1,069,971 warrants already issued following the
registration of the shares of common stock underlying these warrants. Management
believes the net proceeds generated by the exercise of the warrants of
approximately $1,400,000, along with funds generated from operations and
restructuring negotiated settlements with creditors will be sufficient to fund
the Company's requirements for at least the next 12 months. There is no
assurance, however, that the registration of the shares underlying the warrants
will be completed, and if not completed, that the Company will raise alternative
capital sufficient to enable the Company to continue its operations as
contemplated over the next 12 months.
F-10
<PAGE>
3. Going Concern (continued)
In the event the Company is unable to successfully complete the financing, it is
unlikely that the Company will have sufficient cash flow and liquidity to repay
its outstanding obligations in full, as currently contemplated. Accordingly, in
the event alternative financing is not obtained, the Company will likely reduce
expenses, debt payments, and delay new marketing campaigns until it is able to
obtain sufficient financing to do so.
4. Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31, March 31,
------------ ---------
1998 1997 1999 1998
------------ ------------ ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Office and computer equipment $ 129,657 $ 112,324 $ 146,287 $ 112,324
Furniture and fixtures 5,000 5,000 3,450 5,000
------------ ------------ ----------- -----------
Less: accumulated depreciation 66,881 27,120 78,989 36,897
------------ ------------ ----------- -----------
$ 67,776 $ 90,204 $ 70,748 $ 80,427
============ ============ =========== ===========
</TABLE>
Depreciation expense of property and equipment is as follows:
Year ended December 31, 1998 $39,761
=======
Year ended December 31, 1997 $23,614
=======
Three months ended March 31, 1999 (unaudited) $12,108
=======
Three months ended March 31, 1998 (unaudited) $ 9,777
=======
5. Intangible Assets
Intangible assets consists of the following:
<TABLE>
<CAPTION>
December 31, March 31,
------------ ---------
1998 1997 1999 1998
--------- --------- --------- ---------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Finance costs $ 61,450 $ 61,450 $ 61,450 $ 61,450
Maintenance contracts 254,052 254,052 254,052 254,052
Customer lists 195,425 195,425 195,425 195,425
Copyright 390,850 390,850 390,850 390,850
Service mark 56,673 56,673 56,673 56,673
--------- --------- --------- ---------
958,450
Less: accumulated amortization (958,450) (939,337) (958,450) (947,530)
--------- --------- --------- ---------
$ -- $ 19,113 $ -- $ 10,920
========= ========= ========= =========
</TABLE>
F-11
<PAGE>
5. Intangible Assets (continued)
Amortization expense for intangible assets is as follows:
Year ended December 31, 1998 $ 19,113
==============
Year ended December 31, 1997 $ 921,893
==============
Three months ended March 31, 1999 (unaudited) $ --
==============
Three months ended March 31, 1998 (unaudited) $ 8,192
==============
6. Short-term Debt
Debt consists of the following:
<TABLE>
<CAPTION>
December 31, March 31,
------------ ---------
1998 1997 1999 1998
-------- -------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Notes payable to banks with interest at prime
plus 1%. $ 70,000 $ 70,000 $ 70,000 $ 70,000
Demand note payable to a former employee with
interest at 9% per annum. This note is in
default and a judgement has been obtained by
the note holder. 17,950 17,950 17,950 17,950
Demand note payable to a former law firm of the
Company with interest at 10% due September 1997
This note is in default and a judgement has been
obtained by the note holder.
80,000 80,000 80,000 80,000
Legal settlement to a former law firm of the
Company with interest at 9% due throughout
1998. This note is in default. 105,000 125,000 105,000 105,000
Demand note payable to a former shareholder of
IST with interest at 8% per annum.
150,000 150,000 150,000 150,000
Non-interest bearing demand note payable to an
affiliate. 11,288 11,288 11,288 11,288
Non-interest bearing demand note payable to an
individual. 35,320 35,320 35,320 35,320
Demand note payable to a secured lender with
interest at 12%. 115,376 -- -- 35,206
Non-interest bearing demand note payable to an
investor. 15,000 -- -- --
</TABLE>
F-12
<PAGE>
6. Short-term Debt (continued)
<TABLE>
<CAPTION>
December 31, March 31,
------------ ---------
1998 1997 1999 1998
----------- ----------- ---------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Note payable with interest at prime plus one
due March 13, 1999. Paid in full 3/31/99,
interest of $937 and a financing fee of $9,063. 50,000 -- -- --
Promissory notes payable with interest at 15%. 687,196 687,196 687,196 687,196
Miscellaneous -- 100 -- 100
----------- ---------- ---------- ----------
$ 1,337,130 $1,176,854 $1,156,754 $1,192,060
=========== ========== ========== ==========
</TABLE>
7. Commitments and Contingencies
Lease Commitments
Beginning May 21, 1999, the Company entered into a two year lease agreement for
office space. Future minimum lease payments as of December 31, 1998 under
operating leases with terms greater than one year are as follows:
Year Ending
----------------------
December 31, 1999 $ 62,286
December 31, 2000 106,776
December 31, 2001 44,490
------------
$ 213,552
============
Rent expense is as follows:
Year ended December 31, 1998 $ 42,728
=========
Year ended December 31, 1997 $ 70,507
=========
Three months ended March 31, 1999 (unaudited) $ 18,064
=========
Three months ended March 31, 1998 (unaudited) $ 11,148
=========
Employment Agreements - In January 1998, the Company entered into employment
agreements with both the Chief Executive Officer and President of the Company.
Both agreements provide each officer with annual compensation of $145,000 and
warrants to purchase common stock of the Company ranging from a minimum of
100,000 to a maximum of 250,000 per year at an exercise price not less than the
most recently issued warrant by the Company.
F-13
<PAGE>
7. Commitments and Contingencies (continued)
Litigation - In March 1998, a judgement for $162,147 plus accrued interest was
entered in the United States District Court for the Eastern District of Virginia
against the Company in favor of a prior owner of a former wholly owned
subsidiary for legal expenses arising out of the sale of his interest in the
subsidiary to the Company and was imposed pursuant to an indemnity on which the
Company was allegedly obligated. The Company appealed that judgement and, on
June 14, 1999, the United States Court of Appeals for the Fourth Circuit vacated
the judgement. However the appeals court has remanded the case back to district
court for further proceedings as to whether sanctions against the company should
be imposed.
In April 1997, the Company's former accounting firm commenced a lawsuit for
collection of $365,834 in accounting fees. The case is pending in the Supreme
Court of the State of New York, New York County. The Company has answered the
complaint and has asserted various affirmative defenses, among other things that
the plaintiff has not given the Company full credit for payments to plaintiff
and that plaintiff's charges were excessive and unreasonable. Pre-trial
discovery is proceeding.
On January 10, 1997 the Internal Revenue Service ("IRS") filed in the Circuit
Court for the County of Fairfax, Virginia a Notice of Federal Tax Lien in the
amount if $386,234 against the Company for employment withholding tax
liabilities of Integrated Systems Technology, Inc. ("IST"), formerly a wholly
owned subsidiary of the Company. It is the opinion of the Company's legal
counsel that there is no "alter ego" liability on the part of the Company and
that the lien filed against the Company is wrongful and should be released. The
Company had made efforts to get the lien released but the IRS declined the
request at this time. Since the filing of the Notice the IRS has not made any
effort to enforce it against the Company. In the event the lien is not released,
the Company may have to bring a suit against the IRS in the federal courts for
wrongful levy.
The Company is currently a defendant in other lawsuits. The total potential
liability to the Company including the matters as discussed above, is estimated
to be $1,672,000 which has been recorded in the accompanying 1998 and 1997
financial statements.
8. Shareholders' Equity
Common stock and recapitalization - In March 1996, the Company issued 500,000
shares of common stock under Regulation D, Rule 504 at $2.00 per share to
subscribing holders of bridge notes in exchange for 80.08% of the bridge notes
and accrued interest of $1,000,000.
From June 1996 to September 1997, the Company issued 1,095,800 shares of its
common stock under terms of a Regulation A offering of the Company's common
stock at $2.00 per share in exchange for cash and debt repayment totaling
$2,200,000 to subscribers of the offering.
F-14
<PAGE>
8. Shareholders' Equity (continued)
From September 1996 to January 1997, the Company issued 900,000 shares of its
common stock under the terms of a Regulation A offering of the Company's common
stock at $2.00 per share and 300,000 shares of its common stock subject to the
restrictions of Rule 144 of the Securities Exchange Act of 1934 to a financial
institution as part of a transaction in which the Company purchased certain
assets from the financial institution.
In July 1997, the Company issued 100,000 shares of the Company's common stock in
exchange as partial payment for the lease of certain assets by the Company's
subsidiary. These common shares are subject to the restrictions of Rule 144 of
the Securities Exchange Act of 1934.
From September through November 1997, the Company issued 1,143,175 shares of its
common stock in exchange for $366,100 in convertible notes, plus accrued
interest of $66,808. These common shares are subject to the restrictions of Rule
144 of the Securities Exchange Act of 1934.
In November 1997, the holder of a warrant exercised 135,029 warrants to purchase
135,029 shares of the Company's common stock at $2.00 per share in exchange for
cash and debt repayment totaling $270,058. These common shares are subject to
the restrictions of Rule 144 of the Securities Exchange Act 1934.
In August 1998, the Company issued 297,926 shares of its common stock in
exchange for $202,589 in cash, debt repayment and other expenses at the issuance
price of $.68 per share. These common shares are subject to the restrictions of
Rule 144 of the Securities Exchange Act of 1934.
From January 1999 through March 1999, the Company issued 1,035,411 shares of
common stock under Regulation D, Rule 504 at $.50 per share in exchange for
$517,706 in cash, debt conversion and other expenses.
From January 1999 through March 1999, the Company issued 446,389 shares of
common stock under Regulation D, Rule 504 at $.60 per share in exchange for
$267,833 in cash, debt conversion and other expenses.
Warrants - The following is a summary of the warrants issued, outstanding and
exercisable as of December 31, 1998 (warrants to issue 2,735,000 shares were
outstanding at December 31, 1997).
F-15
<PAGE>
8. Shareholders' Equity (continued)
<TABLE>
<CAPTION>
Exercise Period
-------------------------------------------
Number of Common
From To Price Per Share Shares Reserved
----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C>
May 1995 May 2000 $ 7.00 $ 250,000
July 1995 July 2000 2.00 325,000
July 1995 July 2000 7.00 200,000
August 1995 August 2000 7.00 200,000
August 1995 August 2000 2.00 40,000
November 1995 November 2000 7.00 200,000
March 1996 March 2001 2.00 50,000
August 1997 June 2000 2.00 114,971
August 1997 June 2000 1.50 200,000
August 1997 June 2000 1.00 575,000
August 1997 June 2002 2.00 180,000
October 1997 September 2000 .75 160,000
November 1997 October 2000 .75 105,000
January 1998 December 2000 .75 100,000
January 1998 December 2002 .75 325,000
January 1998 December 2000 .75 130,000
February 1998 January 2001 .75 35,000
February 1998 January 2003 .75 1,050,000
March 1998 February 2001 .75 10,000
June 1998 May 2003 .75 25,000
June 1998 May 2003 1.50 250,000
June 1998 May 2003 2.00 150,000
June 1998 May 2003 3.00 100,000
August 1998 September 2001 .75 50,000
November 1998 October 2003 .80 250,000
January 1999 December 2004 1.00 10,000
-----------
Total $ 5,084,971
===========
</TABLE>
In May 1995, the Company issued 250,000 warrants to purchase 250,000 shares of
its common stock at $7.00 per share for a period of five years in
consideration for an aggregate of $250,000 in bridge financing. In July and
August 1995, the Company issued an additional 600,000 warrants, with the same
terms as previously issued, in consideration for an additional $600,000 of
bridge financing. These warrants contain registration rights. In November
1995, 200,000 of the warrants issued in July 1995 were cancelled.
F-16
<PAGE>
8. Shareholders' Equity (continued)
In July 1995, the Company issued 325,000 warrants to purchase 325,000 shares
of the Company's common stock at an exercise price of $2.00 per share for a
period of five years in accordance with an employment agreement with a former
chairman and chief executive of the Company. These warrants contain
registration rights.
In August 1995, the Company issued 40,000 warrants to purchase common stock of
the Company at an exercise price of $2.00 per share to an affiliate of the
former Chairman of the Board of Directors as compensation for financial
advisory services rendered in August 1994. These warrants are exercisable from
August 1995 to August 2000.
In November 1995, the Company issued 200,000 warrants to purchase 200,000
shares of its common stock at $7.00 per share for a period of five years in
consideration for an aggregate of $250,000 in bridge financing.
In March 1996, the Company issued 50,000 warrants at an exercise price of
$2.00 per share to a consultant as compensation for services for a period of
five years.
In January 1997, the Company issued 430,000 warrants at an exercise price of
$2.00 per share; 200,000 warrants at an exercise price of $1.50 per share; and
575,000 warrants at an exercise price of $1.00 per share to a finance company
as part of the consideration for certain intangible assets of IST purchased
from the finance company. These warrants are exercisable from August 1997 to
June 2002. In November 1997, the holder of a warrant exercised 135,029
warrants to purchase 135,029 shares of the Company's common stock at $2.00 per
share in exchange for the repayment of a promissory note with the unpaid face
amount of $161,543, accrued interest of $39,535, cash and other expenses of
$68,980. These common shares are subject to the restrictions of Rule 144 of
the Securities Exchange Act of 1934.
In October 1997, the Company issued 160,000 warrants at an exercise price of
$0.75 per share in exchange for $1.00 per warrant to subscribers of a
Regulation D, Rule 506 offering. These warrants are exercisable from October
1997 to September 2000.
In November 1997, the Company issued 105,000 warrants at an exercise price of
$0.75 per share in exchange for $1.00 per warrant to subscribers of a
Regulation D, Rule 506 offering. These warrants are exercisable from November
1997 to September 2000.
In January 1998, the Company issued 100,000 warrants at an exercise price of
$0.75 per share in exchange for $1.00 per warrant to subscribers of a
Regulation D, Rule 506 offering. These warrants are exercisable for a period
of five years.
In January 1998, the Company issued 325,000 warrants at an exercise price of
$0.75 per share to an investment bank in exchange for financial services.
These warrants are exercisable for a period of five years.
F-17
<PAGE>
INTEGRATED HEALTHCARE SYSTEMS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
8. Shareholders' Equity (continued)
In January 1998, the Company issued 130,000 warrants at an exercise price of
$0.75 per share for a period of five years to an investment bank as
compensation for financial advisory services.
In February 1998, the Company issued 35,000 warrants at an exercise price of
$0.75 per share in exchange for $1.00 per warrant to subscribers of a
Regulation D, Rule 506 offering. These warrants are exercisable from February
1998 to September 2000.
In February 1998, the Company issued 50,000 warrants at an exercise price of
$0.75 per share to a Director of the Company for a period of five years. These
warrants were issued to the Director in lieu of compensation for serving as a
director for calendar years 1996 and 1997. The Company issued 1,000,000
warrants at an exercise price of $0.75 per share to officers of the Company
for a period of five years. These warrants were issued to the officers in lieu
of the Company implementing an executive management stock option program.
In March 1998, the Company issued 10,000 warrants at an exercise price of
$0.75 per share in exchange for $1.00 per warrant to subscribers of a
Regulation D, Rule 506 offering. These warrants are exercisable from March
1998 to September 2000.
In June 1998, the Company issued 25,000 warrants at an exercise price of $0.75
per share to a Director of the Company for a period of five years. These
warrants were issued to the Director in lieu of compensation for serving as a
director for calendar year 1998. The Company issued 250,000 warrants at an
exercise price of $1.50 per share, 150,000 warrants at an exercise price of
$2.00 per share and 100,000 warrants at an exercise price of $3.00 per share
to officers of the Company for a period of 5 years. These warrants were issued
to the officers in lieu of the Company implementing an executive management
stock option program.
In August 1998, the Company issued 50,000 warrants at an exercise price of
$0.75 per share in exchange for $1.00 per warrant to subscribers of a
Regulation D, Rule 506 offering. These warrants are exercisable from August
1998 to September 2001.
In November 1998, the Company issued 250,000 warrants at an exercise price of
$0.80 per share for a five year period in consideration of $25,000.
In December 1998, the Company issued 10,000 warrants at an exercise price of
$1.00 per share for a five year period as partial consideration for a
short-term loan.
F-18
<PAGE>
9. Nonrecurring Charge
In March 1996, Integrated Systems Technology, Inc. (IST), a wholly owned
subsidiary of the Company ceased operations. In December 1996, the assets of
IST, primarily consisting of accounts receivable, equipment and certain
intangibles (consisting of maintenance contracts, customers lists, service
marks, and copyrights of certain software) were repossessed by a third party
creditor having first rights on all such assets. Upon repossession of the assets
by the third party creditor, IST subsequently recognized a gain on the
forgiveness of debt and subsequently sold all of its outstanding common stock at
a nominal amount to another company.
The assets repossessed by the third party creditor were subsequently sold to the
Company in exchange for 1,200,000 shares of common stock of the Company (900,000
shares at $2.00 and 300,000 shares at $1.50) plus $50,000 cash and warrants. The
Company accounted for this transaction by recording these assets based upon the
fair value of the consideration paid.
As a result of changes in technology, the Company reassessed the value of the
intangible assets recorded in 1996 and accordingly, charged-off the remaining
balance of $1,398,000 in December 1997.
10. Income Taxes
The effective income tax rate varied from the federal statutory tax rate as
follows:
<TABLE>
<CAPTION>
December 31, March 31,
------------ ---------
1998 1997 1999 1998
---------- ------------ ------------ -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Statutory Rate (34.0)% (34.0)% (34.0)% (34.0)%
State income taxes-net of federal
income tax benefits (5.0)% (5.0)% (5.0)% (5.0)%
Accruals and other expenses not
deductible for federal income tax
purposes, net 6.6 % 0.5 % 4.2 % (146.0)%
Valuation allowance on net deferred
tax benefits 32.4 % 38.5 % 34.8 % 185.0 %
--------- ---------- ----------- ------------
0.0 % 0.0 % 0.0 % 0.0 %
========= ========== =========== ============
</TABLE>
F-19
<PAGE>
10. Income Taxes (continued)
The deferred tax asset and the deferred tax liability is comprised of the
following:
<TABLE>
<CAPTION>
December 31, March 31,
------------ ---------
1998 1997 1999 1998
----------- ----------- ----------- ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Deferred tax asset:
Expenses not currently deductible
for tax purposes $ 388,861 $ 281,580 $ 314,980 $ 350,813
Capital loss carryfoward 609,423 609,423 609,423 609,423
Net operating loss carryfoward
3,081,000 2,535,000 3,237,000 2,613,000
----------- ----------- ----------- -----------
4,079,284 3,426,003 4,161,403 3,573,236
----------- ----------- ----------- -----------
Valuation allowance (4,079,284) (3,426,000) (4,161,403) (3,516,236)
----------- ----------- ----------- -----------
Gross deferred tax assets -- -- -- --
Gross deferred tax liability -- -- -- --
----------- ----------- ----------- -----------
Net deferred tax asset (liability) $ -- -- $ -- $ --
=========== =========== =========== ===========
</TABLE>
At December 31, 1998 and March 31, 1999 (unaudited) the Company had
approximately $7,900,000 and $8,300,000 (unaudited) in net operating loss
carryfowards which expire at varying dates between the years 2009 and 2018. The
Company also had a capital loss carryfoward of approximately $1,560,000 which
expires in 2001. The annual utilization of these carryfowards are significantly
limited under Section 382 of the Internal Revenue Code as a result of ownership
changes experienced by the Company. A 100% valuation reserve has been provided
in each period due to uncertainty regarding the realization of the net deferred
tax assets.
F-20
<PAGE>
11. Earnings Per Share
The following data shows the amounts used in computing basic and diluted
earnings per share for the years ended December 31, 1998 and 1997, and for three
months ended March 31, 1999 (unaudited) and 1998 (unaudited).
<TABLE>
<CAPTION>
Three months ended
March 31,
1998 1997 1999 1998
----------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Loss before nonrecurring item $(1,684,388) $(1,750,673) $ (80,815) $ (447,535)
Adjustments -- -- -- --
----------- ----------- ----------- -----------
Loss applicable to
common shareholders (1,684,388) (1,750,673) (80,815) (447,535)
Nonrecurring item -- (1,398,000) -- --
----------- ----------- ----------- -----------
Net loss to
Common shareholders (1,684,388) (3,148,673) (80,815) (447,535)
Weighted average number
of outstanding common
shares - basic 4,936,915 3,578,054 6,028,047 4,812,779
Dilutive effect of warrants to
purchase common shares -- -- -- --
----------- ----------- ----------- -----------
Diluted common shares
outstanding 4,936,915 3,578,054 6,028,047 4,812,779
Net loss per share before
nonrecurring item - basic
and diluted $ (0.34) $ (0.49) $ (0.01) $ (0.09)
Nonrecurring item - basic
and diluted
-- (0.39) -- --
----------- ----------- ----------- -----------
Net loss - basic and diluted $ (0.34) $ (0.88) $ (0.01) $ (0.09)
=========== =========== =========== ===========
</TABLE>
Warrants to purchase shares of common stock are not included in computing
diluted earnings per share because their effects are antidilutive.
F-21
<PAGE>
12. Related Party Transactions
An affiliate, of a former Chairman of the Board of the Company, provided
financial advisory services, in the amount of $150,000, in connection with the
acquisition of IST and for participation in the raising of debt financing. In
September 1994, the Company entered into an agreement to repay this amount on
demand without interest. During 1995, $48,712 was repaid and $90,000 was
assigned to an unrelated third party, leaving a balance of $11,288.
In 1995, the Company accrued salary to an officer of the Company in the amount
of $68,833. In 1998, an additional accrual of $117,719 relating to salary was
made for two officers of the Company. In January 1999 and March 1999, these
obligations were paid through the issuance of common stock in connection with a
Regulation D, Rule 504 offering. (See Note 8 Shareholders' Equity).
In March 1996, the Company converted certain promissory notes relating to one
investor into shares of common stock in connection with a Regulation D, Rule 504
offering. The remaining promissory notes due to the investor subsequent to this
transaction, were reduced from $510,000 to $118,245. In January 1997, the
$118,245 was converted into common stock in connection with a Regulation A
offering.
In August 1997, the Company entered into a lease agreement for computer
equipment with a shareholder as the lessor. In lieu of cash, the Company issued
to the shareholder 100,000 shares of common stock at $0.84 per share and 15,000
warrants to purchase common stock at an exercise price of $1.00 per share.
In September 1997, the Company converted two promissory notes (due to a spouse
of a shareholder) totaling $540,000 into shares of common stock of the Company.
13. Supplemental Information to Statements of Cash Flows
Supplemental disclosure of cash flows and noncash investing and financing
activities are as follows:
Year ended December 31, 1997:
o Conversion of debt and accrued interest totaling $432,908 into
1,143,175 shares of common stock of the Company
o Issuance of 100,000 shares of common stock as payment for use of
computer equipment pursuant to a lease agreement
o Conversion of debt and accrued interest totaling $201,078 for 135,029
shares of common stock plus cash and other expenses of $68,980
Year ended December 31, 1998:
o Exchange of debt, expenses, and cash advances totaling $202,588 into
297,924 shares of common stock of the Company
F-22
<PAGE>
14. Subsequent Events
On May 12, 1999 the Board of Directors adopted and approved a downstream merger
pursuant to which all the issued and outstanding shares of common stock of the
Company were exchanged for an equal number of shares of the $.0001 par value
common stock of H-Quotient, Inc., a company incorporated on May 20, 1999 as a
wholly owned subsidiary of the Company. From the effective date of the merger
June 14, 1999, the Company is hereby referred to as H-Quotient, Inc.
Subsequent to approving the downstream merger, the Board of Directors approved a
Warrant Distribution to stockholders of record as of June 14, 1999. Each warrant
will allow the holder to purchase one share of H-Quotient, Inc. common stock
at $5.00 for a period of five years expiring June 11, 2004.
F-23
<PAGE>
EXHIBIT 3.4
STATE OF DELAWARE
CERTIFICATE FOR RENEWAL
AND REVIVAL OF CHARTER
Integrated Healthcare Systems, Inc., a corporation organized under the
laws of Delaware, the charter of which was voided for non-payment of taxes, now
desires to procure a restoration, renewal and revival of its charter, and hereby
certifies as follows:
1. The name of this corporation is Integrated Healthcare Systems, Inc.
2. Its registered office in the State of Delaware is located at 1209
Orange Street, City of Wilmington Zip Code 19801 County of New
Castle the name and address of its registered agent is The
Corporation Trust Company.
3. The date of filing of the original Certificate of Incorporation in
Delaware was March 5, 1993.
4. The date when restoration, renewal, and revival of the charter of
this company is to commence is the 29th day of February, 1996, same
being prior to the date of the expiration of the charter. This
renewal and revival of the charter of this corporation is to be
perpetual.
5. This corporation was duly organized and carried on the business
authorized by its charter until the 1st day of March A.D. 1996, at
which time its charter became inoperative and void for non-payment of
taxes and this certificate for renewal and revival is filed by
authority of the duly elected directors of the corporation in
accordance with the laws of the State of Delaware.
IN TESTIMONY WHEREOF, and in compliance with the provisions of Section
312 of the General Corporation Law of the State of Delaware, as amended,
providing for the renewal, extension and restoration of charters, Michael J.
Black the last and acting authorized officer hereunto set his/her hand to this
certificate this 24th day of October 1997.
INTEGRATED HEALTHCARE SYSTEMS, INC.
BY: /s/ Michael J. Black
-------------------------------------------------
TITLE OF OFFICER: Chairman of the Board and
Chief Executive Officer
<PAGE>
EXHIBIT 3.6
CERTIFICATE OF INCORPORATION
OF
IHS of Virginia, Inc.
FIRST: The name of this corporation is IHS Of Virginia, Inc.
SECOND: It's registered office, in the State of Delaware is to be located at
1313 N. Market Street, Wilmington DE 19801-1151, County of New Castle. The
registered agent in charge thereof is the Company Corporation, address "same as
above".
THIRD: The nature of the business and, the objects and purposes proposed to be
transacted, promoted and carried on, are to do any or all things herein
mentioned as fully and to the same extent as natural persons might or could do,
and in any part of the world, viz:
The purpose of the corporation is to engage in any lawful act or activity for
which corporations may be organized under the General Corporation Law of
Delaware.
FOURTH: The amount of the total authorized capital stock of this corporation is
divided into 1,500 shares of stock at NO par value.
FIFTH: The name and mailing address of the incorporator is as follows:
Regina Cephas, 1313 N. Market Street, Wilmington DE 19801-1151
SIXTH: The Directors shall have power to make and to alter or amend the By-Laws;
to fix the amount to be reserved as working capital, and to authorize and cause
to be executed, mortgages and liens without limit as to the amount, upon the
property and franchise of the Corporation.
With the consent in writing, and pursuant to a vote of the holders of a majority
of the capital stock issued and outstanding, the Directors shall have the
authority to dispose, in any manner, of the whole property of this corporation.
The By-Laws shall determine whether and to what extent the accounts and books of
this corporation, or any of them shall be open to the inspection of the
stockholder; and no stockholder shall have any right of inspecting any account,
or book or document of this Corporation, except as conferred by the law of the
By-Laws, or by resolution of the stockholders.
The stockholders and directors shall have power to hold their meetings and keep
the books, documents and papers of the Corporation outside the of the State of
Delaware, at such places as may be from time to time designated by the By-Laws
or by resolution of the stockholders or directors, except as otherwise required
by the laws of Delaware.
SEVENTH: Directors of the Corporation shall not be liable to either the
corporation or its stockholders for monetary damages for a breach of fiduciary
duties unless the breech involves: (1) a director's duty of loyalty to the
corporation or its stockholders; (2) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law; (3)
liability for unlawful payments of dividends or unlawful stock purchase or
redemption by the corporation; or (4) a transaction from which the director
derived an improper personal benefit.
I, THE UNDERSIGNED, for the purpose of forming a Corporation under the laws of
the State of Delaware, do make, file and record this Certificate and do certify
that the facts herein are true; and I have accordingly hereunto set my hand.
DATED: JULY 3, 1996
/S/ Regina Cephas
<PAGE>
EXHIBIT 3.7
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF RPORATIONS
FILED 09:00 AM - 08/18/1998
CERTIFICATE
FOR RENEWAL AND REVIVAL OF CHARTER
OF
IHS OF VIRGINIA, INC.
IHS OF VIRGINIA, INC., a corporation organized under the laws of the
State of Delaware, the Certificate of Incorporation of which was filed in the
Office of the Secretary of State on the third day of July A.D. 1996, the charter
of which was voided for nonpayment of taxes, now desires to procure a
restroation, renewal and rvival of its charter, and hereby certifies as follows:
1. The name of this Corporation is:
IHS OF VIRGINIA, INC.
2. Its registered office in the State of Delaware is located at 1013
Centre Road, in the City of Wilmington, County of New Castle and its registered
agent is THE COMPANY CORPORATION.
3. The date when the restoration, renewal and revival of the charter of
this company is to commence is the twenty-eighth day of February, A.D., 1998,
same begin prior to the date of the expiration of the charter. This renewal and
revival of the charter of this corporation is to be perpetual.
4. This corporation was duly organized and carried on the business
authorized by its charter until the first day of March, A.D., 1998, at which
time its charter became inoperative and void for non-payment of taxes and this
certificate for renewal and revival is filed by authority of the duly elected
directors of the corporation in accordance with the laws of the State of
Delaware.
IN TESTIMONY WHEREOF, and in compliance with the provisions of Section
312 of General Corporation Law of the State of Delaware, as amended, IHS OF
VIRGINIA, INC. has caused this Certificate to be signed by Alan W. Grote,
President, this 13th day of August A.D. 1998.
/s/ Alan W. Grofe
-----------------------------
Authorized Officer
EXHIBIT 3.7
<PAGE>
EXHIBIT 3.8
BY - LAWS
OF
IHS OF VIRGINIA, INC.
(A Delaware corporation)
ARTICLE I
Meetings of Stockholders
Section 1. Annual Meeting. The annual meeting of stockholders
for the election of directors and for the transaction of such other business as
properly may come before such meeting shall be held on the date fixed, from time
to time, by the directors, provided, that the first annual meeting shall be held
on a date within thirteen months after the formation of the corporation, and
each successive annual meeting shall be held on a date within thirteen months
after the date of the preceding annual meeting.
Section 2. Special Meetings. Special meetings of the
stockholders may be called at any time by the Board of Directors or by the
Chairman of the Board or, in his absence or disability, by the President, or in
his absence or disability, by any Vice President.
Section 3. Place of Meetings. Annual and special meetings of
the stockholders shall be held at the principal office of the corporation or at
such other place within or without the State of Delaware as the Board of
Directors may authorize, or as the notice of such meeting shall specify.
Section 4. Notice of Meetings. Written notice stating the
place, date and hour, and in the case of a special meeting, the purpose of the
meeting, shall be delivered not less than ten nor more than sixty days before
the date of the meeting, either personally or by mail to each stockholder of
record entitled to vote at such meeting. Notice of meetings, if mailed, shall be
deemed to be delivered when deposited in the United States mail, with postage
thereon prepaid addressed to the stockholder at his address as it appears on the
records of the corporation.
So long as the time and place to which the meeting is
adjourned is announced at the meeting at which such adjournment is taken, notice
of adjourned meetings need not be given unless the adjournment is for more than
thirty days or the directors after such adjournment fix a new record date for
the adjourned meeting.
<PAGE>
Notice of meeting need not be given to any stockholder who
submits a signed waiver of notice, in person or by proxy, whether before or
after the meeting. The attendance of any stockholder at a meeting, in person or
by proxy, without protesting at the beginning of the meeting to the transaction
of any business because the meeting is not lawfully called or convened, shall
constitute a waiver of notice by him.
Section 5. Quorum. The holders of a majority of the stock
entitled to vote, represented in person or by proxy, shall constitute a quorum
at a meeting of stockholders. The stockholders present may adjourn the meeting
despite the absence of a quorum.
Section 6. Voting and Proxies. At each meeting of the
stockholders every stockholder of record entitled to vote at such meeting shall
be entitled to one vote for every share of stock entitled to be voted thereat
and standing in his name on the books of the corporation.
Any stockholder entitled to vote at any meeting may vote
either in person or by proxy executed in writing by the stockholder or by his
duly authorized attorney-in-fact, provided that no proxy shall be valid after
three years from the date thereof, unless otherwise provided in the proxy.
Shares belonging to the corporation shall not be voted directly or indirectly.
At all meetings of the stockholders, except as at the time otherwise expressly
required by statute, by the Certificate of Incorporation or by these By-Laws,
the affirmative vote of a majority of the stock represented at the meeting and
entitled to vote on the subject matter shall be the act of the stockholders.
Section 7. Fixing Record Date. For the purpose of determining
the stockholders entitled to notice of or to vote at any meeting of stockholders
or any adjournment thereof, or to express consent to or dissent from any
proposal without a meeting, or for the purpose of determining stockholders
entitled to receive payment of any dividend or the allotment of any rights, or
for the purpose of any other action, the directors may fix, in advance, a date
as the record date for any such determination of stockholders. Such date shall
not be more than sixty nor less than ten days before the date of such meeting,
nor more than sixty days prior to any other action.
If no record date is so fixed:
(1) The record date for the determination of stockholders
shall be at the close of business on the day next preceding the day on which
notice is given, or, if notice waived, at the close of business on the day next
preceding the day on which the meeting is held.
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(2) The record date for determining stockholders entitled to
express consent to corporate actions in writing without a meeting, when no prior
action by the Board is necessary, shall be the day on which the first written
consent is expressed.
(3) The record date for determining stockholders for any
purpose other than that specified in subparagraph (1) shall be the close of
business on the day on which the resolution of the Board relating thereto is
adopted.
When a determination of stockholders of record entitled to
notice of or to vote at a meeting of stockholders has been made as provided in
this Section, such determination shall apply to any adjournment thereof, unless
the directors fix a new record date under this Section for the adjourned
meeting.
The officer who has charge of the stock ledger of the
corporation shall prepare and make, at least ten days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present.
Section 9. Action by Written Consent. Any action required by
the General Corporation Law to be taken at any annual or special meeting of
stockholders, may be taken without a meeting, without prior notice and without a
vote, if a consent in writing, setting forth the action so taken, shall be
signed by the holders of outstanding stock having not less than the minimum
number of votes which would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote thereon were present and voted.
Prompt notice of the taking of the action without a meeting by less than
unanimous written consent shall be given to those stockholders who have not
consented in writing.
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ARTICLE II
Board of Directors
Section 1. General Powers. The business and affairs of the
corporation shall be managed by the Board of Directors, which shall exercise all
the powers of the corporation except as otherwise provided by the Certificate of
Incorporation or these By-Laws.
Section 2. Number, Term of Office, Election and Qualification.
The Board of Directors shall consist of three people. Such number may be fixed
and increased or decreased from time to time by action of the stockholders or of
the directors, provided that any action of the directors to effect such increase
or decrease shall require the vote of a majority of the entire Board. No
decrease shall shorten the term of any incumbent director. Each director
(whether elected at an annual meeting or to fill a vacancy or otherwise) shall
continue in office until the annual meeting of stockholders held not after his
election, until his successor shall have been elected, or until he shall have
resigned in the manner provided in Section 7 of this Article II or shall have
been removed in the manner provided in Section 8 of this Article II. No director
need be a stockholder, a citizen of the United States, or a resident of the
State of Delaware.
Section 3. Annual and Regular Meetings. The annual meeting of
the Board of Directors, for the election of officers and for the transaction of
such other business as may come before the meeting, shall be held in each year
immediately after the annual meeting of stockholders at the place of such annual
meeting of stockholders, and notice of such annual meeting of the Board of
Directors need not be given. The Board of Directors from time to time may
provide by resolution for holding regular meetings and may fix the time and
place thereof, which may be within or without the State of Delaware.
Section 4. Special Meetings. Special meetings of the Board of
Directors shall be held whenever called by the Chairman of the Board or, in his
absence or disability, by the President, or a majority of the directors then in
office, at such time and place (which may be within or outside of the State of
Delaware) as may be specified in the respective notices or waivers of notice
thereof.
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Section 5. Notice of Meetings. No notice shall be required for
regular meetings for which the time and place have been fixed by the Board of
Directors. Written, oral or any other mode of notice of the time and place shall
be given for special meetings at least three days prior to the date of such
meeting. Except as provided herein or by statute, the notice of any meeting need
not specify the purpose of the meeting. Any requirement of furnishing a notice
shall be waived by any director who signs a waiver of notice before or after the
meeting, or who attends the meeting without protesting at the beginning of the
meeting to the transaction of any business because the meeting is not lawfully
called or convened.
Section 6. Quorum and Manner of Acting. The presence at any
meeting of a majority of the entire Board of Directors shall constitute a quorum
for the transaction of business, and except as at the time otherwise expressly
required by statute, the Certificate of Incorporation of these By-Laws, the act
of a majority of the directors present at a meeting at which a quorum is present
shall be the act of the Board of Directors. In the absence of a quorum, a
majority of the directors present at the time and place of any meeting may
adjourn the meeting from time to time until a quorum be present.
Section 7. Resignations. Any director may resign at any time
by delivering a written resignation to the corporation at its principal office.
Unless otherwise specified therein, such resignation shall take effect upon
receipt by the corporation.
Section 8. Removal of Directors. At a meeting of stockholders
called expressly for that purpose, the entire Board of Directors or any lesser
number of directors may be removed, with or without cause, by a vote of the
holders of a majority of the stock entitled to vote at an election of directors.
Section 9. Vacancies. Any vacancy in the Board of Directors
caused by removal by the stockholders of one or more directors shall be filled
by the stockholders then entitled to vote for the election of directors at a
meeting called expressly for that purpose. Any other vacancy occurring in the
Board of Directors by reason of an increase in the number thereof, death,
resignation or otherwise may be filled by the vote of the remaining directors
then in office, although less than a quorum exists.
Section 10. Executive Committee and Other Committees. The
Board of Directors, by resolution adopted by a majority of the entire Board of
Directors, may designate from their number one or more directors to constitute
an Executive Committee and other committees, each of which, to the extent
provided in the resolution designating it, shall have the authority of the Board
of Directors with the exception of any authority, the delegation of which is
prohibited by the General Corporation Law.
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Section 11. Informal Action. Any action required or permitted
to be taken by the Board of Directors or any committee thereof may be taken
without a meeting, if all members of the Board or committee consent thereto in
writing. The written consents thereto by the members of the Board or committee
shall be filed with the minutes of the proceedings of the Board or committee.
Any member or members of the Board of Directors, or any
committee designated by the Board, may participate in a meeting of the Board, or
any such committee, by means of conference telephone or similar communications
equipment by means of which all persons participating in such meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at such meeting.
ARTICLE III
Officers
Section 1. Number and Qualification. The officers of the
corporation shall be elected by the directors and shall consist of a President,
a Secretary, a Treasurer and such other officers, including a Chairman of the
Board and one or more Vice Presidents, as may be elected by the directors from
time to time. Except for the Chairman of the Board no officer need be a director
of the corporation.
Section 2. Term of Office. Each officer (whether elected at an
annual meeting of the Board of Directors or to fill a vacancy or otherwise)
shall hold his office until his successor shall have been elected and qualified
or until he shall have resigned in the manner provided in Section 3 of this
Article III or shall have been removed in the manner provided in Section 4 of
this Article III.
Section 3. Resignation. Any officer may resign at any time by
delivering a written resignation to the President or the Secretary. Unless
otherwise specified therein, such resignation shall take effect upon receipt.
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<PAGE>
Section 4. Removal. Any officer may be removed by the
directors at any time either for or without cause.
Section 5. Powers and Duties of Officers. The officers of the
corporation shall each have such powers and duties as generally pertain to their
respective offices, as well as such powers and duties as from time to time may
be conferred by the Board of Directors.
ARTICLE IV
Capital Stock
Section 1. Certificates for Stock. The stock of the
corporation shall be represented by certificates signed by the President or a
Vice President and the Secretary or an Assistant Secretary or the Treasurer of
the corporation, and may be sealed with the seal of the corporation. In case any
officer who has signed such certificate shall have ceased to be such officer
before such certificate is issued, it may be issued by the corporation with the
same effect as if he were such officer at the date if its issue.
Section 2. Transfer of Stock. The corporation or its transfer
agent shall keep at its principal place of business a record of its
stockholders, giving the names and addresses of all stockholders, the number and
class of the shares of stock held by each, and the dates when they respectively
became the owners of record thereof. Transfers of shares of stock of the
corporation shall be made on the books of the corporation by the holder thereof,
or by his attorney thereunto duly authorized by a power of attorney duly
executed and filed with the Secretary of the corporation or the corporation's
transfer agent and on surrender of the certificate or certificates for such
shares properly endorsed.
Section 3. Regulations. Subject to the provisions of this
Article IV, the Board of Directors from time to time may make such rules and
regulations as it may deem expedient concerning the issuance and transfer of
certificates for shares of stock of the corporation.
Section 4. Lost or Destroyed Certificates. The holders of any
shares of stock of the corporation shall immediately notify the corporation of
any loss or destruction of the certificate representing the same. The
corporation may issue a new certificate in the place of any certificate
theretofore issued by it alleged to have been lost or destroyed, and the Board
of Directors may require the owner of the lost or destroyed certificate, or his
legal representatives, to give the corporation a bond in such sum as the Board
may direct, to indemnify the corporation against any claim that may be made
against it on account of the alleged loss or destruction of any such certificate
or the new certificate may be issued without requiring the bond.
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<PAGE>
Article V
Miscellaneous
Section 1. Corporate Seal. The seal of the corporation shall
be circular in form and shall bear the name of the corporation, the year of
incorporation, and the words "Corporate Seal-Delaware".
Section 2. Fiscal Year. The fiscal year of the corporation
shall be fixed, and shall be subject to change, by the Board of Directors.
Section 3. Notices. Except as otherwise specifically provided
in these By-Laws, whenever under the provisions of these By-Laws notice is
required to be given to any director, officer or stockholder, it shall not be
construed to mean personal notice, but such notice may be given either by
personal notice or by radio, cable telegraph, telex or telecopier, or by mail by
depositing the same in a post office or letter box in a postpaid sealed wrapper,
addressed to such stockholder, officer or director at such address as appears on
the books of the corporation or at such other address which may have been
furnished in writing to the Secretary of the corporation, and such notice shall
be deemed to be given at the time when the same shall be thus sent or mailed.
When any notice whatever is required to be given by law, or
under the provisions of the Certificate of Incorporation or amendments thereto,
or under the By-Laws of this corporation, a waiver thereof, in writing, signed
by the person or persons entitled to said notice, whether before, at, or after
the time stated therein, shall be deemed equivalent thereto. No notice of any
meeting need be given to any person who shall attend such meeting without proper
protest as to lack of notice.
Section 4. Voting Corporation's Securities. Unless otherwise
ordered by the Board of Directors, the Chairman of the Board, or, in the event
of his inability to act, the President, or in the event of his inability to act,
the Vice President designated by the Board of Directors to act in the absence of
the President, shall have full power and authority on behalf of the corporation
to attend and to act and to vote at any meetings of security holders of
corporations in which the corporation may hold securities, and at such meeting
shall possess and may exercise any and all rights and powers incident to the
ownership of such securities, and which as the owner thereof the corporation
might have possessed and exercised, if present. The Board of Directors by
resolution from time to time may confer like powers upon any other officer in
the absence of the President, who shall have full power and authority on behalf
of the corporation to attend and to act and to vote at any meetings of security
holders of corporations in which the corporation may hold securities, and at
such meetings shall possess and may exercise any and all rights and powers
incident to the ownership of such securities, and which as the owner thereof the
corporation might have possessed and exercised, if present. The Board of
Directors by resolution from time to time may confer like powers upon any other
person or persons.
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<PAGE>
Section 5. Indemnification. Each director and officer of the
corporation whether or not then in office, and each person whose testator or
intestate was such a director or officer, shall be indemnified by the
corporation in accordance with and to the full extent permitted by the Delaware
General Corporation Law.
Section 6. Amendments. The stockholders entitled to vote in
the election of directors or the directors may amend or repeal the By-Laws and
may adopt new By-Laws, except that the directors may not amend or repeal any
By-Law or adopt any new By-Law, if the power to do so is vested exclusively in
the stockholders by action validly taken by them. By-Laws adopted by the
incorporators or directors may be amended or repealed by the stockholders.
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<PAGE>
ARTICLES OF INCORPORATION
of
H-QUOTIENT, INC.
The undersigned, pursuant to Chapter 9 of Title 13.1 of the Code of
Virginia, states as follows:
1. The name of the Corporation is: H-Quotient, Inc.
2. The address of its initial registered office which is the business
address of the initial registered agent is 5511 Staples Mill Road, Richmond,
Virginia 23228 in the County of Henrico. The name of its initial registered
agent at such address: is Edward R. Parker, a resident of the State of Virginia.
3. The initial registered agent of the Corporation is a member of the
Virginia State Bar.
4. The names and addresses of the initial directors are:
Michael J. Black 8305A Merryfield Ave., Fairfax,
Virginia 22031
Alan W. Grofe 8305A Merryfield Ave., Fairfax,
Virginia 22031
Roger J. Doerman 37787 Elizabeth's Field Lane, Purceville,
Virginia 20312
5. The nature of the business or purposes to be conducted or promoted
is: To engage in any lawful act or activity for which corporations may be
organized under the Virginia Stock Corporation Act.
6. The total number of shares of stock which the Corporation shall have
authority to issue is 100,000,000 shares, consisting of 90,000,000 shares of
Common Stock and 10,000,000 shares of Series Preferred Stock. Each of such
shares of Common Stock shall have a par value of $0.0001 and each such shares of
Series Preferred Stock shall have such par value as the Board of Directors shall
determine. All such shares (other than the shares of Series Preferred Stock) are
shares of common stock. The designations and the powers, preferences and rights,
and the qualifications, limitations or restrictions of the shares of each class
of stock are as follows:
PREFERRED STOCK
The Series Preferred Stock may be issued from time to time by the Board
of Directors in one or more series. The Board of Directors is hereby expressly
vested with authority to fix by resolution or resolutions the designations and
the powers, preferences and relative, participating, optional or other rights,
if any, and the qualifications, limitations or restrictions thereof, including,
without limitation, the voting powers, if any, the dividend rate, conversion
rights, redemption price, or liquidation preference,
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of any series of Series Preferred Stock, and to fix the number of shares
constitution any such series and to increase or decrease the number of shares of
any such series (but not below the number of shares thereof then outstanding).
The number of authorized shares of any class or classes of stock may be
increased or decreased (but not below the number of shares thereof then
outstanding) by the affirmative vote of the holders of a majority of the stock
of the Corporation entitled to vote.
COMMON STOCK
Subject to all of the rights of the Preferred Stock, and except as may
be expressly provided with respect to the Preferred Stock herein, by law or by
the Board of Directors pursuant to this Article 4:
a) dividends may be declared and paid or set apart for payment
upon the Common Stock out of any assets or funds of the Corporation
legally available for the payment of dividends;
b) the holders of Common Stock shall have the exclusive right to
vote for the election of directors and on all other matters requiring
stockholder action, each share being entitled to one vote; and
c) upon the voluntary or involuntary liquidation, dissolution or
winding up of the Corporation, the net assets of the Corporation shall
be distributed pro rata to the holders of the Common Stock in
accordance with their respective rights and interests.
PREEMPTIVE RIGHTS
No holder of any stock of the Corporation shall be entitled as such, as
a matter of right, to subscribe for or purchase any part of any new or
additional issue of stock of any class whatsoever of the Corporation, or of
securities convertible into stock of any class whatsoever, whether now or
hereafter authorized, or whether issued for cash or other consideration or by
way of dividend.
7. The name and mailing address of the incorporator is as follows:
Name Mailing Address
---- ---------------
H. Melville Hicks, Jr. 551 Fifth Avenue, Suite 1625
New York, NY 10176
8. The Corporation is to have perpetual existence.
9. In furtherance and not in limitation of the powers conferred by
statute, it is further provided:
a) Election of directors need not be by written ballot unless the
By-Laws of the Corporation shall so provide;
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b) The Board of Directors is expressly authorized to adopt, amend
or repeal all or any of the By-Laws of the Corporation.
10. The Corporation shall, to the fullest extent permitted by the
Virginia Stock Corporation Act, as the same may be amended and supplemented,
indemnify any and all persons whom it shall have power to indemnify under said
Act from and against any and all of the expenses, liabilities or other matters
referred to in or covered by said Act, and the indemnification provided for
herein shall not be deemed exclusive of any other rights to which those
indemnified may be entitled under any By-Law, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his official capacity
and as to action in another capacity while holding such office, and shall
continue as to a person who has ceased to be a director, officer, employee or
agent and shall inure to the benefit of the heirs, executors and administrators
of such a person.
11. The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Articles of Incorporation, in the manner
now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to the provisions of this Article 11.
IN WITNESS WHEREOF, the undersigned, being the sole incorporator named
above, has hereunto set his hand and seal this 12 day of May, 1999.
/s/ H. Melville Hicks Jr.
-----------------------------------
H. Melville Hicks, Jr.
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COMMONWEALTH OF VIRGINIA
STATE CORPORATION COMMISSION
May 20, 1999
The State Corporation Commission has found the accompanying articles submitted
on behalf of
H-Quotient, Inc.
to comply with the requirements of law, and confirms payment of all required
fees.
Therefore, it is ORDERED that this
CERTIFICATE OF INCORPORATION
be issued and admitted to record with the articles of incorporation in the
Office of the Clerk of the Commission, effective May 20, 1999.
The corporation is granted the authority conferred on it by law in accordance
with the articles, subject to the conditions and restrictions imposed by law.
STATE CORPORATION COMMISSION
By_______________________________________
Commissioner
<PAGE>
Commonwealth of Virginia
LOGO State Corporation Commission
I Certify the Following from the Records of the Commission:
the foregoing is a true copy of all documents constituting the charter of
H-Quotient, Inc.
Nothing more is hereby certified.
Signed and Sealed at Richmond on this Date:
June 7, 1999
Seal
/s/ Joel H. Peck
-------------------------------------------
Joel H. Peck, Clerk of the Commission
<PAGE>
EXHIBIT A
PLAN OF MERGER
PLAN OF MERGER, dated as of May 20, 1999, by and between H-Quotient
Inc., a Virginia corporation ("HQI") and Integrated Healthcare Systems, Inc., a
Delaware corporation ("IHS"), said corporations being hereinafter collectively
referred to as the "Constituent Corporations".
W I T N E S S E T H:
WHEREAS, HQI is a wholly-owned subsidiary of IHS;
WHEARES, the respective Boards of Directors of each of the Constituent
Corporations deem it advisable and in the best interests of each of such
corporations and their respective stockholders that IHS be merged with and into
HQI in the manner contemplated herein and have recommended that the merger of
IHS with and into HQI (the "Merger") be approved, and that this Plan of Merger
be approved and adopted by the stockholders of their respective corporations;
WHEREAS, the authorized capital stock of HQI is 100,000,000 shares consisting of
90,000,000 shares of common stock, $0.0001 par value ("Surviving Corporation
Common Stock") and 10,000,000 shares of Series Preferred Stock, of which 100
shares of the Surviving Corporation Common Stock are intended to be issued and
outstanding and to be owned by IHS, each such shares of Common Stock being
entitled to one vote;
WHEREAS, the authorized capital stock of IHS consists of 50,000,000 shares of
common stock, $0.0001 par value ("IHS Common Stock"), of which 6,925,318 shares
are issued and outstanding and 5,072,565 shares were reserved for issuance in
the event of the conversion all of the outstanding IHS Common Stock Purchase
Warrants, each such share of IHS common stock being entitled to one vote;
WHEREAS, the principal office of HQI is at 12030 Sunrise Valley Drive, Suite
205, Reston, Virginia 20191; and
WHEREAS, the principal office of IHS is at 12030 Sunrise Valley Drive, Suite
205, Reston, Virginia 20191.
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NOW THEREFORE, in consideration of the premises and the mutual covenants and
agreements herein contained, and for the purpose of stating the terms and
conditions of the Merger and the mode of carrying the same into effect and the
manner of converting IHS securities into HQI securities and such other details
and provisions as are deemed desirable, the parties hereto hereby agree as
follows:
ARTICLE I
In accordance with the provisions of the laws of the State of Virginia, IHS
shall be merged with and into HQI, and HQI shall be, and is herein sometimes
referred to as, the "Surviving Corporation" and, as such shall remain organized
under the laws of Virginia for the purposes stated in its Articles of
Incorporation.
ARTICLE II
The Merger shall become effective on the later of June 14, 1999 or the date of
the filing of the Articles of Merger attached hereto as Exhibit I with the
Secretary of State of the State of Virginia pursuant to the Virginia Stock
Corporation Act. The date when the Merger becomes effective is herein called the
"Effective Date of the Merger."
ARTICLE III
On the Effective Date of the Merger, the Articles of Incorporation of HQI,
attached hereto as Exhibit II, and the By-Laws of HQI shall continue to be the
Articles of Incorporation and By-Laws of the Surviving Corporation until further
amended in accordance with applicable laws of the State of Virginia..
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ARTICLE IV
The manner of (i) converting the shares IHS common Stock issued and
outstanding immediately prior to the Effective Date of the Merger into shares of
the Surviving Corporation Common Stock shall be as follows:
(1) On the Effective Date of the Merger each share of IHS Common Stock
issued and outstanding immediately prior to the Effective Date of
the Merger shall, by virtue of the Merger be convertible into one
(1) fully paid and nonassessalbe share of the Surviving
Corporation Common Stock. Upon the Effective Date of the Merger
the holders of certificates representing shares of IHS Common
Stock outstanding at such time shall cease to have any rights with
respect to such stock and their sole rights shall be with respect
to the Surviving Corporation Common Stock into which their shares
of IHS Common Stock have been converted by the Merger as herein
provided.
(2) After the Effective Date of the Merger:
(a) Each holder of an outstanding certificate or certificates
which prior thereto represented shares of IHS Common Stock
shall be entitled to receive therefor a certificate or
certificates representing the number of shares of the
Surviving Corporation Common Stock into which the shares IHS
Common Stock theretofore represented by the certificate or
certificates shall have been converted as aforesaid, upon
surrender of such certificate or certificates to such agent or
agents as may be appointed by the Surviving Corporation (the
"Exchange Agent"). On or before the fifth business day
following the Effective Date of Merger, the Exchange Agent
will send a notice and a transmittal form to each holder of an
outstanding certificate or certificates which immediately
prior to the Effective Date of the Merger represented shares
of IHS Common Stock, advising such stockholder of the terms of
the conversion effected by the Merger and the procedure for
surrendering to the Exchange Agent such certificate or
certificates for exchange for one or more certificates
representing the number of full shares of the Surviving
Corporation Common Stock which such stockholder is entitled to
receive pursuant to the terms of this Agreement. After the
Effective Date of the Merger the stock transfer books of IHS
shall be permanently closed, there shall be no further
registry of transfers on the records of IHS Common Stock
outstanding immediately prior to the Effective Date of the
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Merger, and if certificates representing such shares are
presented to either IHS or HQI, they shall be cancelled and
exchanged for certificates representing full shares of The
Surviving Corporation Common Stock as herein provided.
(b) If any certificate for the Surviving Corporation Common Stock
is to be issued in a name other than that in which the
certificate for IHS Common Stock surrendered for exchange is
registered, it shall be a condition of such exchange that the
certificate so surrendered shall be properly endorsed and
otherwise in proper form for transfer and that the person
requesting such exchange shall pay to the Exchange Agent any
transfer or other taxes required by reason of the issuance of
such Surviving Corporation Common Stock in any name other than
that of the registered holder of the IHS certificate
surrendered, or establish to the satisfaction of the Exchange
Agent that such tax has been paid or is not applicable.
(c) Until so surrendered, each outstanding certificate which prior
to the Effective Date of the Merger represented shares of IHS
Common Stock shall be deemed for all corporate purposes to
evidence the ownership of the number of whole shares of the
Surviving Corporation Common Stock into which such shares of
IHS Common Stock have been so converted. No cash or stock
dividend payable, nor any certificate representing shares
deliverable in the event any stock split shall be declared to
holders of the Surviving Corporation Common Stock on or after
the Effective Date of the Merger, to the holder of any
certificate which prior to such date represented IHS Common
stock, unless and until such certificate is surrendered to the
Exchange Agent as herein provided, but upon such surrender
there shall be paid or delivered to the registered holder of
the certificate Surviving Corporation Common Stock issued in
exchange therefor, the amount of cash (without interest
thereon), resulting from any such stock dividends or splits
which shall have theretofore become payable or deliverable
with respect to the Surviving Corporation Common Stock.
ARTICLE V
Except as herein specifically set forth, the identity, existence, purposes,
powers, objects, franchises, privileges, rights and immunities of the Surviving
Corporation shall continue unaffected and unimpaired by the Merger and the
corporate
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franchises, existence and rights of IHS shall be merged into the Surviving
Corporation and HQI shall, as the Surviving Corporation be fully vested
therewith. On the Effective Date of the Merger, the separate existence of IHS
shall cease and in accordance with the terms of this Plan of Merger the
Surviving Corporation shall possess all the rights privileges, powers and
franchises as well of a public as of a private nature, and be subject to all the
restrictions, disabilities and duties of each of the Constituent Corporations;
and all and singular, the rights privileges, powers and franchises of each of
the Constituent Corporation and all property, real, personal and mixed and all
debts due to either of the Constituent Corporations on whatever account,
including stock subscriptions, and all other things in action and all and every
other interest of or belonging to or due to each of such corporations shall be
taken and deemed to be transferred to and vested in the Surviving Corporation
without any further act or deed; and all property, rights, privileges, powers
and franchises, and all and every other interest shall be thereafter as
effectually the property of the Surviving Corporation as they were of the
respective Constituent Corporations, and the title to any real estate or
interest therein, vested by deed or otherwise in either of such corporations
shall not revert or be in any way impaired by reason of the Merger. The
Surviving Corporation shall thence forth be responsible and liable for all the
liabilities and obligations of the Constituent Corporations and any claim
existing or action or proceeding pending by or against either of said
Constituent Corporations may be prosecuted as if the Merger had not taken place,
or the Surviving Corporation may be substituted in its place. Neither the rights
of creditors nor any liens upon the property of the of the Constituent
Corporations shall be impaired by the Merger, and all debts, liabilities and
duties of each of said Constituent Corporations shall thence forth attach to the
Surviving Corporation, and maybe enforced against it to the same extent as if
said debts, liabilities and duties had been incurred or contracted by it.
ARTICLE VI
From time to time, as and when by the Surviving Corporation, or by its
successors or assigns, IHS shall execute and deliver or cause to be executed and
delivered all such other instruments and shall take or cause to be taken all
such further or other actions, as the Surviving Corporation or its successors or
assigns, may deem necessary or desirable oin order to vest in and confirm to the
Surviving Corporation,, and its successors and assigns, title to and possession
of all the property, rights, privileges, powers and franchises referred to in
Article V hereof and otherwise to carry out the intent and purposes of this Plan
of Merger, and the officers and directors of Surviving Corporation are fully
authorized in the name of IHS or other wise to take any and all such action.
5
<PAGE>
ARTICLE VII
This Plan of Merger may be terminated and abandoned upon mutual consent
of the respective Boards of Directors of IHS and HQI at any time prior to the
Effective Date of the Merger, notwithstanding approval of this Plan of Merger by
the stockholders of the Constituent Corporations. In the event of the
termination and abandonment of this Plan of Merger pursuant to the foregoing
provisions of this Article VII, this Plan shall be void and have no effect, and
of liability shall be incurred thereby on the part of either or IHS or HQI the
shareholders , directors, or officers thereof.
ARTICLE VIII
Any of the terms or conditions of this Plan of Merger may be waived at any time
by whichever of the Constituent Corporation is, or the stockholders of which
are, entitled to the benefit thereof, by action taken by the Board of Directors
of such Constituent Corporation, or may be amended or modified in whole or in
part at any time by an agreement in writing authorized by The Boards of
Directors of the Constituent Corporations; provided, however, that no such
amendment or modification or waiver after adoption by the stockholders of the
Constituent Corporations shall be made which changes the ratio at which the IHS
Common Stock is to be converted into the Surviving Corporation Common Stock as
provided in Article IV of this Plan of Merger.
ARTICLE IX
For the convenience of the parties hereto and to facilitate the filing of this
Plan of Merger, counterparts hereof may be executed, and each such counterpart
shall be deemed to be an original instrument.
IN WITNESS WHEREOF, each of the Constituent Corporations has caused
this Planed Merger to be signed in its corporate name by its President and
Secretary, and its corporate seal to be affixed hereto, all as of the date first
above written.
6
<PAGE>
INTEGRATED HEALTHCARE SYSTEMS, INC.
By /s/ Michael J. Black
------------------------------------
Michael J. Black
Chairman of the Board and
Chief Executive Officer
Attest:
/s/ Alan Grofe
- ------------------------
Alan Grofe
President
H-QUOTIENT, INC.
By /s/ Alan W. Grofe
------------------------------------
Alan W. Grofe
President
Attest:
/s/ Michael J. Black
- ------------------------
Michael J. Black
Secretary
7
<PAGE>
EXHIBIT I
ARTICLES OF MERGER
H-QUOTIENT, INC.
and
INTEGRATED HEALTHCARE
SYSTEMS, INC.
The undersigned corporations, pursuant to Title 13.1, Chapter 9,
Article 13 of the Code of Virginia (the "Code"), hereby execute the following
Articles of Merger and set forth:
ONE
The Plan of Merger between the undersigned corporations, dated as of
May 20, 1999, attached hereto as Exhibit A and made a part hereof.
TWO
The Plan of Merger was adopted by the written consent of a majority of
the stockholders, entitled to vote, of Integrated Healthcare Systems, Inc., a
Delaware corporation and holder of all the outstanding shares of Common Stock of
H-Quotient, Inc., a Virginia corporation, in accordance with the provisions of
Sections 228 and 253 of the Delaware Corporation Law and Section 13.1-719 of the
Code.
The undersigned executive officers declare that the facts herein stated
are true as of June 4, 1999.
INTEGRATED HEALTHCARE SYSTEMS, INC. H-QUOTIENT, INC.
By: /s/ Michael J. Black By: /s/ Allan W. Grofe
------------------------------ ----------------------
Michael J. Black, Chairman and Alan W. Grofe
Chief Executive Officer President
<PAGE>
EXHIBIT II
ARTICLES OF INCORPORATION OF
H-QUOTIENT, INC.
The undersigned, pursuant to Chapter 9 of Title 13.1 of the Code of
Virginia, states as follows:
1. The name of the Corporation is: H-Quotient, Inc.
2. The address of its initial registered office which is the business
address of the initial registered agent is 5511 Staples Mill Road, Richmond,
Virginia 23228 in the County of Henrico. The name of its initial registered
agent at such address: is Edward R. Parker, a resident of the State of Virginia.
3. The initial registered agent of the Corporation is a member of the
Virginia State Bar.
4. The names and addresses of the initial directors are:
Michael J. Black 8305A Merryfield Ave., Fairfax,
Virginia 22031
Alan W. Grofe 8305A Merryfield Ave., Fairfax,
Virginia 22031
Roger J. Doerman 37787 Elizabeth's Field Lane, Purceville,
Virginia 20312
5. The nature of the business or purposes to be conducted or promoted
is: To engage in any lawful act or activity for which corporations may be
organized under the Virginia Stock Corporation Act.
6. The total number of shares of stock which the Corporation shall have
authority to issue is 100,000,000 shares, consisting of 90,000,000 shares of
Common Stock and 10,000,000 shares of Series Preferred Stock. Each of such
shares of Common Stock shall have a par value of $0.0001 and each such shares of
Series Preferred Stock shall have such par value as the Board of Directors shall
determine. All such shares (other than the shares of Series Preferred Stock) are
shares of common stock. The designations and the powers, preferences and rights,
and the qualifications, limitations or restrictions of the shares of each class
of stock are as follows:
1
<PAGE>
EXHIBIT II
PREFERRED STOCK
The Series Preferred Stock may be issued from time to time by the Board
of Directors in one or more series. The Board of Directors is hereby expressly
vested with authority to fix by resolution or resolutions the designations and
the powers, preferences and relative, participating, optional or other rights,
if any, and the qualifications, limitations or restrictions thereof, including,
without limitation, the voting powers, if any, the dividend rate, conversion
rights, redemption price, or liquidation preference, of any series of Series
Preferred Stock, and to fix the number of shares constitution any such series
and to increase or decrease the number of shares of any such series (but not
below the number of shares thereof then outstanding). The number of authorized
shares of any class or classes of stock may be increased or decreased (but not
below the number of shares thereof then outstanding) by the affirmative vote of
the holders of a majority of the stock of the Corporation entitled to vote.
COMMON STOCK
Subject to all of the rights of the Preferred Stock, and except as may
be expressly provided with respect to the Preferred Stock herein, by law or by
the Board of Directors pursuant to this Article 4:
a) dividends may be declared and paid or set apart for payment
upon the Common Stock out of any assets or funds of the Corporation
legally available for the payment of dividends;
b) the holders of Common Stock shall have the exclusive right to
vote for the election of directors and on all other matters requiring
stockholder action, each share being entitled to one vote; and
c) upon the voluntary or involuntary liquidation, dissolution or
winding up of the Corporation, the net assets of the Corporation shall
be distributed pro rata to the holders of the Common Stock in
accordance with their respective rights and interests.
PREEMPTIVE RIGHTS
No holder of any stock of the Corporation shall be entitled as such, as
a matter of right, to subscribe for or purchase any part of any new or
additional issue of stock of any class whatsoever of the Corporation, or of
securities convertible into stock of any class whatsoever, whether now or
hereafter authorized, or whether issued for cash or other consideration or by
way of dividend.
2
<PAGE>
7. The name and mailing address of the incorporator is as follows:
Name Mailing Address
H. Melville Hicks, Jr. 551 Fifth Avenue, Suite 1625
New York, NY 10176
8. The Corporation is to have perpetual existence.
9. In furtherance and not in limitation of the powers conferred by
statute, it is further provided:
a) Election of directors need not be by written ballot unless the
By-Laws of the Corporation shall so provide;
b) The Board of Directors is expressly authorized to adopt, amend
or repeal all or any of the By-Laws of the Corporation.
10. The Corporation shall, to the fullest extent permitted by the
Virginia Stock Corporation Act, as the same may be amended and supplemented,
indemnify any and all persons whom it shall have power to indemnify under said
Act from and against any and all of the expenses, liabilities or other matters
referred to in or covered by said Act, and the indemnification provided for
herein shall not be deemed exclusive of any other rights to which those
indemnified may be entitled under any By-Law, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his official capacity
and as to action in another capacity while holding such office, and shall
continue as to a person who has ceased to be a director, officer, employee or
agent and shall inure to the benefit of the heirs, executors and administrators
of such a person.
11. The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Articles of Incorporation, in the manner
now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to the provisions of this Article 11.
IN WITNESS WHEREOF, the undersigned, being the sole incorporator named
above, has hereunto set his hand and seal this 12 day of May, 1999.
/s/ H. Melville Hicks Jr.
--------------------------------
H. Melville Hicks, Jr.
3
<PAGE>
ARTICLES OF MERGER
H-QUOTIENT, INC.
and
INTEGRATED HEALTHCARE
SYSTEMS, INC.
The undersigned corporations, pursuant to Title 13.1, Chapter 9,
Article 13 of the Code of Virginia (the "Code") , hereby execute the following
Articles of Merger and set forth:
ONE
The Plan of Merger between the undersigned corporations, dated as of
May 20, 1999, attached hereto as Exhibit A and made a part hereof.
TWO
The Plan of Merger was adopted by the written consent of a majority of
the stockholders, entitled to vote, of Integrated Healthcare Systems, Inc., a
Delaware corporation and holder of all the outstanding shares of Common Stock of
H-Quotient, Inc., a Virginia corporation, in accordance with the provisions of
Sections 228 and 253 of the Delaware Corporation Law and Section 13.1-719 of the
Code.
The undersigned executive officers declare that the facts herein stated
are true as of June 4, 1999.
INTEGRATED HEALTHCARE SYSTEMS, INC. H-QUOTIENT, INC.
By: /s/ Michael J. Black By: /s/ Alan W. Grofe
--------------------------------- --------------------------------
Michael J. Black, Chairman and Alan W. Grofe
Chief Executive Officer President
<PAGE>
EXHIBIT A
PLAN OF MERGER
PLAN OF MERGER, dated as of May 20, 1999, by and between H-Quotient
Inc., a Virginia corporation ("HQI") and Integrated Healthcare Systems, Inc., a
Delaware corporation ("IHS"), said corporations being hereinafter collectively
referred to as the "Constituent Corporations".
W I T N E S S E T H:
WHEREAS, HQI is a wholly-owned subsidiary of IHS;
WHEARES, the respective Boards of Directors of each of the Constituent
Corporations deem it advisable and in the best interests of each of such
corporations and their respective stockholders that IHS be merged with and into
HQI in the manner contemplated herein and have recommended that the merger of
IHS with and into HQI (the "Merger") be approved, and that this Plan of Merger
be approved and adopted by the stockholders of their respective corporations;
WHEREAS, the authorized capital stock of HQI is 100,000,000 shares
consisting of 90,000,000 shares of common stock, $0.0001 par value ("Surviving
Corporation Common Stock") and 10,000,000 shares of Series Preferred Stock, of
which 100 shares of the Surviving Corporation Common Stock are intended to be
issued and outstanding and to be owned by IHS, each such shares of Common Stock
being entitled to one vote;
WHEREAS, the authorized capital stock of IHS consists of 50,000,000
shares of common stock, $0.0001 par value ("IHS Common Stock"), of which
6,925,318 shares are issued and outstanding and 6,925,318 shares were reserved
for issuance in the event of the conversion all of the outstanding IHS Common
Stock Purchase Warrants, each such share of IHS common stock being entitled to
one vote;
WHEREAS, the principal office of HQI is at 12030 Sunrise Valley Drive,
Suite 205, Reston, Virginia 20191; and
WHEREAS the principal office of IHS is at 12030 Sunrise Valley Drive,
Suite 205, Reston, Virginia 20191
1
<PAGE>
EXHIBIT A
NOW THEREFORE, in consideration of the premises and the mutual
covenants and agreements herein contained , and for the purpose of stating the
terms and conditions of the Merger and the mode of carrying the same into effect
and the manner of converting IHS securities into HQI securities and such other
details and provisions as are deemed desirable, the parties hereto hereby agree
as follows:
ARTICLE I
In accordance with the provisions of the laws of the State of Virginia,
IHS shall be merged with and into HQI, and HQI shall be, and is herein sometimes
referred to as, the "Surviving Corporation" and, as such shall remain organized
under the laws of Virginia for the purposes stated in its Articles of
Incorporation.
ARTICLE II
The Merger shall become effective on the later of June 14, 1999 or the
date of the filing of the Articles of Merger attached hereto as Exhibit I with
the Secretary of State of the State of Virginia pursuant to the Virginia Stock
Corporation Act. The date when the Merger becomes effective is herein called the
"Effective Date of the Merger."
ARTICLE III
On the Effective Date of the Merger, the Articles of Incorporation of
HQI, attached hereto as Exhibit II, and the By-Laws of HQI shall continue to be
the Articles of Incorporation and By-Laws of the Surviving Corporation until
further amended in accordance with applicable laws of the State of Virginia.
2
<PAGE>
EXHIBIT A
ARTICLE IV
The manner of (i) converting the shares IHS common Stock issued and
outstanding immediately prior to the Effective Date of the Merger into shares of
the Surviving Corporation Common Stock shall be as follows:
(1) On the Effective Date of the Merger each share of IHS Common Stock
issued and outstanding immediately prior to the Effective Date of
the Merger shall, by virtue of the Merger be convertible into one
(1) fully paid and nonassessalbe share of the Surviving
Corporation Common Stock. Upon the Effective Date of the Merger
the holders of certificates representing shares of IHS Common
Stock outstanding at such time shall cease to have any rights with
respect to such stock and their sole rights shall be with respect
to the Surviving Corporation Common Stock into which their shares
of IHS Common Stock have been converted by the Merger as herein
provided.
(2) After the Effective Date of the Merger:
(a) Each holder of an outstanding certificate or certificates
which prior thereto represented shares of IHS Common Stock
shall be entitled to receive therefor a certificate or
certificates representing the number of shares of the
Surviving Corporation Common Stock into which the shares IHS
Common Stock theretofore represented by the certificate or
certificates shall have been converted as aforesaid, upon
surrender of such certificate or certificates to such agent or
agents as may be appointed by the Surviving Corporation (the
"Exchange Agent"). On or before the fifth business day
following the Effective Date of Merger, the Exchange Agent
will send a notice and a transmittal form to each holder of an
outstanding certificate or certificates which immediately
prior to the Effective Date of the Merger represented shares
of IHS Common Stock, advising such stockholder of the terms of
the conversion effected by the Merger and the procedure for
surrendering to the Exchange Agent such certificate or
certificates for exchange for one or more certificates
representing the number of full shares of the Surviving
Corporation Common Stock which such stockholder is entitled to
receive pursuant to the terms of this Agreement. After the
Effective Date of the Merger the stock transfer books of IHS
shall be permanently closed, there shall be no further
registry of transfers on the records of IHS Common Stock
outstanding immediately prior to the Effective Date of the
Merger, and if certificates representing such shares are
presented to either IHS or HQI, they shall be cancelled and
exchanged for certificates representing full shares of The
Surviving Corporation Common Stock as herein provided.
3
<PAGE>
EXHIBIT A
(b) If any certificate for the Surviving Corporation Common Stock
is to be issued in a name other than that in which the
certificate for IHS Common Stock surrendered for exchange is
registered, it shall be a condition of such exchange that the
certificate so surrendered shall be properly endorsed and
otherwise in proper form for transfer and that the person
requesting such exchange shall pay to the Exchange Agent any
transfer or other taxes required by reason of the issuance of
such Surviving Corporation Common Stock in any name other than
that of the registered holder of the IHS certificate
surrendered, or establish to the satisfaction of the Exchange
Agent that such tax has been paid or is not applicable.
(c) Until so surrendered, each outstanding certificate which prior
to the Effective Date of the Merger represented shares of IHS
Common Stock shall be deemed for all corporate purposes to
evidence the ownership of the number of whole shares of the
Surviving Corporation Common Stock into which such shares of
IHS Common Stock have been so converted. No cash or stock
dividend payable, nor any certificate representing shares
deliverable in the event any stock split shall be declared to
holders of the Surviving Corporation Common Stock on or after
the Effective Date of the Merger, to the holder of any
certificate which prior to such date represented IHS Common
stock, unless and until such certificate is surrendered to the
Exchange Agent as herein provided, but upon such surrender
there shall be paid or delivered to the registered holder of
the certificate Surviving Corporation Common Stock issued in
exchange therefor, the amount of cash (without interest
thereon), resulting from any such stock dividends or splits
which shall have theretofore become payable or deliverable
with respect to the Surviving Corporation Common Stock.
4
<PAGE>
EXHIBIT A
ARTICLE V
Except as herein specifically set forth, the identity, existence,
purposes, powers, objects, franchises, privileges, rights and immunities of the
Surviving Corporation shall continue unaffected and unimpaired by the Merger and
the corporate franchises, existence and rights of IHS shall be merged into the
Surviving Corporation and HQI shall, as the Surviving Corporation be fully
vested therewith. On the Effective Date of the Merger, the separate existence of
IHS shall cease and in accordance with the terms of this Plan of Merger the
Surviving Corporation shall possess all the rights privileges, powers and
franchises as well of a public as of a private nature, and be subject to all the
restrictions, disabilities and duties of each of the Constituent Corporations;
and all and singular, the rights privileges, powers and franchises of each of
the Constituent Corporation and all property, real, personal and mixed and all
debts due to either of the Constituent Corporations on whatever account,
including stock subscriptions, and all other things in action and all and every
other interest of or belonging to or due to each of such corporations shall be
taken and deemed to be transferred to and vested in the Surviving Corporation
without any further act or deed; and all property , rights, privileges, powers
and franchises, and all and every other interest shall be thereafter as
effectually the property of the Surviving Corporation as they were of the
respective Constituent Corporations, and the title to any real estate or
interest therein, vested by deed or otherwise in either of such corporations
shall not revert or be in any way impaired by reason of the Merger. The
Surviving Corporation shall thence forth be responsible and liable for all the
liabilities and obligations of the Constituent Corporations and any claim
existing or action or proceeding pending by or against either of said
Constituent Corporations may be prosecuted as if the Merger had not taken place,
or the Surviving Corporation may be substituted in its place. Neither the rights
of creditors nor any liens upon the property of the of the Constituent
Corporations shall be impaired by the Merger, and all debts, liabilities and
duties of each of said Constituent Corporations shall thence forth attach to the
Surviving Corporation, and maybe enforced against it to the same extent as if
said debts, liabilities and duties had been incurred or contracted by it.
ARTICLE VI
From time to time, as and when by the Surviving Corporation, or by its
successors or assigns, IHS shall execute and deliver or cause to be executed and
delivered all such other instruments and shall take or cause to be taken all
such further or other actions, as the Surviving Corporation or its successors or
assigns, may deem necessary or desirable oin order to vest in and confirm to the
Surviving Corporation,, and its successors and assigns, title to and possession
of all the property, rights, privileges, powers and franchises referred to in
Article V hereof and otherwise to carry out the intent and purposes of this Plan
of Merger, and the officers and directors of Surviving Corporation are fully
authorized in the name of IHS or other wise to take any and all such action.
5
<PAGE>
EXHIBIT A
ARTICLE VII
This Plan of Merger may be terminated and abandoned upon mutual consent
of the respective Boards of Directors of IHS and HQI at any time prior to the
Effective Date of the Merger, notwithstanding approval of this Plan of Merger by
the stockholders of the Constituent Corporations. In the event of the
termination and abandonment of this Plan of Merger pursuant to the foregoing
provisions of this Article VII, this Plan shall be void and have no effect, and
of liability shall be incurred thereby on the part of either or IHS or HQI the
shareholders , directors, or officers thereof.
ARTICLE VIII
Any of the terms or conditions of this Plan of Merger may be waived at
any time by whichever of the Constituent Corporation is, or the stockholders of
which are, entitled to the benefit thereof, by action taken by the Board of
Directors of such Constituent Corporation, or may be amended or modified in
whole or in part at any time by an agreement in writing authorized by The Boards
of Directors of the Constituent Corporations; provided, however, that no such
amendment or modification or waiver after adoption by the stockholders of the
Constituent Corporations shall be made which changes the ratio at which the IHS
Common Stock is to be converted into the Surviving Corporation Common Stock as
provided in Article IV of this Plan of Merger.
ARTICLE IX
For the convenience of the parties hereto and to facilitate the filing
of this Plan of Merger, counterparts hereof may be executed, and each such
counterpart shall be deemed to be an original instrument.
IN WITNESS WHEREOF, each of the Constituent Corporations has
caused this Planed Merger to be signed in its corporate name by its President
and Secretary, and its corporate seal to be affixed hereto, all as of the date
first above written.
6
<PAGE>
EXHIBIT A
INTEGRATED HEALTHCARE SYSTEMS, INC.
By /S/ Michael J. Black
------------------------------------
Michael J. Black
Chairman of the Board and
Chief Executive Officer
Attest:
/S/ Alan Grofe
- ----------------------
Alan Grofe
President
H-QUOTIENT, INC.
By /S/ Alan W. Grofe
------------------------------------
Alan W. Grofe
President
Attest:
/S/ Michael J. Black
- -------------------------
Michael J. Black
Secretary
7
<PAGE>
EXHIBIT I to EXHIBIT A
ARTICLES OF MERGER
H-QUOTIENT, INC.
and
INTEGRATED HEALTHCARE
SYSTEMS, INC.
The undersigned corporations, pursuant to Title 13.1, Chapter 9,
Article 13 of the Code of Virginia (the "Code"), hereby execute the following
Articles of Merger and set forth:
ONE
The Plan of Merger between the undersigned corporations, dated as of
May 20, 1999, attached hereto as Exhibit A and made a part hereof.
TWO
The Plan of Merger was adopted by the written consent of a majority of
the stockholders, entitled to vote, of Integrated Healthcare Systems, Inc., a
Delaware corporation and holder of all the outstanding shares of Common Stock of
H-Quotient, Inc., a Virginia corporation, in accordance with the provisions of
Sections 228 and 253 of the Delaware Corporation Law and Section 13.1-719 of the
Code.
The undersigned executive officers declare that the facts herein stated
are true as of June 4, 1999.
INTEGRATED HEALTHCARE SYSTEMS, INC. H-QUOTIENT, INC.
By: /S/ Michael J. Black By: /S/ Alan W. Grofe
--------------------------------- --------------------------------
Michael J. Black, Chairman and Alan W. Grofe
Chief Executive Officer President
<PAGE>
COMMONWEALTH OF VIRGINIA
STATE CORPORATION COMMISSION
June 14, 1999
The State Corporation Commission finds the accompanying articles submitted on
behalf of
H-QUOTIENT, INC.
to comply with the requirements of law. Therefore, it is ORDERED that this
CERTIFICATE OF MERGER
be issued and admitted to record with the articles in the office of the Clerk
of the Commission. Each of the following:
INTEGRATED HEALTHCARE SYSTEMS, INC. (A DE CORPORATION NOT QUALIFIED IN VA)
is merged into H-QUOTIENT, INC., which continues to exist under the laws of
VIRGINIA with the name H-QUOTIENT, INC. The existence of each non-surviving
entity ceases, according to the plan of merger.
The certificate is effective on June 14, 1999.
STATE CORPORATION COMMISSION
By /s/ XXXXXXXXXXXXXXX
-------------------------------------
Commissioner
<PAGE>
EXHIBIT 3.12
AGREEMENT OF MERGER
AGREEMENT OF MERGER, dated as of the 20th day of May, 1999, pursuant to
Section 252 of the General Corporation Law of the State of Delaware, between
H-Quotient, Inc., a Virginia corporation and Integrated Healthcare Systems Inc.,
a Delaware corporation.
WITNESSETH:
WHEREAS, all of the constituent corporations desire to merge into a
single corporation; and
NOW, THEREFORE, the corporations, parties to this Agreement, in
consideration of the mutual covenants, agreements and provisions hereinafter
contained, do hereby prescribe the terms and conditions of said merger and mode
of carrying the same into effect as follows:
FIRST: H-Quotient, Inc., hereby merges into itself H-Quotient, Inc.,
and said Integrated Healthcare Systems, Inc. shall be and hereby is merged into
H-Quotient, Inc., which shall be the surviving corporation.
SECOND: The Articles of Incorporation of H-Quotient, Inc., as
heretofore amended and as in effect on the date of merger provided for this
Agreement, shall continue in full force and effect as the Articles of
Incorporation of the corporation surviving this merger.
-1-
<PAGE>
THIRD: The manner of converting the outstanding shares of the capital
stock of each of the constituent corporations into the shares or other
securities of the surviving corporation shall be as follows:
(a) Each share of common stock of the merged corporation which shall be
outstanding as of June 14, 1999, and all rights in respect thereto
shall forthwith be changed and converted into same number of shares
of common stock of the surviving corporation.
(b) After the effective date of this Agreement, each holder of an
outstanding certificate representing shares of common stock of the
merged corporation shall surrender the same to the surviving
corporation and each such holder shall be entitled upon such
surrender to receive the number of shares of common stock of the
surviving corporation on the basis provided herein. Until so
surrendered, the outstanding shares of stock of the merged
corporation to be converted into the stock of the surviving
corporation as provided herein, may be treated by the surviving
corporation for all corporate purposes as evidencing the ownership
of shares of the surviving corporations as though said surrender
and exchange had taken place. After the effective date of this
Agreement, each registered owner of any uncertificated shares of
common stock of the merged corporation shall have said shares
cancelled and said registered owner shall be entitled to the number
of common shares of the surviving corporation on the basis provided
herein.
FOURTH: The terms and conditions of the merger are as follows:
(a) The by-laws of the surviving corporation as they shall exist on the
effective date of this Agreement shall be and remain the by-laws of
the surviving corporation until the same shall be altered, amended
and repeated as therein provided.
(b) The directors and officers of the surviving corporation shall
continue in office until the next annual meeting of stockholders
and until their successors shall have been elected and qualified.
(c) This merger shall become effective upon filing with the Secretary
of State of Delaware. However, for all accounting purposes the
effective date of the merger shall be as of the close of business
on June 14, 1999.
(d) Upon the merger becoming effective, all the property, rights,
privileges, franchises, patents, trademarks licenses, registrations
and other assets of every kind and description of the merged
corporation shall be transferred to, vested in and devolve upon the
surviving corporation without further
-2-
<PAGE>
act or deed and all property, rights, and every other interest of
the surviving corporation and the merged corporation shall be as
effectively the property of the surviving corporations they were of
the surviving corporation and the merged corporation respectively.
The merged corporation hereby agrees from time to time, as and when
requested by the surviving corporation or by its successors or
assigns, to execute and deliver or caused to be executed and
delivered all such deeds and instruments and to take or cause to be
taken such further or other action as the surviving corporation may
deem necessary or desirable in order to vest in and confirm to the
surviving corporation title to and possession of any property of
the merged corporation acquired or to be acquired by reason of or
as a result of the merger herein provided for and otherwise to
carry out the intent and purposes hereof and the proper officers
and directors of the merged corporation and the proper officers and
directors of the surviving corporation are fully authorized in the
name of the merged corporation or otherwise to take any and all
such action.
FIFTH: The surviving corporation may be served with process in the
State of Delaware in any processing for enforcement of any obligation of
Integrated Healthcare Systems, Inc. as well as for enforcement of any
obligations of the surviving corporation arising from the merger, including any
suit or other proceedings to enforce the right of any stockholder as determined
in appraisal proceedings pursuant to the provisions of section 262 of Title 8 of
the Delaware Code and it does hereby irrevocably appoint the Secretary of State
of Delaware as its agent to accept service of process in any such suit or other
proceedings. The address to which a copy of such process shall be mailed by the
Secretary of State of Delaware is c/o H-Quotient, Inc., 12030 Sunrise Valley
Drive, Suite 205, Reston, Virginia 201191 until the surviving corporation shall
have hereafter designated in writing to the said Secretary of State a different
address for such purpose. Service of such process may be made by personally
delivering to and leaving with the Secretary of State of Delaware duplicate
copies of such process, one of which copies the
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<PAGE>
Secretary of State of Delaware shall forthwith send by registered mail to said
H-Quotient, Inc., at the above address.
IN WITNESS WHEREOF, the parties to this Agreement, pursuant to the
approval and authority duly given by resolution adopted by their respective
Boards of Directors have caused these presents to be executed by the Chairman
and Chief Execution Officer of H-Quotient, Inc. and the President of
Integrated Healthcare Systems, Inc. hereto as the respective act, deed and
agreement of each said corporations, as of the 20th day of May 1999.
H-QUOTIENT, INC.,
By: /s/ Michael J. Black
------------------------------------
Michael, J. Black, Chairman
and Chief Executive Officer
INTEGRATED HEALTHCARE
SYSTEMS, INC.
By: /s/ Alan W. Grofe'
------------------------------------
Alan W. Grofe', President
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<PAGE>
I, Michael J. Black, Secretary of Integrated Healthcare Systems, Inc.,
a corporation organized and existing under the laws of the State of Delaware,
hereby certify, as such Secretary , that the Agreement of Merger to which this
Certificate is attached, after having been first duly signed on behalf of the
said corporation and having been signed on behalf of H-Quotient, Inc., a
corporation of the State of Virginia, was duly adopted pursuant to Section 228
of Title 8 of the Delaware Code by the written consent of the stockholders
holding 3,756,883 shares of the capital stock of the corporation, same being
54.94% (percentum) of the shares issued and outstanding having voting power,
which Agreement of Merger was thereby adopted as the act of the stockholders of
said Integrated Healthcare Systems, Inc. and the duly adopted agreement and act
of at the said corporation.
WITNESS, my hand on this 14th day of June, 1999.
/s/ Michael J. Black
------------------------------------
Michael J. Black, Secretary
-5-
<PAGE>
H-QUOTIENT, INC.
*****
B Y L A W S
*****
ARTICLE I
OFFICES
Section 1. The registered office shall be located in Richmond,
Virginia.
Section 2. The Corporation may also have offices at such other
places both within and without the State of Virginia as the Board of Directors
may from time to time determine or the business of the Corporation may require.
ARTICLE II
ANNUAL MEETINGS OF SHAREHOLDERS
Section 1. All meetings of Shareholders for the election of
directors shall be held in Reston, State of Virginia, at such place as may be
fixed from time to time by the Board of Directors.
Section 2. Annual meetings of Shareholders, commencing with
the year 2000, shall be held on the 15th of June if not a legal holiday, and if
a legal holiday, then on the next secular day following, at 10:00AM Virginia
time, at which they shall elect by a plurality vote a Board of Directors, and
transact such other business as may properly be brought before the meeting.
Section 3. Written or printed notice of the annual meeting
stating the date, time and place of the meeting shall be delivered not less than
ten nor more than sixty days before the date of the meeting,
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either personally or by mail, by or at the direction of the President, the
Secretary, or the officer or persons calling the meeting, to each shareholder of
record entitled to vote at such meeting.
ARTICLE III
SPECIAL MEETINGS OF SHAREHOLDERS
Section 1. Special meetings of Shareholders for any purpose
other than the election of Directors may be held at such time and place within
or without the State of Virginia as shall be stated in the notice of the meeting
or in a duly executed waiver of notice thereof.
Section 2. Special meetings of the Shareholders, for any
purpose or purposes, unless otherwise prescribed by statute or by the Articles
of Incorporation, may be called by the Chairman of the Board of Directors, the
President, or the Board of Directors.
Section 3. Written or printed notice of a special meeting
stating the date, time and place of the meeting and the purpose or purposes for
which the meeting is called, shall be delivered not less than ten nor more than
sixty days before the date of the meeting, either personally or by mail, by or
at the direction of the President, the Secretary, or the officer or persons
calling the meeting, to each shareholder of record entitled to vote at such
meeting. Notwithstanding the preceding paragraph, notice of a Shareholders'
meeting to act on an amendment of the Articles of Incorporation, on a plan of
merger or share exchange, on a proposed sale of assets other than in the regular
course of business, or on a plan of dissolution shall be given, in the manner
provided herein, not less than ten nor more than sixty days before the date of
the meeting. Any such notice shall be accompanied by a copy of the proposed
amendment, plan of merger, or share exchange, or plan of proposed sale of
assets.
Section 4. The business transacted at any special meeting of
Shareholders shall be limited to the purposes stated in the notice.
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ARTICLE IV
QUORUM AND VOTING OF SHARES
Section 1. A majority of the votes entitled to be cast on a
matter by a voting group constitutes a quorum of that voting group for action on
that matter except as otherwise provided by statute or by the Articles of
Incorporation. If, however, such quorum shall not be present or represented at
any meeting of the Shareholders, the Shareholders present in person or
represented by proxy shall have power to adjourn the meeting from time to time,
without notice other than announcement at the meeting, until a quorum shall be
present or represented. At such adjourned meeting at which a quorum shall be
present or represented, any business may be transacted which might have been
transacted at the meeting as originally notified.
Section 2. If a quorum is present, action on a matter by a
voting group is approved if the votes cast within the voting group favoring the
action exceed the votes cast opposing the action unless the vote of a greater
number of affirmative votes is required by law or the Articles of Incorporation.
Section 3. A. Each outstanding share, regardless of class,
shall be entitled to one vote on each matter submitted to a vote at a meeting of
Shareholders unless the Articles of Incorporation or law provide otherwise. A
shareholder may vote either in person or by proxy executed in writing by the
shareholder or by his duly authorized attorney-in-fact.
B. Without limiting the manner in which a Shareholder
may authorize another persons to act for him as proxy pursuant to Subsection A
of this Section 3, the following shall constitute a valid means by which a
Shareholder may grant such authority:
1. A Shareholder may execute a writing authorizing another
person or persons to act for him as proxy. Execution may be
accomplished by the shareholder or his authorized officer,
director employee or agent signing such writing or causing his
signature to be affixed to such writing by any reasonable means
including, but not limited to, by facsimile signature.
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2. A Shareholder may authorize another person or persons to
act for him as proxy by transmitting or authorizing the
transmission of a telegram, cablegram or other means of
electronic transmission to the person who will be the holder of
the proxy or to a proxy solicitation firm, proxy support
service organization or like agent duly authorized by the
person who will be the holder of the proxy to receive such
transmission, provided that any such telegram, cablegram or
other means of electronic transmission must either set forth or
be submitted with information from which the inspectors of
election can determine that the telegram, cablegram or other
electronic transmission was authorized by the shareholder. If
it is determined that such telegrams, cablegrams or other
electronic transmissions are valid, the inspectors, or if there
are no inspectors, such other persons making that
determination, shall specify the information upon which they
relied.
3. Any copy, facsimile telecommunication or other reliable
reproduction of writing or transmission created pursuant to
this Subsection B may be substituted or used in lieu of the
original writing or transmission for any and all purposes for
which the original writing or transmission could be used,
provided that such copy, facsimile telecommunication or other
reproduction shall be a complete reproduction of the entire
original writing or transmission.
Section 4. Any action required or permitted to be taken at a
meeting of the Shareholders may be taken without a meeting if a consent in
writing, setting forth the action so taken, shall be signed by all of the
Shareholders entitled to vote with respect to the subject matter thereof.
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<PAGE>
ARTICLE V
DIRECTORS
Section 1. The number of Directors shall be not less than three
nor more than nine. The number of Directors may be fixed or changed within the
minimum or maximum by the Shareholders or by the or by the Board of Directors,
unless shares have been issued in which case only the Shareholders may change
the range or switch to a fixed size Board. Directors need not be residents of
the State of Virginia nor Shareholders of the corporation. The Directors, other
than the first Board of Directors, shall be elected at the annual meeting of the
Shareholders, and each director elected shall serve until the next succeeding
annual meeting and until his successor shall have been elected and qualified.
The first Board of Directors shall hold office until the first annual meeting of
Shareholders.
Section 2. Any vacancy occurring in the Board of Directors,
including a vacancy resulting from an increase in the number of Directors, may
be filled by the Shareholders, the Board of Directors, or if the Directors
remaining in office constitute fewer than a quorum of the Board, the vacancy may
be filled by the affirmative vote of the Directors remaining in office.
Section 3. The business and affairs of the Corporation shall be
managed by its Board of Directors which may exercise all such powers of the
Corporation and do all such lawful acts and things as are not by statute or by
the Articles of Incorporation or by these By-Laws directed or required to be
exercised or done by the Shareholders.
Section 4. The Directors may keep the books of the Corporation,
except such as are required by law to be kept within the state, outside of the
State of Virginia, at such place or places as they may from time to time
determine.
Section 5. The Board of Directors, by the affirmative vote of a
majority of the Directors then in office, and irrespective of any personal
interest of any of its members, shall have authority to establish reasonable
compensation of all Directors for services to the Corporation as Directors,
officers or otherwise.
Section 6. Directors may be paid such compensation for their
services and such reimbursement for expenses of attendance at meetings the Board
of Directors may from time to time
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<PAGE>
determine. No such payment shall preclude any director from serving the
corporation or any of its parent or subsidiary corporations in any other
capacity and receiving compensation for such service.
ARTICLE VI
MEETINGS OF THE BOARD OF DIRECTORS
Section 1. Meetings of the Board of Directors, regular or
special, may be held either within or without the State of Virginia.
Section 2. The first meeting of each newly elected Board of
Directors shall be held at such time and place as shall be fixed by the vote of
the Shareholders at the annual meeting and no notice of such meeting shall be
necessary to the newly elected Directors in order legally to constitute the
meeting, provided a quorum shall be present, or it may convene at such place and
time as shall be fixed by the consent in writing of all the Directors.
Section 3. Regular meetings of the Board of Directors may be
held upon such notice, or without notice, and at such time and at such place as
shall from time to time be determined by the Board.
Section 4. Special meetings of the Board of Directors may be
called by the Chairman or President on one days' notice to each director, either
personally or by mail or by facsimile telecommunication; special meetings shall
be called by the Chairman, President or Secretary in like manner and on like
notice on the written request of two Directors.
Section 5. Attendance of a director at any meeting shall
constitute a waiver of notice of such meeting, except where a director attends
for the express purpose of objecting to the transaction of any business because
the meeting is not lawfully called or convened. Neither the business to be
transacted at, nor the purpose of, any regular or special meeting of the Board
of Directors need be specified in the notice or waiver of notice of such
meeting.
Section 6. A majority of the Directors shall constitute a
quorum for the transaction of business unless a greater number is required by
law or by the Articles of Incorporation. The act of a majority of the Directors
present at any meeting at which a quorum is present shall be the act of the
Board of Directors, unless the act of a greater number is required by statute or
by the Articles of Incorporation. If
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<PAGE>
a quorum shall not be present at any meeting of Directors, the Directors present
thereat may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present.
Section 7. Any action required or permitted to be taken at a
meeting of the Directors may be taken without a meeting if one or more consents
in writing, setting forth the action so taken, shall be signed by each director
entitled to vote with respect to the subject matter thereof and included in the
minutes or filed with the corporate records reflecting the action taken.
Section 8. Directors or any members of any committee designated
by the Directors may participate in a meeting of the Board of Directors or such
committee by means of conference telephone video conferencing or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and participation by such means shall constitute
presence in person at such meeting.
ARTICLE VII
COMMITTEES OF DIRECTORS
Section 1. A majority of the number of Directors fixed by the
By-Laws or otherwise, may create one or more committees and appoint members of
the Board to serve on the committee or committees. To the extent provided by the
Board of Directors or Articles of Incorporation, each committee shall have and
exercise all of the authority of the Board of Directors in the management of the
Corporation, except as otherwise required by law. Each committee shall have two
or more members who serve at the pleasure of the Board of Directors. Each
committee shall keep regular minutes of its proceedings and report the same to
the Board when required.
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ARTICLE VIII
NOTICES
Section 1. Whenever, under the provisions of the statutes or of
the Articles of Incorporation or of these By-Laws, notice is required to be
given to any director or shareholder, it shall not be construed to mean personal
notice, but such notice may be given in writing, by mail, addressed to such
director or shareholder, at his address as it appears on the records of the
Corporation, with postage thereon prepaid, and such notice shall be deemed to be
given at the time when the same shall be deposited in the United States mail.
Notice to Directors may also be given by facsimile telecommunication.
Section 2. Whenever any notice whatever is required to be given
under the provisions of the statutes or under the provisions of the Articles of
Incorporation or these By-Laws, a waiver thereof in writing signed by the person
or persons entitled to such notice, whether before or after the time stated
therein, shall be deemed equivalent to the giving of such notice.
ARTICLE IX
OFFICERS
Section 1. The officers of the Corporation shall be chosen by
the Board of Directors and shall be a Chairman of the Board, a President, a
Secretary and a Treasurer. The Board of Directors may also choose one or more
Vice-Presidents, Assistant Secretaries and Assistant Treasurers.
Section 2. The Board of Directors at its first meeting after
each annual meeting of Shareholders shall choose a Chairman of the Board, a
President, a Secretary and a Treasurer, none of whom except the Chairman need be
a member of the Board.
Section 3. The Board of Directors may appoint such other
officers and agents with such other titles as the Board of Directors shall
determine, from time to time and agents as it shall deem necessary who shall
hold their offices for such terms and shall exercise such powers and perform
such duties as shall be determined from time to time by the Board of Directors.
Section 4. The salaries of all officers and agents of the
Corporation shall be fixed by the Board of Directors.
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Section 5. The officers of the Corporation shall hold office
until their successors are chosen and qualify. Any officer elected or appointed
by the Board of Directors may be removed at any time by the affirmative vote of
a majority of the Board of Directors. Any vacancy occurring in any office of the
Corporation shall be filled by the Board of Directors.
THE CHAIRMAN
Section 6. The Chairman of the Board, shall, when present,
preside at all meetings of the Board of Directors. He shall perform such duties
and possess such powers as are usually vested in the office of the Chairman of
the Board or as may be vested in him by the Board of Directors. If the Board of
Directors appoints a Vice-Chairman of the Board, he shall in the absence or
disability of the Chairman of the Board perform the duties and exercise the
powers of the Chairman of the Board and shall perform such other duties and
possess such other powers as may from time to time be vested in him by the Board
of Directors.
THE PRESIDENT
Section 7. The President shall be the chief executive officer
of the Corporation, and if there is no Chairman or in the absence of the
Chairman, shall preside at all meetings of the Shareholders and the Board of
Directors, shall have general and active management of the business of the
Corporation and shall see that all orders and resolutions of the Board of
Directors are carried into effect.
Section 8. He shall execute bonds, mortgages and other
contracts requiring a seal, under the seal of the Corporation, except where
required or permitted by law to be otherwise signed and executed and except
where the signing and execution thereof shall be expressly delegated by the
Board of Directors to some other officer or agent of the Corporation.
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THE VICE-PRESIDENTS
Section 9. If elected, the Vice-President, or if there shall be
more than one, the Vice-Presidents in the order determined by the Board of
Directors, shall, in the absence or disability of the President, perform the
duties and exercise the powers of the President and shall perform such other
duties and have such other powers as the Board of Directors may from time to
time prescribe.
THE SECRETARY AND ASSISTANT SECRETARIES
Section 10. The Secretary shall attend all meetings of the
Board of Directors and all meetings of the Shareholders and record all the
proceedings of the meetings of the Corporation and of the Board of Directors in
a book to be kept for that purpose and shall perform like duties for the
standing committees when required. He shall give, or cause to be given, notice
of all meetings of the Shareholders and special meetings of the Board of
Directors, and shall perform such other duties as may be prescribed by the Board
of Directors or President, under whose supervision he shall be. He shall have
custody of the Corporate seal of the Corporation and he, or an assistant
Secretary, shall have authority to affix the same to any instrument requiring it
and when so affixed, it may be attested by his signature or by the signature of
such assistant Secretary. The Board of Directors may give general authority to
any other officer to affix the seal of the Corporation and to attest the
affixing by his signature.
Section 11. If elected, the assistant Secretary, or if there be
more than one, the assistant secretaries in the order determined by the Board of
Directors, shall, in the absence or disability of the Secretary, perform the
duties and exercise the powers of the Secretary and shall perform such other
duties and have such other powers as the Board of Directors may from time to
time prescribe.
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THE TREASURER AND ASSISTANT TREASURERS
Section 12. The Treasurer shall have the custody of the
Corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the Board of
Directors.
Section 13. He shall disburse the funds of the Corporation as
may be ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the President and the Board of Directors, at
its regular meetings, or when the Board of Directors so requires, an account of
all his transactions as Treasurer and of the financial condition of the
Corporation.
Section 14. If required by the Board of Directors, he shall
give the Corporation a bond in such sum and with such surety or sureties as
shall be satisfactory to the Board of Directors for the faithful performance of
the duties of his office and for the restoration to the Corporation, in case of
his death, resignation, retirement or removal from office, of all books, papers,
vouchers, money and other property of whatever kind in his possession or under
his control belonging to the Corporation.
Section 15. If elected, the assistant Treasurer, or if there
shall be more than one, the assistant Treasurers in the order determined by the
Board of Directors, shall, in the absence or disability of the Treasurer,
perform the duties and exercise the powers of the Treasurer and shall perform
such other duties and have such other powers as the Board of Directors may from
time to time prescribe.
COMPENSATION
Section 16. Officers of the corporation shall be entitled to
such salaries, compensation or reimbursement as shall be fixed or allowed form
time to time by the Board of Directors.
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ARTICLE X
CERTIFICATES FOR SHARES
Section 1. The shares of the Corporation shall be represented
by certificates. Certificates shall be signed by the President or a
Vice-President and the Secretary or an Assistant Secretary of the Corporation,
and may be sealed with the seal of the Corporation or a facsimile thereof.
When the Corporation is authorized to issue shares of more than
one class there shall be set forth upon the face or back of each certificate, or
each certificate shall have a statement that the Corporation will furnish to any
shareholder upon request and without charge, a full statement of the
designations, preferences, limitations, and relative rights of the shares of
each class authorized to be issued and, if the Corporation is authorized to
issue different series within a class, the variations in the relative rights and
preferences between the shares of each such series so far as the same have been
fixed and determined and the authority of the Board of Directors to fix and
determine the relative rights and preferences of subsequent series.
Section 2. The signatures of the officers upon a certificate
may be facsimiles, unless otherwise provided in the Articles of Incorporation.
In case any officer who has signed or whose facsimile signature has been placed
upon such certificate shall have ceased to be such officer before such
certificate is issued, it may be issued by the Corporation with the same effect
as if he were such officer at the date of its issue.
LOST CERTIFICATES
Section 3 The Board of Directors may direct a new certificate
or uncertificated security to be issued in place of any certificate theretofore
issued by the Corporation alleged to have been lost or destroyed. When
authorizing such issue of a new certificate or uncertificated security, the
Board of Directors, in its discretion and as a condition precedent to the
issuance thereof, may prescribe such terms and conditions as it deems expedient,
and may require such indemnities as it deems adequate, to protect the
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Corporation from any claim that may be made against it with respect to any such
certificate alleged to have been lost or destroyed.
TRANSFERS OF SHARES
Section 4. Upon surrender to the Corporation or the transfer
agent of the Corporation of a certificate representing shares duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, a new certificate shall be issued to the person entitled thereto, and
the old certificate cancelled and the transaction recorded upon the books of the
Corporation.
CLOSING OF TRANSFER BOOKS
Section 5. For the purpose of determining Shareholders entitled
to notice of or to vote at any meeting of Shareholders, or any adjournment
thereof or entitled to receive payment of any dividend, or in order to make a
determination of Shareholders for any other proper purpose, the Board of
Directors may fix in advance a date as the record date for the determination of
Shareholders, such date in any case to be not more than seventy days before the
meeting or action requiring the determination of Shareholders. If no record date
is fixed for the determination of Shareholders entitled to notice of or to vote
at a meeting of Shareholders, or Shareholders entitled to receive payment of a
dividend, the date on which notice of the meeting is mailed or the date on which
the resolution of the Board of Directors declaring such dividend is adopted, as
the case may be, shall be the record date for such determination of
Shareholders. When a determination of Shareholders office of the Corporation and
shall be subject to inspection by any shareholder at any time during usual
business hours. Such list shall also be produced and kept open at the time and
place of the meeting and shall be subject to the inspection of any Shareholder
during the whole time of the meeting. The original share transfer book, or a
duplicate thereof, shall be prima facie evidence as to who are the Shareholders
entitled to examine such list or share transfer book or to vote at any meeting
of the Shareholders.
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ARTICLE XI
GENERAL PROVISIONS
DIVIDENDS
Section 1. Subject to the provisions of the Articles of
Incorporation relating thereto, if any, dividends may be declared by the Board
of Directors at any regular or special meeting, pursuant to law. Dividends may
be paid in money or other property subject to any provisions of the Articles of
Incorporation.
Section 2. Before payment of any dividend, there may be set
aside out of any funds of the Corporation available for dividends such sum or
sums as the directors from time to time, in their absolute discretion, think
proper as a reserve fund to meet contingencies, or for equalizing dividends, or
for repairing or maintaining any property of entitled to vote at any meeting of
Shareholders has been made as provided in this section, such determination shall
apply to any adjournment thereof.
REGISTERED SHAREHOLDERS
Section 6. The Corporation shall be entitled to recognize the
exclusive right of a person registered on its books as the owner of shares to
receive dividends, and to vote as such owner, and to hold liable for calls and
assessments a person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Virginia.
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LIST OF SHAREHOLDERS
Section 7. The officer or agent having charge of the transfer
books for shares shall make, at least ten days before each meeting of
Shareholders, a complete list of the Shareholders entitled to vote at such
meeting, arranged by voting group and within each voting group by class or
series of shares, with the address of each and the number of shares held by
each, which list, for a period of ten days prior to such meeting, shall be kept
on file at the principal business the Corporation, or for such other purpose as
the Directors shall think conductive to the interest of the Corporation, and the
directors may modify or abolish any such reserve in the manner in which it was
created.
CHECKS
Section 3. All checks or demands for money and notes of the
Corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors nay from time to time designate.
VOTING CORPORATION'S SECURITIES
Section 4. Unless otherwise ordered by the Board of Directors,
the Chairman of the Board, or, in the event of his inability to act, the
President, or in the vent of his inability to act, a Vice President designated
by the Board of Directors to act in the absence of the President, shall have
full power and authority on behalf of the Corporation to attend and to act and
to vote at any meetings of security holders of corporations in which the
Corporation may hold securities, and at such meeting shall possess and may
exercise any and al rights and powers incident to the ownership of such
securities, and which as the owner thereof the corporation might have possessed
and exercised, if present. The Board of Directors by resolution from time to
time may confer like powers upon any other officer in the absence of the
Chairman and the President, who shall have full power and authority on behalf of
the Corporation to attend and to act
15
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and to vote at any meetings of security holders of corporations in which the
corporation may hold securities, and at such meetings shall possess and may
exercise any and all rights and powers incident to the ownership of such
securities, and which as the owner thereof the corporation might have possessed
and exercised, if present. The Board of Directors by resolution from time to
time may confer like powers upon any other person or persons.
FISCAL YEAR
Section 5. The fiscal year of the Corporation shall be fixed
by resolution of the Board of Directors.
SEAL
Section 6. The Corporate Seal shall have inscribed thereon the
name of the Corporation, the year of its organization and the words "Corporate
Seal, Virginia". The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or in any manner reproduced.
ARTICLE XI
INDEMNIFICATION
Section 1. Each Director and officer of the Corporation
whether or not then in office, and each person whose testator or intestate was
such a director or officer, shall be indemnified by the Corporation in
accordance with and to the full extent permitted by the Code of Virginia.
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ARTICLE XII
AMENDMENTS
Section 1. These By-Laws may be amended or repealed or new
By-Laws may be adopted by the affirmative vote of a majority of the Board of
Directors at any regular or special meeting of the Board unless the Articles of
Incorporation or law reserve this power to the Shareholders.
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<TABLE>
<CAPTION>
<S> <C>
====================================================================================================================================
- ----------------- -----------------
NUMBER SHARES
H-Quotient, Inc.
HQC
- ----------------- INCORPORATED UNDER THE LAWS OF THE COMMONWEALTH OF VIRGINIA -----------------
CUSIP 40426E 10 1
SEE REVERSE FOR CERTAIN DEFINITIONS
THIS CERTIFIES that
is the owner of
FULLY-PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF
H-QUOTIENT, INC. transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon
surrender of this certificate properly endorsed. This certificate is not valid until countersigned by the Transfer Agent.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers.
Dated
H-QUOTIENT, INC.
CORPORATE
SEAL
1999 /s/ Michael J. Black Alan W. Grofe
VIRGINIA
* Secretary President
Countersigned:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY,
(Jersey City, N.J.) Transfer Agent
By
Authorized Officer
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The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<CAPTION>
<S> <C>
TEN COM -- as tenants in common UNIF TRANS MIN ACT -- ________ Custodian _______ Under
TEN ENT -- as tenants by the entireties (cust) (Minor)
JT TEN -- as joint tenants with right of the _______________ Transfers to Minors Act
survivorship and not as tenants (State)
in common
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Additional abbreviations may also be used though not in the above list.
For value received, ______________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE:
- ---------------------------------------
- ---------------------------------------
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
__________________________________________________________________ common shares
represented by the within Certificate, and do hereby irrevocably constitute
and appoint
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated _____________________
- --------------------------------------------------------------------------------
NOTICE: The signature to this assignment must correspond with the name as
written upon the face of the certificate in every particular without aberation
or enlargement or any change whatever. The signature of the person executing
this power must be guaranteed by an Eligible Guarantor Institution such as a
Commercial Bank, Trust Company, Securities Broker/Dealer, Credit Union, or a
Savings Association participating in a Mediation program approved by the
Securities Transfer Association, Inc.
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THE SECURITIES WHICH ARE REPRESENTED BY THE CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND THEY
MAY NOT BE OFFERED, SOLD, PLEDGED, HYPOTHECATED, ASSIGNED OR TRANSFERRED EXCEPT
(i) PURSUANT TO A REGISTRATION STATEMENT UNDER THE SECURITIES ACT WHICH HAS
BECOME EFFECTIVE AND IS CURRENT WITH RESPECT TO THESE SECURITIES, OR (ii)
PURSUANT TO A SPECIFIC EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT BUT
ONLY UPON A HOLDER HEREOF FIRST HAVING OBTAINED THE WRITTEN OPINION OF COUNSEL
TO THE CORPORATION, OR THEIR COUNSEL REASONABLY ACCEPTABLE TO THE CORPORATION,
THAT THE PROPOSED DISPOSITION IS CONSISTENT WITH ALL APPLICABLE PROVISIONS OF
THE SECURITIES ACT AS WELL AS ANY APPLICABLE "BLUE SKY" OR OTHER STATE
SECURITIES LAW.
THE REGISTERED HOLDER OF THIS WARRANT BY ITS ACCEPTANCE HEREOF, AGREES THAT IT
WILL NOT SELL, TRANSFER OR ASSIGN THIS WARRANT EXCEPT AS HEREIN PROVIDED.
NOT EXERCISABLE PRIOR TO July 15,1995. VOID AFTER 5:00 P.M. VIRGINIA TIME July
14, 2000.
COMMON STOCK PURCHASE WARRANT
For the Purchase of 325,000 Shares of Common Stock
Of
INTEGRATED HEALTHCARE SYSTEMS, INC.
(A Delaware Corporation)
1. Warrant.
THIS CERTIFIES THAT the Steven W. Bingaman 1996 Trust (or registered
assigns succeeding to ownership hereof pursuant to the provisions of Section
3.1 hereof) (the "Holder"), as registered owner of this Warrant, is entitled, at
any time and from time to time on or after July 15, 1996 (the "Effective Date"),
and at or before 5:00 p.m., Virginia Time, on the termination date set forth
below, but not thereafter, to subscribe for, purchase and receive, in whole or
in part, up to Three Hundred Twenty-five Thousand (325,000) shares of Common
Stock, $.0001 par value ("Common Stock"), of Integrated Healthcare Systems,
Inc., a Delaware corporation (the "Company"). If such termination date is a day
on which banking institutions are authorized by law to close, then this Warrant
may be exercised on the next succeeding day that is not such a day in
accordance with the terms hereof. This Warrant is initially exercisable as to
shares of Common Stock covered hereby ("Warrant Shares") in the amount and at
the per share exercise price ("Exercise Price") set forth below.
No. of Warrant - Shares Exercise Price Termination Date
----------------------- -------------- ----------------
325,000 $2.00 July 14, 2000
The term "Exercise Price" shall mean either the initial per share exercise price
or such exercise price as adjusted in the manner provided herein as the case may
be.
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2. Exercise.
In order to exercise this Warrant, the exercise form attached hereto
as Exhibit A must be duly executed, completed and delivered to the Company,
together with this Warrant and payment of the applicable Exercise Price
multiplied by the number of Warrant Shares being purchased. If the rights
represented hereby shall not have been exercised at or before 5: 00 p.m.,
Virginia Time, on or before the termination date set forth above this Warrant
shall become and be void and without further force or effect and all rights
represented hereby shall cease and expire.
3. Transfer.
3.1 General-Restriction. The registered Holder of this Warrant by its
acceptance hereof, agrees that it shall not sell, transfer or assign or
hypothecate this Warrant to anyone other than the permitted persons described in
Section 3.3 hereof. In order to make any permitted assignment, the Holder must
deliver to the Company the assignment form attached hereto as Exhibit B duly
executed and completed, together with this Warrant and payment of all transfer
taxes, if any, payable in connection therewith and an agreement by the
transferee to be bound by the terms hereof together with any other documentation
reasonably requested by the Company. Upon compliance of the Holder with the
provisions hereof, the Company shall immediately transfer the number of Warrants
specified in the assignment form on the books of the Company and shall execute
and deliver a new warrant or warrants of like tenor to the appropriate
assignee(s) expressly evidencing the right to purchase the number of Warrant
Shares purchasable hereunder or such portion of such number as shall be
contemplated by such assignment.
3.2 Restrictions Imposed by the Act. The Holder by accepting this
Warrant confirms that the Warrant was acquired by the Holder solely for
investment and with no present intention to distribute the Warrant or the
Warrant Shares issuable upon the exercise hereof and that the Holder will
dispose of such Warrant and Warrant Shares only in compliance with applicable
Federal and state securities laws. This Warrant and the Warrant Shares purchased
upon exercise of this Warrant shall not be transferred unless and until (i) the
Company has received an opinion of counsel for the Holder that this Warrant
and/or such Warrant Shares may be sold pursuant to an exemption from
registration under the Securities Act of 1933, as amended (the "Act"), the
availability of which is established to the reasonable satisfaction of the
Company, or (ii) a registration statement relating to the Warrant and/or the
Warrant Shares issuable upon the exercise hereof has been filed by the Company
and declared effective by the Securities and Exchange Commission (the
"Commission").
Each certificate for Warrant Shares purchased upon exercise of this
Warrant shall bear a legend as follows unless such securities have been
registered under the Act:
"THE SECURITIES WHICH ARE REPRESENTED BY THE CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), AND THEY MAY NOT BE OFFERED, SOLD, PLEDGED,
HYPOTHECATED, ASSIGNED OR TRANSFERRED EXCEPT (i) PURSUANT TO A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT WHICH HAS BECOME
EFFECTIVE AND IS CURRENT WITH RESPECT TO THESE SECURITIES, OR (ii)
PURSUANT TO A SPECIFIC EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT BUT ONLY UPON A HOLDER HEREOF FIRST HAVING OBTAINED
THE VALUED OPINION OF COUNSEL TO THE CORPORATION, OR THEIR COUNSEL
REASONABLY ACCEPTABLE TO THE CORPORATION, THAT THE PROPOSED
DISPOSITION IS CONSISTENT WITH ALL APPLICABLE PROVISIONS OF THE
SECURITIES ACT AS WELL AS ANY APPLICABLE "BLUE SKY" OR OTHER STATE
SECURITIES LAW. COPIES OF THE WARRANT COVERING SECURITIES AND
RESTRICTING THEIR TRANSFER MAY BE OBTAINED AT NO COST BY WRITTEN
REQUEST MADE BY THE HOLDER OF
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RECORD OF THIS CERTIFICATE TO THE SECRETARY OF THE COMPANY AT THE
PRINCIPAL EXECUTIVE OFFICES OF THE COMPANY."
The Certificate may also include any legend required by applicable
state securities laws.
3.3 This Warrant and the Warrant Shares may not be sold or
otherwise disposed of except as follows:
(a) Subject to Section 3.1 as to the Warrants, to a person, who,
in the opinion of counsel reasonably satisfactory to the Company, is a
person to whom this Warrant or the underlying Warrant Shares may
legally be transferred without registration and without the delivery of
a current prospectus under the Act;
(b) to any person in a transaction that, in the opinion of
counsel reasonably satisfactory to the Company, complies with the
provisions of Rule 144 under the Act; or
(c) to any person upon delivery of a prospectus included in a
then effective registration statement under the Act relating to the
sale or disposition of the Warrant and/or the Warrant Shares.
4. New Warrants to be Issued.
4.1 Partial Exercise or Transfer. Subject to the restrictions in
Section 3 hereof, this Warrant may be exercised or assigned in whole or in part.
In the event of the exercise or assignment hereof in part only, upon surrender
of this Warrant for cancellation, together with the duly executed exercise or
assignment form and funds sufficient to pay any required transfer tax, the
Company shall cause to be delivered to the Holder without charge a new warrant
or new warrants of like tenor m the name of the Holder evidencing the right to
purchase, in the aggregate, the remaining number of underlying Warrant Shares
purchasable hereunder after giving effect to any such partial exercise or
assignment.
4.2 Lost Warrant. Upon receipt by the Company of evidence
satisfactory to it of the loss, theft, destruction or mutilation of this Warrant
and of an indemnification in favor of the Company, reasonably satisfactory to
it, the Company shall execute and deliver a new warrant of like tenor and date.
Any such new warrant executed and delivered as a result of such loss, theft,
mutilation or destruction shall constitute an additional contractual obligation
on the part of the Company.
5. Registration Rights Under the Securities Act of 1933.
5.1 "Piggy-Back" Registration.
5.1.1. Grant of Right. (a) The Holder of the Warrant shall have
the right for a period of three (3) years after the Effective Date, to include
all of the Warrant Shares underlying this Warrant bit with respect to which this
Warrant has not been terminated (the "Registrable Securities") as part of any
registration of securities filed by the Company (other than in connection with a
transaction contemplated by Rule 145(a) promulgated under the Act or pursuant to
Form S-8 or Form S-4).
5.1.2 Terms. The Company shall bear all fees and expenses
attendant to registering the Registrable Securities, but the Holder shall pay
any and all underwriting commissions, the expenses of any legal counsel selected
by the Holder to represent it in connection with the sale of the Registrable
Securities and applicable transfer taxes, if any. In the event of such a
proposed registration, the Company shall finish the then Holder with not less
thirty (30) days' written notice by registered mail prior to the proposed
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date of filing of such registration statement. Such notice to the Holder shall
continue to be given for each registration statement filed by the Company until
such time as all of the Registrable Securities have been registered and sold.
The Holder of Registrable Securities shall exercise the "piggyback" rights
provided for herein by giving written notice, within ten (10) days after the
receipt of the Company's notice of its intention to file a registration
statement. The Company shall cause any registration statement filed pursuant to
the above "piggyback" rights (a "Registration Statement") to remain effective
for at least nine (9) months from the date that a Holder of Registrable
Securities is first given the opportunity to sell all of such securities.
5.2 General Terms.
5.2.1 Indemnification. (a) The Company shall indemnify the
Holder of the Registrable Securities to be sold pursuant to any Registration
Statement hereunder and each person, if any, who controls such Holder within the
meaning of Section 15 of the Act or Section 20(a) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), against all loss, claim, damage,
expense or liability (inducting all reasonable attorneys' fees and other
expenses reasonably incurred in investigating, preparing or defending against
any claim whatsoever) to which any of them may become subject under the Act, the
Exchange Act or otherwise, arising out of or based upon any untrue statement or
alleged untrue statement of a material fact contained in a Registration
Statement or related preliminary or final prospectus (the "Prospectus") (as from
time to time amended and supplemented) or the omission or alleged omission
therefrom of a material fact required to be stated therein or necessary to make
the statements therein not misleading, unless such statement or omission was
made in reliance upon and in conformity with written information furnished to
the Company with respect to such Holder by or on behalf of such Holder expressly
for use in the Registration Statement or Prospectus, or any amendment or
supplement thereof, as the case may be.
If any action is brought against any Holder or a controlling
person in respect of which indemnity may be sought against the Company pursuant
to the foregoing, such Holder shall promptly give notice to the Company of the
institution of such action and the Company shall assume the defense and control
of such action, including the employment of counsel and payment of reasonable
fees and expenses. The Holder or such controlling person shall have the right to
employ its own counsel in any such case, but the fees and expenses of such
counsel shall be at the expense of such Holder or such controlling person unless
the employment of such counsel shall have been authorized in writing by the
Company in connection with the defense of such action, or the Company shall not
have employed counsel to have charge of the defense of such action, or counsel
for such indemnified party or parties shall have reasonably concluded that there
may be defenses available to it or them which are different from or additional
to those available to the Company (in which case the Company " not have the
right to direct the defense of such action on behalf of the indemnified party or
parties), in any of which events such fees and expenses shall be borne by the
Company. It is understood, however, that the Company shall not, in connection
with any one action or separate but substantially similar or related actions
arising out of the same general allegations or circumstances, be liable for the
reasonable fees and expenses of more than one separate counsel for the Holders
and controlling persons, which firm shall be designated in writing by a majority
in interest of the Holders based upon the value of the Registrable Securities
included in the relevant Registration Statement. Anything in this paragraph to
the contrary notwithstanding, the Company shall not be liable for any settlement
of any such claim or action effected without its written consent. The Company
agrees promptly to notify the Holder of the commencement of any litigation or
proceedings against it or any of its officers or directors, in connection with
the Registration Statement or Prospectus, or any amendment or supplement
thereto. Each party entitled to indemnification hereunder shall give notice to
the Company promptly after such party has Knowledge of any claim as to which
indemnity may be sought. With respect to any untrue statement or alleged untrue
statement made in, or omission or alleged omission from, any Prospectus, the
indemnity agreement contained in this Section 5.2.1 with respect to such
Prospectus shall not inure to the
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benefit of any Holder (or to the benefit of any person controlling Holder) if
the Prospectus (or the Prospectus as amended or supplemented if the Company
shall have made any amendments thereof or supplement thereto which shall have
been furnished to such Holder prior to the time of confirmation of such sale)
does not contain such statement, alleged statement, omission or alleged
omission, and a copy of such Prospectus shall not have been sent or given to
such person at or prior to the written confirmation of such sale to such person.
(b) The Holder agrees to indemnify and hold harmless the Company,
each of the directors of the Company, each of the officers of the Company who
shall have signed a Registration Statement and each other person, if any, who
controls the Company within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act to the same extent as the foregoing indemnity from
the Company to the Holder but only as to each such Holder with respect to
statements or omissions, or alleged statements or omissions, if any, made in
any Registration Statement or Prospectus or any amendment or supplement
thereto or any application in reliance upon, and in conformity with, written
information furnished to the Company with respect to the Holder by or on
behalf of such Holder expressly for use in any Registration Statement or
Prospectus or any amendment or supplement thereto or in any application, as
the case may be. The Company shall give notice to each Holder entitled to
indemnity hereunder promptly after the Company has Knowledge of any claim as
to which indemnity may be sought. In case any action shall be brought against
the Company, or any person so indemnified, based on any Registration Statement
or Prospectus or any amendment or supplement thereto or any application, and
in respect of which indemnity may be sought against any Holder, such Holder
shall have the rights and duties given to the Company, and the Company, and
each other person so indemnified shall have the rights and duties given to the
Holder(s) by the provisions of subsection (a) above.
5.2.2. Documents Delivered to Holder. Upon request, the Company
shall furnish (and, in the case of clause (ii) below, shall use its reasonable
best efforts to furnish) to each Holder participating in any of the foregoing
offerings and to each underwriter of any such offering, if any, a signed
counterpart, addressed to such Holder or underwriter, of (i) an opinion of
counsel to the Company, dated the effective date of such Registration Statement
(and, if such registration includes an underwritten public offering, an opinion
dated the date of the closing under any underwriting agreement related thereto),
and (ii) a "cold comfort" letter dated the effective date of such Registration
Statement (and, if such registration includes an underwritten public offering, a
letter dated the date of closing under the underwriting agreement) signed by
independent public accountants who have issued a report on the Company's
financial statements included in such Registration Statement, in each case
covering substantially the same matters with respect to such Registration
Statement (and the Prospectus included therein) and, in the case of such
accountants' letter, with respect to events subsequent to the date of such
financial statements, as are customarily covered in opinions of issue as counsel
and in accountants' letters delivered to underwriters in underwritten public
offerings of securities with such changes or omissions therefrom as are
appropriate under the circumstances. The Company shall also deliver promptly to
each Holder participating in the offering requesting the correspondence and
memoranda described below and to the managing underwriter copies of all
correspondence between the Commission and the Company, its counsel or auditors
and all memoranda relating to discussions with the Commission or its staff with
respect to the Registration Statement and permit each Holder and underwriter to
do such investigation, upon reasonable advance notice, with respect to
information contained in or omitted from the Registration Statement as it deems
reasonably necessary to comply with applicable securities laws or rules of the
National Association of Securities Dealers, Inc. ("NASD"). Such investigation
shall include access to books, records and properties and opportunities to
discuss the business of the Company with its officers and independent auditors,
all to such reasonable extent and at such reasonable times and as often as any
such Holder's shall reasonably request and all of which shall be subject to any
confidential restrictions as may be reasonably imposed by the Company. Following
the effective date of any such registration, the Company shall upon the request
of the Holder forthwith supply such a number of Prospectuses the requirements of
the Act, as shall be reasonably
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requested to make a public offering of the Registrable Securities from time to
time offered or sold by such Holder.
5.2.3 Underwriting Agreement. The Holder shall be a party to
any underwriting agreement relating to an underwritten sale of his Registrable
Securities and may, at its option, require that any or all of the covenants of
the Company to or for the benefit of the underwriters in such offerings shall
also be made to and for the benefit of such Holder. Such Holder shall not be
required to make any representations or warranties to or agreements with the
Company or the underwriters except as they may relate to such Holder, the
Registrable Securities and their intended methods of distribution. The Holder
may not participate in any underwritten registration provided for herein unless
such Holder (a) agrees to sell his Registrable Securities being registered on
the basis provided in any underwriting arrangements approved by the Company or
selling security-holder and (b) completes and executes all reasonable and
customary indemnities, questionnaires, powers of attorney, underwriting
agreements and other documents reasonably required under the terms of such
underwriting arrangements contemplated hereby.
5.2.4. Cooperation by Holder. The Company by written notice may
require the Holder to promptly furnish in writing to the Company such
information regarding the Holder and his distribution of the Registrable
Securities as it may from time to time reasonably request and such other
information as may be reasonably required or advisable in connection with such
registration. The Company shall have the right to exclude from any offering the
Registrable Securities of the Holder if he does not comply with the provisions
of the immediately preceding sentence. The Holder agrees that upon receipt of
any notice from the Company of the happening of any event which makes any
statement in a Registration Statement or Prospectus (including supplements and
amendments) or any document incorporated or deemed to be incorporated therein by
reference untrue in any material respect or that requires the making of any
changes in such Registration Statement, prospectus or documents so that, in the
case of the Registration Statement it will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, the Holder will forthwith discontinue
disposition of Registrable Securities pursuant to the Registration Statement
covering such Registrable Securities with the Holder's receipt of the copies of
a supplemented or amended Prospectus and, if so directed by the Company, the
Holder will deliver to the Company all copies, other than permanent file copies,
then in the Holder's possession, of the most recent prospectus covering such
Registrable Securities at the time of receipt of such notice.
6. Adjustments to Exercise Prices and Number of Securities.
6.l. Computation of Adjusted Exercise Prices. For purposes of this
Warrant, the term "Common Stock" shall include each class of common stock of the
Company. Except as hereinafter provided, in case the Company shall at any time
after the date hereof issue or sell any shares of Common Stock (other than the
issuances or sales referred to in Section 6.8 hereof), including shares held in
the Company's treasury and shares of Common Stock issued upon the exercise of
any options, rights or warrants to subscribe for shares of Common Stock and
shares of Common Stock issued upon the direct or indirect conversion or exchange
of securities for shares of Common Stock, for a consideration per share less
than the Exercise Price in effect immediately prior to the issuance or sale of
such shares, or without consideration, then forthwith upon such issuance or
sale, such Exercise Price shall (until another such issuance or sale) be reduced
to the price (calculated to the nearest full cent) equal to the quotient derived
by dividing (i) an amount equal to the sum of (x) the number of shares of Common
Stock outstanding immediately prior to such issuance or sale multiplied by such
Exercise Price in effect immediately prior to such issuance or sale, plus (y)
the aggregate of the amount of all consideration, if any, received by the
Company upon such issuance or sale, by (ii) the number of shares of Common Stock
outstanding immediately after such issuance or sale; provided, however, that in
no event shall any Exercise Price be adjusted pursuant to this
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computation to an amount in excess of such Exercise Price in effect immediately
prior to such computation, (except in the case of a combination of outstanding
shares of Common Stock, as provided by Section 6.4 hereof.)
6.2 General Rules for Computation of Adjustment. For the purposes of
any computation to be made in accordance with Section 6.1, the following
provisions shall be applicable:
6.2.1 Cash Compensation - In the case of the issuance or sale
of shares of Common Stock for a consideration part or all of which shall be
cash, the amount of the cash consideration therefor shall be deemed to be the
amount of cash received by the Company for such shares (or, if shares of Common
Stock are offered by the Company for subscription, the subscription price, or if
such securities shall be sold to underwriters or dealers for public offering
without a subscription offering, the initial public offering price), before
deducting therefrom any compensation paid or discount allowed in the sale,
underwriting or purchase thereof by underwriters or dealers or others performing
such services, or any expenses incurred in connection therewith.
6.2.2 Other Than Cash Consideration. In case of the issuance or
sale (otherwise than as a dividend or other distribution on any stock of the
Company) of shares of Common Stock for a consideration part or all of which
shall be other than cash, the amount of the consideration therefor other than
cash shall be deemed to be the value of such consideration as determined in good
faith by the Board of Directors of the Company.
6.2.3 Share Dividends. Shares of Common Stock issuable by way of
dividend or other distribution on any stock of the Company shall be deemed to
have been issued immediately after the opening of business on the day following
the record date for the determination of stockholders entitled to receive such
dividend or other distribution and shall be deemed to have been issued without
consideration.
6.2.4 Reclassification. The reclassification of securities of
the Company other than shares of Common Stock into securities including shares
of Common Stock shall be deemed to involve the issuance of such shares of common
Stock for a consideration other than cash immediately prior to the close of
business on the date fixed for the determination of security holders entitled to
receive such shares, and the value of the consideration allocable to such shares
of Common Stock shall be determined as provided in Section 6.2.2.
6.2.5 Outstanding Shares. The number of shares of Common Stock
at any one time outstanding shall include the aggregate number of shares issued
or issuable (subject to readjustment upon the actual issuance thereof) upon the
exercise of any and all outstanding options, rights, warrants to purchase shares
of Common Stock and upon the conversion or exchange-of any and all outstanding
securities convertible or exchangeable into shares of Common Stock.
6.3. Options, Rights, Warrants and Convertible and Exchangeable
Securities. In case the Company shall at any time after the date hereof issue
options, rights or warrants to subscribe for shares of Common Stock, or issue
any securities convertible into or exchangeable for shares of Common Stock, for
a consideration per share less than the lowest Exercise Price in effect
immediately prior to the issuance of such options, rights or warrants, or such
convertible or exchangeable securities, or without consideration, each Exercise
Price in effect immediately prior to the issuance of such options, rights or
warrants, or such convertible or exchangeable securities, as the case may be,
be reduced to a price determined by making a computation in accordance with the
provisions of Section 6.1 hereof, provided that:
(i) The aggregate maximum number of shares of Common Stock issuable
under such options, rights or warrants shall be deemed to be issued and
outstanding at the time such options, rights or
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warrants were issued, and for a consideration equal to the minimum purchase
price per share provided for in such options, rights or warrants at the time of
issuance, plus the consideration, if any, received by the Company for the
issuance of such options, rights or warrants;
(ii) The aggregate maximum number of shares of Common Stock
issuable upon conversion or exchange of any convertible or exchangeable
securities shall be deemed to be issued and outstanding at the time of issuance
of such securities, and for a consideration equal to the consideration received
by the Company for the issuance of such securities, plus the minimum
consideration, if any, receivable by the Company upon the conversion or exchange
thereof, and
(iii) If any change shall occur in the exercise price per share
provided for in any of the options, rights or warrants referred to in clause (i)
of Section 6.3, or in the price per share at which the securities referred to in
clause (ii) of Section 6.3 are convertible or exchangeable, such options, rights
or warrants or conversion or exchange rights, as the case may be, shall be
deemed to have expired or terminated on the date when such price change became
effective in respect of shares not theretofore issued pursuant to the exercise
or conversion or exchange thereof, and the Company shall be deemed to have
issued upon such date new options, rights or warrants or convertible or
exchangeable securities at the new price in respect of the number of shares
issuable upon the exercise of such options, rights or warrants or the conversion
or exchange of such convertible or exchangeable securities.
6.4 Subdivision and Combination. In the case the Company shall at any
time subdivide or combine the outstanding shares of Common Stock, the Exercise
Prices shall forthwith be proportionately decreased in the case of subdivision
or increased in the case of combination.
6.5 Adjustment in Number of Shares. Upon each adjustment of any
Exercise Price pursuant to the provisions of this Section 6, the number of
shares of Common Stock issuable upon the exercise of this Warrant at such
Exercise Price shall be adjusted to the nearest fun number obtained by
multiplying such Exercise Price in effect immediately prior to such adjustment
by the number of shares of Common Stock issuable upon exercise of this Warrant
at such Exercise Price immediately prior to such adjustment and dividing the
product so obtained by the adjusted Exercise Price.
6.6 Recapitalization. For the purpose of this Warrant, the term
"Common Stock" shall also mean any other class of stock resulting from
successive changes or reclassifications of Common Stock consisting solely of
changes in par value, or from par value to no par value, or from no par value to
par value.
6.7 Merger or Consolidation. In case of any consolidation of the
Company with, or merger of the Company with, or merger of the Company into,
another corporation (other than a consolidation or merger which does not result
in any reclassification or change of the outstanding Common Stock), the
corporation formed by such consolidation or merger shall execute and deliver to
the Holder a supplemental warrant providing that the holder of each warrant then
outstanding or to be outstanding shall have the right thereafter (until the
stated expiration of such warrant) to receive, upon exercise of such warrant,
the kind arid amount of shares of stock and other securities and property
receivable upon such consolidation or merger, by a holder of the number of
shares of Common Stock of the Company for which such warrants have been
exercised immediately prior to such consolidation, merger, sale or transfer.
Such supplemental warrant shall provide for adjustments which shall be identical
to the adjustments provided in Section 6. The above-provision of this Section
shall similarly apply to successive consolidations or mergers.
6.8 No Adjustment of Exercise prices in Certain Cases. No
adjustment of the Exercise Prices shall be made:
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(i) Upon the issuance or sale of the shares of Common Stock
issuable upon the exercise of (i) this Warrant, (ii) options granted under any
stock option plan or (iii) options granted to officers and directors of the
Company; or
(ii) If the amount of said adjustment shall be less than two cents
($.02) per share of Common Stock, provided, however, that in such case, any
adjustment that would otherwise be required then to be made shall be carried
forward and shall be made at the tune of and together with the next subsequent
adjustment which, together with any adjustment so carried forward, shall amount
to at least two cents ($.02) per share of Common Stock.
6.9 Redemption of Warrants. This warrant cannot be redeemed by the
Company without the prior written consent of the Holder.
6.10 Dividends and Other Warrants. In the event that the Company
shall at any time prior to the exercise in full of this Warrant declare a
dividend (other than a dividend consisting solely of shares of Common Stock) or
otherwise distribute to its stockholders any assets, property, rights, evidences
of indebtedness, securities (other than shares of Common Stock), whether issued
by the Company or by another, or any other thing of value, the Holder of this
Warrant shall thereafter, be entitled, in addition to the shares of Common Stock
or other securities and property receivable upon the exercise thereof, to
receive, upon the exercise of such Warrant, the same property, assets, rights,
evidences of indebtedness, securities or any other thing of value that it would
have been entitled to receive at the time of such dividend or distribution as if
the Warrant had been exercised immediately prior to such dividend or
distribution. At the time of any such dividend or distribution, the Company
shall make appropriate reserves to ensure the timely performance of the
provisions of this Section 6.10.
6.ll Elimination of Fractional Interests The company shall nor be
required to issue certificates representing fractions of shares of Common Stock
upon the exercise of the Warrant, nor shall it be required to issue scrip or pay
cash in lieu of any fractional interests, it being the intent of the parties
that all fractional interests shall be eliminated by rounding any fraction up to
the nearest whole number of shares of Common Stock or other securities,
properties or rights as shall be issuable upon the exercise thereof.
7. Reservation and Listings. The Company shall at all times reserve and keep
available out of its authorized shares of Common Stock, solely for the purpose
of issuance upon exercise of the Warrant, such number of shares of Common Stock
or other securities, properties or rights as shall be issuable upon the exercise
thereof. The Company covenants and agrees that, upon exercise of the Warrant and
payment of the applicable Exercise Price therefor, all shares of Common Stock
and other securities issuable, properties and rights upon such exercise shall be
duly and validly issued, fully paid and nonassessable and not subject to
preemptive rights of any stockholder. The Company further covenants and agrees
that upon exercise of this Warrant and payment of the applicable Exercise Price
therefor, all shares of Common Stock and other securities issuable upon such
exercises shall be duly and validly issued, fully paid and nonassessable and not
subject to preemptive rights of any stockholder. As long as this Warrant shall
be outstanding the Company shall use its best efforts to cause all shares of
Common Stock issuable upon exercise of the Warrant to be listed (subject to
official notice of issuance) on all securities exchanges (or, if applicable on
NASDAQ) on which the Common Stock may then be listed and/or quoted.
8. Certain Notice Requirements.
8.1 Holder's Right to Receive Notice. Nothing herein shall be
construed as conferring upon the Holder the right to vote or consent or to
receive notice as a stockholder for the election of directors or any
9
<PAGE>
other matter, or as having any rights whatsoever as a stockholder of the Company
(including the right to receive dividends). If, however, at any time prior to
the expiration of the Warrant and its exercise, any of the events described in
Section 8.2 shall occur, then, in one or more of said events, the Company shall
give written notice of such event at least fifteen (15) days prior to the date
fixed as a record date or the date of closing the transfer books for the
determination of the stockholders entitled to such dividend, distribution,
conversion or exchange of securities or subscription rights, or entitled to vote
on such proposed dissolution, liquidation, winding up or sale. Such notice
shall specify such record date or the date of the closing of the transfer books,
as the case may be.
8.2 Events Requiring Notice. The Company shall be required to give
the notice described in this Section 8 upon one or more of the following events:
(i) if the Company shall take a record of the holders of its shares of Common
Stock for the purpose of entitling them to receive a dividend or distribution
payable otherwise than in cash, or a cash dividend or distribution payable
otherwise in out of retained earnings, as indicated by the accounting treatment
of such dividend or distribution on the books of the Company, or (n) the Company
shall offer to all the holders of its Common Stock any additional owes of
capital stock of the Company or securities convertible into or exchangeable for
shares of capital stock of the Company, or any option, right or warrant to
subscribe therefor, or (m) a dissolution, liquidation or winding up of the
Company (other than in connection with a consolidation or merger) or a sale of
all or substantially all of its property, assets and business shall be proposed.
8.3 Notice of change in Exercise Prices. The Company shall, promptly
after an event requiring a change in the Exercise Prices pursuant to Section 6
hereof, send notice to the Holder of such event and change (the "Price Notice").
The Price Notice shall describe the event causing the change and the method of
calculating same and shall be certified as being true and accurate by the
Company's Chief Executive Officer and Chief Financial Officer.
8.4 Transmittal of Notices. All notices, requests, consents and
other communications under this Warrant shall be in writing and shall be deemed
to have been duly given or made when hand delivered, or when delivered by
telecopier or by responsible overnight courier:
(i) If to the registered Holder of this Warrant, to:
The Steven W. Bingaman 1996 Trust
545 Fifth Avenue
New York, NY 10017
Attention: Leonard A. Rodes, Trustee
[Telecopier No. (212) 972-7581
(ii) if to the Company, to:
Integrated Healthcare System, Inc.
12007 Sunrise Valley Drive
Reston, Virginia 20191
Attention: Chief Executive Officer
[Telecopier No. (703) 716-0592
Either of the Holder or the Company may change the foregoing address by notice
given pursuant to this Section 8.4.
9. Miscellaneous.
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<PAGE>
9.1 Amendments. The Company and the Holder may from time to time
supplement or amend this Warrant in order to cure any ambiguity, to correct or
supplement any provision contained hereon which may be defective or inconsistent
with any other provisions herein, or to make any other provisions in regard to
matters or questions arising hereunder which the Company and the Bank may deem
necessary or desirable and which the Company and the Bank deem shall not
adversely affect the interest of the Holder. All other modifications or
amendments shall require the written consent of the party against whom
enforcement of the modification or amendment is sought.
9.2 Headings. The headings contained herein are for the sole
purpose of reference, and shall not in any way limit or affect the meaning or
interpretation of any of the terms or provisions of this Warrant.
9.3 Entire Agreement. This Warrant (together with the other
agreements and documents being delivered pursuant to or in connection with this
Warrant) constitute the entire agreement of the parties hereto with respect to
the subject matter hereof, and supersede all prior agreements and understandings
of the parties, oral and written, with respect to the subject matter hereof.
9.4 Binding Effect. This Warrant shall inure solely to the benefit
of and shall be binding upon the Holder and the Company and their permitted
assignees, respective successors, legal representatives and assigns, and no
other person shall have or be construed to have any legal or equitable right,
remedy or claim under or in respect of or by virtue of this Warrant or any
provisions herein contained.
9.5 Governing Law. This Warrant shall be governed by and construed and
enforced in accordance with the laws of the State of Delaware, without giving
effect to conflict of laws.
9.6 Waiver, Etc. The failure of the Company or the Holder to at any
time enforce any of the provisions of this Warrant shall not be deemed or
construed to be a waiver of any such provision, nor to in any way affect the
validity of this Warrant or any such provision hereof, or the right of the
Company or any Holder to thereafter enforce each and every provision of this
Warrant. No waiver of any breach, noncompliance or nonfulfillment of any of the
provisions of this Warrant shall be effective unless set forth by a written
instrument executed by the party or parties against whom or which enforcement of
such waiver is sought; and no waiver of any such breach, noncompliance or
nonfulfillment shall be construed or deemed to be a waiver of any other or
subsequent breach, noncompliance or nonfulfillment.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed
by its duly authorized officer as of the 18th day of December, 1996,
INTEGRATED HEALTHCARE SYSTEMS, INC.
By:
-------------------------------------------
Name: Michael J. Black
Title: Chairman and Chief Executive Officer
Exhibit A
---------
Form to be used to exercise Warrant:
Integrated Healthcare Systems, Inc.
11
<PAGE>
12007 Sunrise Valley Drive
Reston, Virginia 20191
Attention: Chief Executive Officer
Date: ___________
The Undersigned hereby elects irrevocably to exercise the within
Warrant and to Purchase shares of Common Stock of Integrated Healthcare Systems,
Inc. and hereby makes payment of $ ________ (at the rate of $__________ per
share) in payment Exercise Price pursuant thereto. Please issue the shares as to
which this Warrant is exercised in accordance with the instructions given below.
Signature
Signature Guaranteed
INSTRUCTIONS FOR REGISTRATION OF SECURITIES
Name
(Print in Block Letters)
Address
NOTICE: The signature, to this form must correspond with the name as
written upon the face of the within Warrant in every particular without
alteration or enlargement or any change whatsoever, and must be guaranteed by a
bank, other than a savings bank, or by a trust company or by a firm having
membership on a registered national securities exchange.
12
<PAGE>
Exhibit B
---------
Form to be used to assign Warrant:
ASSIGNMENT
(To be executed by the Registered Holder to effect a transfer
of the within Warrant):
FOR VALUE RECEIVED_____________________________ does hereby
sell, assign, and transfer unto ____________________ the right to purchase
shares of Common Stock of Integrated Healthcare Systems, Inc. (the "Company")
evidenced by the within Warrant and does hereby authorize the Company to
transfer such right on the books of the Company.
Dated: _______________________
Signature
Signature
Guaranteed
Notice: The signature to this form must correspond with the name as
written upon the face of the within Warrant in every particular without
alteration or enlargement or any change whatsoever, and must be guaranteed by a
bank, other than a savings bank, or by a trust company or by a firm having
membership on a registered national securities exchange.
13
<PAGE>
EXHIBIT 4.3
40,000 Warrants
INTEGRATED HEALTHCARE SYSTEMS, INC.
Warrant Certificate
Void after August 15, 2000
THIS CERTIFIES THAT for value received, Asset Growth
Partners, Inc. is the owner of the number of Warrants set forth above, each of
which entities the owner thereof to purchase at any time from August 15, 1995,
until 5:00 p.m., Eastern Standard Time on August 15, 2000 (the "Warrant
Expiration Date"), on share of Common Stock of Integrated Healthcare Systems,
Inc., formerly known as Traverse Technologies, Inc. (the "Company"), at the
price of $2.00 per share (the "Exercise Price") upon presentation and surrender
of the Warrant Certificate with the Form of Election to Purchase duly executed.
The number of Warrants evidenced by this Warrant Certificate (and the number of
shares which may be purchased thereof) set forth above, and the Exercise Price
per share set forth above, are the number and Exercised Price as of the date of
original issuance of the Warrants, based upon the Common Stock of the Company,
as constituted at such date. The Exercise Price and the number and kind of
Shares which may be purchased under the exercise of the Warrants evidenced by
this Warrant Certificate are, upon the happening of certain events, subject to
modification and adjustment.
The underlying shares represented by this Warrant Certificate
shall, at the holder's option be included in a registration statement filed with
the Securities and Exchange Commission, subsequent to the Company's initial
public offering, ("piggyback registration rights"). Notice will be given to the
holder of the Company's intent to file a subsequent registration statement and
the holder shall notify the Company within 15 days of receipt of such notice of
holder's intent as to registration of the underlying shares.
This Warrant Certificate, with or without the Warrant
Certificates, upon surrender at the principal office of the company, may be
exchanged for another Warrant Certificate or Warrant Certificates of like tenor
and date evidencing Warrants entitling the holder to purchase a like aggregate
number of shares of Common Stock as the Warrants evidenced by the Warrant
Certificate or Warrant Certificates surrendered entitled to such holder to
purchase. If this Warrant Certificate shall be exercised in part, the holder
hereof shall be entitled to receive upon surrender hereof another Warrant
Certificate or Warrant Certificates for the number of whole Warrants not
exercised.
No fractional shares will be issued upon the exercise of any
Warrant or Warrants evidenced hereby, but in lieu thereof a cash payment will be
made.
No holder of this Warrant Certificate shall be entitled to
vote or receive dividends or be deemed the holder of Common Stock or any other
securities of the Company which may at any time be issuable on the exercise
hereof for any purpose, or herein be construed to confer upon the holder hereof,
as such, any of the rights of a stockholder of the Company or any right to vote
for the election of directors or upon any matter submitted to stockholders at
any meeting thereof, or to give or withhold consent to any corporate action
(whether upon any recapitalization, issue of stock, reclassification of Stock,
change of par value or change of stock to no par value, consolidation, merger,
conveyance, or otherwise) or, to receive dividends or subscription rights or
otherwise, until the Warrant or Warrants evidenced by this Warrant Certificate
shall be been exercised and the shares shall have become deliverable.
<PAGE>
If this Warrant shall be surrendered for exercise within any
period during which the transfer books for the Company's Common Stock or other
class of stock purchasable upon the exercise of the Warrant are closed for any
purpose, the Company shall not be required to make delivery of certificates for
shares purchasable upon such exercise until the date of the reopening if said
transfer books.
IN WITNESS WHEREOF, INTEGRATED HEALTHCARE SYSTEMS, INC. has
caused the signature (or facsimile signature) of its Secretary and Treasurer to
be printed hereon and its corporate seal (or facsimile) to be printed hereon.
Dated: August 15, 1995
INTEGRATED HEATLHCARE SYSTEMS, INC.
By: /s/ Michael J. Black
--------------------------------
Its: Secretary & Treasurer
[Corporate Seal]
Attest:
___________________________
<PAGE>
EXHIBIT 4.4
50,000 Warrants
INTEGRATED BEALTHCARE SYSTEMS, INC.
Warrant Certificate
Void after March 31, 2001
THIS CERTIFIES THAT for value received Mark Wachs or
registered assigns, is the owner of the number of Warrants set forth above, each
of this entitles the owner thereof to purchase at any time from March 31, 1996,
until 5:00 p.m., Eastern Standard Time on May 31, 2001 (the "Warrant Expiration
Date"), one share of Common Stock (the "Common Stock, of Integrated Healthcare
Systems, Inc., a Delaware corporation (the "Company"), at the purchase price of
$2.00 per Share (the "Exercise Price") upon presentation and surrender of this
Warrant Certificate with the Form of Election to Purchase duly executed. The
number of Warrants evidenced by this Warrant Certificate (and the number of
Shares which may be purchased upon exercise thereof) set forth above, and the
Exercise Price per share set forth above, are the number and Exercise Price as
of the date of the original issuance of the Warrants, based on the Common Stock
of the Company as constituted at such date. As provided in the Warrant Agreement
referred to below, the Exercise Price and the number and kind of Shares which
may be purchased under the exercise of the Warrants evidenced by this Warrant
Certificate are, upon the happening of certain events, subject to modification
and adjustment.
This Warrant Certificate, with or without other Warrant
Certificates, upon surrender at the principal office of the Company, may be
exchanged for another Warrant Certificate or Warrant Certificates of like tenor
and date evidencing Warrants entitling the holder to purchase a like aggregate
number of shares of Common Stock as the Warrants evidenced by the Warrant
Certificate or Warrant Certificates surrendered entitled such holder to
purchase. If this Warrant Certificate shall be exercised in part, the holder
hereof shall be entitled to receive upon surrender hereof another Warrant
Certificate or Warrant Certificates for the number of whole Warrants not
exercised.
No fractional Shares will be issued upon the exercise of any
Warrant or Warrants evidenced hereby, but in lieu thereof a cash payment will be
made, as provided in the Warrant Agreement.
No holder of this Warrant Certificate shall be entitled to
vote or receive dividends or be deemed the holder of Common Stock or any other
securities of the Company which may at any time be issuable on the exercise
hereof for any purpose, nor shall anything contained in the Warrant Agreement or
herein be construed to confer upon the holder hereof, as such, any of the rights
of a stockholder of the Company or any right to vote for the election of
directors or upon any matter submitted to stockholders at any meeting thereof,
or to give or withhold consent to any corporate action (whether upon any
recapitalization, issue of stock, reclassification of Stock, change of par value
or change of stock to no par value, consolidation, merger, conveyance, or
otherwise) or, except as provided in the Warrant Agreement, to receive notice of
meetings, or to receive dividends or subscription rights or otherwise, until the
Warrant or Warrants evidenced by this Warrant Certificate shall have been
exercised and the shares shall have become deliverable as provided in the
Warrant Agreement.
<PAGE>
If this Warrant shall be surrendered for exercise within any
period during the transfer books for the Company's Common Stock or other class
of stock purchasable upon the exercise of this Warrant are closed for any
purpose, the Company shall not be required to make delivery of certificates for
shares purchasable upon such exercise until the date of the reopening of said
transfer books.
IN WITNESS WHEREOF, INTEGRATED BEALTHCARE SYSTEMS, INC. has
caused the signature (or facsimile signature) of its President or its Secretary
or Assistant Secretary to be printed hereon and its corporate seal (or
facsimile) to be printed hereon.
Dated: March 31, 1996
INTEGRATED HEALTHCARE SYSTEMS, INC.
By: /s/ Michael J. Black
------------------------------
Its: Chairman
[Corporate Seal]
Attest:
_____________________
<PAGE>
EXHIBIT 4.5
THE SECURITIES REPRESENTED BY THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THE SECURITIES MAY NOT BE
OFFERED FOR SALE, SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE ACT, OR PURSUANT TO AN EXEMPTION FROM
REGISTRATION UNDER THE ACT.
THE REGISTERED HOLDER OF THIS WARRANT BY ITS ACCEPTANCE HEREOF, AGREES THAT IT
WILL NOT SELL, TRANSFER OR ASSIGN THIS WARRANT EXCEPT AS HEREIN PROVIDED.
NOT EXERCISABLE PRIOR TO August 1, 1997. VOID AFTER 5:00 P.M. VIRGINIA TIME June
30, 2002.
COMMON STOCK PURCHASE WARRANT
For the Purchase of 1,190,000 Shares of Common Stock
of
INTEGRATED HEALTHCARE SYSTEMS, INC.
(A Delaware Corporation)
1 . Warrant.
THIS CERTIFIES THAT AESOP FINANCIAL CORPORATION (or registered
assigns succeeding to ownership hereof pursuant to the provisions of Section 3.1
hereof) (the "Holder"), as registered owner of this Warrant, is entitled, at any
time and from time to time on or after August 1, 1997 (the "Effective Date"),
and at or before 5:00 p.m., Virginia Time, on the respective termination dates
set forth below, but not thereafter, to subscribe for, purchase and receive, in
whole or in part, up to One Million One Hundred Ninety Thousand (1,190,000)
shares of Common Stock, $.0001 par value ("Common Stock"), of Integrated
Healthcare Systems, Inc., a Delaware corporation (the "Company"). If such
termination date is a day on which banking institutions are authorized by law to
close, then this Warrant may be exercised on the next succeeding day that is not
such a day in accordance with the terms hereof. This Warrant is initially
exercisable as to shares of Common Stock covered hereby ("Warrant Shares") in
the amounts and at the respective per share exercise prices (each an "Exercise
Price" and, collectively, the "Exercise Prices") set forth below:
No. of Warrant Shares Exercise Price Termination Date
--------------------- -------------- ----------------
235,000 $2.00 June 30, 2000
200,000 1.50 June 30, 2000
575,000 1.00 June 30, 2000
180,000 2.00 June 30, 2002
<PAGE>
The terms "Exercise Price" and "Exercise Prices" shall mean the initial per
share exercise price or prices or such exercise price or prices, as adjusted in
the manner provided herein.
2. Exercise.
In order to exercise this Warrant, the exercise form attached
hereto as Exhibit A must be duly executed, completed and delivered to the
Company, together with this Warrant and payment of the applicable Exercise Price
multiplied by the number of Warrant Shares being purchased. If the rights
represented hereby shall not have been exercised at or before 5:00 p.m.,
Virginia Time, on or before the respective termination dates set forth above
this Warrant shall become and be void and without further force or effect and
all rights represented hereby shall cease and expire.
3. Transfer.
3.1 General Restrictions. The registered Holder of this
Warrant, by its acceptance hereof, agrees that it shall not sell, transfer or
assign or hypothecate this Warrant to anyone other than the permitted persons
described in Section 3.3 hereof. In order to make any permitted assignment, the
Holder must deliver to the Company the assignment form attached hereto as
Exhibit B duly executed and completed, together with this Warrant and payment of
all transfer taxes, if any, payable in connection therewith and an agreement by
the transferee to be bound by the terms hereof together with any other
documentation reasonably requested by the Company. Upon compliance of the Holder
with the provisions hereof, the Company shall immediately transfer the number of
Warrants specified in the assignment form on the books of the Company and shall
execute and deliver a new warrant or warrants of like tenor to the appropriate
assignee(s) expressly evidencing the right to purchase the number of Warrant
Shares purchasable hereunder or such portion of such number as shall be
contemplated by such assignment.
3.2 Restrictions Imposed by the Act. The Holder by accepting
this Warrant confirms that the Warrant was acquired by the Holder solely for
investment and with no present intention to distribute the Warrant or the
Warrant Shares issuable upon the exercise hereof and that the Holder will
dispose of such Warrant and Warrant Shares only in compliance with applicable
Federal and state securities laws. This Warrant and the Warrant Shares purchased
upon exercise of this Warrant shall not be transferred unless and until (i) the
Company has received an opinion of counsel for the Holder that this Warrant
and/or such Warrant Shares may be sold pursuant to an exemption from
registration under the Securities Act of 1933, as amended (the "Act"), the
availability of which is established to the reasonable satisfaction of the
Company, or (ii) a registration statement relating to the Warrant and/or the
Warrant Shares issuable upon the exercise hereof has been filed by the Company
and declared effective by the Securities and Exchange Commission (the
"Commission").
Each certificate for Warrant Shares purchased upon exercise of
this Warrant shall bear a legend as follows unless such securities have been
registered under the Act:
2
<PAGE>
"The securities represented by this certificate have not
been registered under the Securities Act of 1933 (the
"Act"). The securities may not be offered for sale, sold or
otherwise transferred except pursuant to an effective
registration statement under the Act, or pursuant to an
exemption from registration under the Act. Copies of the
warrant covering the securities and restricting their
transfer may be obtained at no cost by written request made
by the holder of record of this certificate to the Secretary
of the Company at the principal executive offices of the
Company."
The Certificate may also include any legend required by
applicable state securities laws.
3.3 This Warrant and the Warrant Shares may not be sold or
otherwise disposed of except as follows:
(a) Subject to Section 3.1 as to the Warrants, to a
person, who, in the opinion of counsel reasonably satisfactory
to the Company, is a person to whom this Warrant or the
underlying Warrant Shares may legally be transferred without
registration and without the delivery of a current prospectus
under the Act;
(b) to any person in a transaction that, in the
opinion of counsel reasonably satisfactory to the Company,
complies with the provisions of Rule 144 under the Act; or
(c) to any person upon delivery of a prospectus
included in a then effective registration statement under the
Act relating to the sale or disposition of the Warrant and/or
the Warrant Shares.
4. New Warrants to be Issued.
4.1 Partial Exercise or Transfer. Subject to the restrictions
in Section 3 hereof, this Warrant may be exercised or assigned in whole or in
part. In the event of the exercise or assignment hereof in part only, upon
surrender of this Warrant for cancellation, together with the duly executed
exercise or assignment form and funds sufficient to pay any required transfer
tax, the Company shall cause to be delivered to the Holder without charge a new
warrant or new warrants of like tenor in the name of the Holder evidencing the
right to purchase, in the aggregate, the remaining number of underlying Warrant
Shares purchasable hereunder after giving effect to any such partial exercise or
assignment.
4.2 Lost Warrant. Upon receipt by the Company of evidence
satisfactory to it of the loss, theft, destruction or mutilation of this Warrant
and of an indemnification in favor of the Company, reasonably satisfactory to
it, the Company shall execute and deliver a new
3
<PAGE>
warrant of like tenor and date. Any such new warrant executed and delivered as a
result of such loss, theft, mutilation or destruction shall constitute an
additional contractual obligation on the part of the Company.
5. Registration Rights Under the Securities Act of 1933..
5.1 "Piggy-Back" Registration..
5.1.1. Grant of Right. (a) The Holder of the Warrant
shall have the right for a period of five (5) years after the Effective Date, to
include all of the Warrant Shares underlying this Warrant but with respect to
which this Warrant has not been terminated (the "Registrable Securities") as
part of any registration of securities filed by the Company (other than in
connection with a transaction contemplated by Rule 145(a) promulgated under the
Act or pursuant to Form S-8 or Form S-4); provided, however, that if, in the
written opinion of the Company's managing underwriter or underwriters, if any,
for such offering, the inclusion of the Registrable Securities, when added to
the securities being registered by the Company or the selling shareholder(s),
will adversely affect the distribution of the securities to be sold, the Company
shall nevertheless register all or any portion of the Registrable Securities
required to be so registered, but such Registrable Securities, at the option of
the Company, shall not be sold by the Holder(s) until 180 days after the
registration statement for such offering has become effective and provided
further that, if any securities are registered for sale on behalf of other
security holders in such offering and such security holders have not agreed to
defer such sale until the expiration of such 180-day period, the number of
securities to be sold by all security holders in such public offering during
such 180-day period shall be apportioned pro rata among all such selling
security holders, including all holders of the Registrable Securities, according
to the total amount of securities of the Company owned by said selling security
holders, including all holders of the Registrable Securities.
(b) Demand Registration. Whenever the Company, at any time
after the date hereof, shall receive a written request therefor (a "Demand")
from the Holder or Holders of an aggregate of at least a fifty-one (51 %)
percent of the outstanding Warrants (based on the number of shares which may be
purchased on exercise) and Registrable Shares, taken together, the Company shall
promptly prepare and file with the Securities and Exchange Commission, not later
than the (60th) day after the Company receives such request (the "Filing
Deadline"), a registration statement under the Act covering the sale by such
Holder or Holders of the number of Registrable Shares which are the subject of
such request and shall use its best efforts to cause such registration statement
to promptly become effective and to remain effective for at least nine months
or, if sooner, until all Registrable Shares included in such registration have
been sold by the Holder(s) thereof. In addition, upon its receipt of such
request, the Company shall give prompt written notice to all other Holders that
such registration is to be effected. The Company shall also include in such
registration statement such number of Registerable Shares which it has received
written requests to register the sale thereof by such other Holders within 20
days after the Company's written notice to such other Holders. If a registration
statement filed pursuant to a Demand under this paragraph (b) becomes effective
and remains effective for at least 90 days (whether or not consecutive) during
the nine month period following the date of initial
4
<PAGE>
effectiveness, the Company shall not be required to file any additional
registration statements pursuant to this paragraph (b). The Company shall not be
required to file a registration statement under this paragraph (b) with respect
to any Demand received after January 31, 2002. Notwithstanding the foregoing
provisions of this paragraph (b) to the contrary, if (i) after receiving a
Demand the Company files a Company-initiated registration statement, prior to
the Filing Deadline, for a registration in which the Holders are entitled to
participate pursuant to the foregoing paragraph (1) (a) "Piggyback Registration
Statement"), (ii) the Company complies with the foregoing paragraph (1) in
connection with such Piggyback Registration Statement, and (iii) the Piggyback
Registration Statement includes the registration of all the Registrable Shares
requested to be registered by the Holders pursuant to such Demand, then the
Company shall not be required to file a registration statement under this
paragraph pursuant to such Demand. Any such Piggyback Registration Statement
shall not constitute a registration statement filed pursuant to a Demand under
this paragraph (b).
5.1.2 Terms. The Company shall bear all fees and
expenses attendant to registering the Registrable Securities, but the Holder
shall pay any and all underwriting commissions, the expenses of any legal
counsel selected by the Holder to represent it in connection with the sale of
the Registrable Securities and applicable transfer taxes, if any. In the event
of such a proposed registration, the Company shall furnish the then Holder with
not less than twenty (20) days' written notice prior to the proposed date of
filing of such registration statement. Such notice to the Holder shall continue
to be given for each registration statement filed by the Company until such time
as all of the Registrable Securities have been registered and sold. The Holder
of Registrable Securities shall exercise the "piggyback" rights provided for
herein by giving written notice, within fifteen (15) days after the receipt of
the Company's notice of its intention to file a registration statement. The
Company shall cause any registration statement filed pursuant to the above
"piggyback" rights (a "Registration Statement") to remain effective for at least
nine (9) months from the date that a Holder of Registrable Securities is first
given the opportunity to sell all of such securities.
5.2 General Terms.
5.2.1. Indemnification. (a) The Company shall
indemnify the Holder of the Registrable Securities to be sold pursuant to any
Registration Statement hereunder and each person, if any, who controls such
Holder within the meaning of Section 15 of the Act or Section 20(a) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), against all
loss, claim, damage, expense or liability (including all reasonable attorneys'
fees and other expenses reasonably incurred in investigating, preparing or
defending against any claim whatsoever) to which any of them may become subject
under the Act, the Exchange Act or otherwise, arising out of or based upon any
untrue statement or alleged untrue statement of a material fact contained in a
Registration Statement or related preliminary or final prospectus (the
"Prospectus") (as from time to time amended and supplemented) or the omission or
alleged omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein not misleading, unless such statement
or omission was made in reliance upon and in conformity with written information
furnished to the Company with respect to such Holder by or on behalf of such
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<PAGE>
Holder expressly for use in the Registration Statement or Prospectus, or any
amendment or supplement thereof, as the case may be.
If any action is brought against any Holder or a controlling
person in respect of which indemnity may be sought against the Company pursuant
to the foregoing, such Holder shall promptly give notice to the Company of the
institution of such action and the Company shall assume the defense and control
of such action, including the employment of counsel and payment of reasonable
fees and expenses. The Holder or such controlling person shall have the right to
employ its own counsel in any such case, but the fees and expenses of such
counsel shall be at the expense of such Holder or such controlling person unless
the employment of such counsel shall have been authorized in writing by the
Company in connection with the defense of such action, or the Company shall not
have employed counsel to have charge of the defense of such action, or counsel
for such indemnified party or parties shall have reasonably concluded that there
may be defenses available to it or them which are different from or additional
to those available to the Company (in which case the Company shall not have the
right to direct the defense of such action on behalf of the indemnified party or
parties), in any of which events such fees and expenses shall be borne by the
Company. It is understood, however, that the Company shall not, in connection
with any one action or separate but substantially similar or related actions
arising out of the same general allegations or circumstances, be liable for the
reasonable fees and expenses of more than one separate counsel for the Holders
and controlling persons, which firm shall be designated in writing by a majority
in interest of the Holders based upon the value of the Registrable Securities
included in the relevant Registration Statement. Anything in this paragraph to
the contrary notwithstanding, the Company shall not be liable for any settlement
of any such claim or action effected without its written consent. The Company
agrees promptly to notify the Holder of the commencement of any litigation or
proceedings against it or any of its officers or directors, in connection with
the Registration Statement or Prospectus, or any amendment or supplement
thereto. Each party entitled to indemnification hereunder shall give notice to
the Company promptly after such party has knowledge of any claim as to which
indemnity may be sought. With respect to any untrue statement or alleged untrue
statement made in, or omission or alleged omission from, any Prospectus, the
indemnity agreement contained in this Section 5.2. 1 with respect to such
Prospectus shall not inure to the benefit of any Holder (or to the benefit of
any person controlling Holder) if the Prospectus (or the Prospectus as amended
or supplemented if the Company shall have made any amendments thereof or
supplement thereto which shall have been furnished to such Holder prior to the
time of confirmation of such sale) does not contain such statement, alleged
statement, omission or alleged omission, and a copy of such Prospectus shall not
have been sent or given to such person at or prior to the written confirmation
of such sale to such person.
(b) The Holder agrees to indemnify and hold harmless the
Company, each of the directors of the Company, each of the officers of the
Company who shall have signed a Registration Statement and each other person, if
any, who controls the Company within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act to the same extent as the foregoing indemnity
from the Company to the Holder but only as to each such Holder with respect to
statements or omissions, or alleged statements or omissions, if any, made in any
Registration Statement or Prospectus or any amendment or supplement thereto or
any
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application in reliance upon, and in conformity with, written information
furnished to the Company with respect to the Holder by or on behalf of such
Holder expressly for use in any Registration Statement or Prospectus or any
amendment or supplement thereto or in any application, as the case may be. The
Company shall give notice to each Holder entitled to indemnity hereunder
promptly after the Company has knowledge of any claim as to which indemnity may
be sought. In case any action shall be brought against the Company, or any
person so indemnified, based on any Registration Statement or Prospectus or any
amendment or supplement thereto or any application, and in respect of which
indemnity may be sought against any Holder, such Holder shall have the rights
and duties given to the Company, and the Company, and each other person so
indemnified shall have the rights and duties given to the Holder(s) by the
provisions of subsection (a) above.
5.2.2. Documents Delivered to Holder. Upon request,
the Company shall furnish (and, in the case of clause (ii) below, shall use its
reasonable best efforts to furnish) to each Holder participating in any of the
foregoing offerings and to each underwriter of any such offering, if any, a
signed counterpart, addressed to such Holder or underwriter, of (i) an opinion
of counsel to the Company, dated the effective date of such Registration
Statement (and, if such registration includes an underwritten public offering,
an opinion dated the date of the closing under any underwriting agreement
related thereto), and (ii) a "cold comfort" letter dated the effective date of
such Registration Statement (and, if such registration includes an underwritten
public offering, a letter dated the date of closing under the underwriting
agreement) signed by independent public accountants who have issued a report on
the Company's financial statements included in such Registration Statement, in
each case covering substantially the same matters with respect to such
Registration Statement (and the Prospectus included therein) and, in the case of
such accountants' letter, with respect to events subsequent to the date of such
financial statements, as are customarily covered in opinions of issuer's counsel
and in accountants' letters delivered to underwriters in underwritten public
offerings of securities, with such changes or omissions therefrom as are
appropriate under the circumstances. The Company shall also deliver promptly to
each Holder participating in the offering requesting the correspondence and
memoranda described below and to the managing underwriter copies of all
correspondence between the Commission and the Company, its counsel or auditors
and all memoranda relating to discussions with the Commission or its staff with
respect to the Registration Statement and permit each Holder and underwriter to
do such investigation, upon reasonable advance notice, with respect to
information contained in or omitted from the Registration Statement as it deems
reasonably necessary to comply with applicable securities laws or rules of the
National Association of Securities Dealers, Inc. ("NASD"). Such investigation
shall include access to books, records and properties and opportunities to
discuss the business of the Company with its officers and independent auditors,
all to such reasonable extent and at such reasonable times and as often as any
such Holder shall reasonably request and all of which shall be subject to any
confidential restrictions as may be reasonably imposed by the Company. Following
the effective date of any such registration, the Company shall upon the request
of the Holder forthwith supply such a number of Prospectuses meeting the
requirements of the Act, as shall be reasonably requested to make a public
offering of the Registrable Securities from time to time offered or sold by such
Holder.
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<PAGE>
5.2.3 Underwriting Agreement. The Holder shall be a
party to any underwriting agreement relating to an underwritten sale of his
Registrable Securities and may, at its option, require that any or all of the
covenants of the Company to or for the benefit of the underwriters in such
offerings shall also be made to and for the benefit of such Holder. Such Holder
shall not be required to make any representations or warranties to or agreements
with the Company or the underwriters except as they may relate to such Holder,
the Registrable Securities and their intended methods of distribution. The
Holder may not participate in any underwritten registration provided for herein
unless such Holder (a) agrees to sell his Registrable Securities being
registered on the basis provided in any underwriting arrangements approved by
the Company or selling security holder and (b) completes and executes all
reasonable and customary indemnities, questionnaires, powers of attorney,
underwriting agreements and other documents reasonably required under the terns
of such underwriting arrangements contemplated hereby.
5.2.4 Cooperation by Holder. The Company by written
notice may require the Holder to promptly furnish in writing to the Company such
information regarding the Holder and his distribution of the Registrable
Securities as it may from time to time reasonably request and such other
information as may be reasonably required or advisable in connection with such
registration. The Company shall have the right to exclude from any offering the
Registrable Securities of the Holder if he does not comply with the provisions
of the immediately preceding sentence. The Holder agrees that upon receipt of
any notice from the Company of the happening of any event which makes any
statement in a Registration Statement or Prospectus (including supplements and
amendments) or any document incorporated or deemed to be incorporated therein by
reference untrue in any material respect or that requires the making of any
changes in such Registration Statement, prospectus or documents so that, in the
case of the Registration Statement it will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, the Holder will forthwith discontinue
disposition of Registrable Securities pursuant to the Registration Statement
covering such Registrable Securities until the Holder's receipt of the copies of
a supplemented or amended Prospectus and, if so directed by the Company, the
Holder will deliver to the Company all copies, other than permanent file copies,
then in the Holder's possession, of the most recent prospectus covering such
Registrable Securities at the time of receipt of such notice.
6. Adjustments to Exercise Prices and Number of Securities.
6.1. Computation of Adjusted Exercise Prices. For purposes of
this Warrant, the term "Common Stock" shall include each class of common stock
of the Company. Except as hereinafter provided, in case the Company shall at any
time after the date hereof issue or sell any shares of Common Stock (other than
the issuances or sales referred to in Section 6.8 hereof), including shares held
in the Company's treasury and shares of Common Stock issued upon the exercise of
any options, rights or warrants to subscribe for shares of Common Stock and
shares of Common Stock issued upon the direct or indirect conversion or exchange
of securities for shares of Common Stock, for a consideration per share less
than the lowest Exercise Price in
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<PAGE>
effect immediately prior to the issuance or sale of such shares, or without
consideration, then forthwith upon such issuance or sale, each Exercise Price
shall (until another such issuance or sale) be reduced to the price (calculated
to the nearest full cent) equal to the quotient derived by dividing (i) an
amount equal to the sum of (x) the number of shares of Common Stock outstanding
immediately prior to such issuance or sale multiplied by such Exercise Price in
effect immediately prior to such issuance or sale, plus (y) the aggregate of the
amount of all consideration, if any, received by the Company upon such issuance
or sale, by (ii) the number of shares of Common Stock outstanding immediately
after such issuance or sale; provided, however, that in no event shall any
Exercise Price be adjusted pursuant to this computation to an amount in excess
of such Exercise Price in effect immediately prior to such computation, (except
in the case of a combination of outstanding shares of Common Stock, as provided
by Section 6.4 hereof.)
6.2. General Rules for Computation of Adjustments. For the
purposes of any computation to be made in accordance with Section 6. 1, the
following provisions shall be applicable:.
6.2.1 Cash Compensation. In the case of the issuance
or sale of shares of Common Stock for a consideration part or all of which shall
be cash, the amount of the cash consideration therefor shall be deemed to be the
amount of cash received by the Company for such shares (or, if shares of Common
Stock are offered by the Company for subscription, the subscription price, or if
such securities shall be sold to underwriters or dealers for public offering
without a subscription offering, the initial public offering price), before
deducting therefrom any compensation paid or discount allowed in the sale,
underwriting or purchase thereof by underwriters or dealers or dealers or others
performing similar services, or any expenses incurred in connection therewith.
6.2.2 Other Than Cash Consideration. In case of the
issuance or sale (otherwise than as a dividend or other distribution on any
stock of the Company) of shares of Common Stock for a consideration part or all
of which shall be other than cash, the amount of the consideration therefor
other than cash shall be deemed to be the value of such consideration as
determined in good faith by the Board of Directors of the Company.
6.2.3 Share Dividends. Shares of Common Stock
issuable by way of dividend or other distribution on any stock of the Company
shall be deemed to have been issued immediately after the opening of business on
the day following the record date for the determination of stockholders entitled
to receive such dividend or other distribution and shall be deemed to have been
issued without consideration.
6.2.4 Reclassification. The reclassification of
securities of the Company other than shares of Common Stock into securities
including shares of Common Stock shall be deemed to involve the issuance of such
shares of Common Stock for a consideration other than cash immediately prior to
the close of business on the date fixed for the determination of security
holders entitled to receive such shares, and the value of the consideration
allocable to such shares of Common Stock shall be determined as provided in
Section 6.2.2.
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6.2.5 Outstanding Shares. The number of shares of
Common Stock at any one time outstanding shall include the aggregate number of
shares issued or issuable (subject to readjustment upon the actual issuance
thereof) upon the exercise of any and all outstanding options, rights, warrants
to purchase shares of Common Stock and upon the conversion or exchange of any
and all outstanding securities convertible or exchangeable into shares of Common
Stock.
6.3 Options, Rights, Warrants and Convertible and Exchangeable
Securities. In case the Company shall at any time after the date hereof issue
options, rights or warrants to subscribe for shares of Common Stock, or issue
any securities convertible into or exchangeable for shares of Common Stock, for
a consideration per share less than the lowest Exercise Price in effect
immediately prior to the issuance of such options, rights or warrants, or such
convertible or exchangeable securities, or without consideration, each Exercise
Price in effect immediately prior to the issuance of such options, rights or
warrants, or such convertible or exchangeable securities, as the case may be,
shall be reduced to a price determined by making a computation in accordance
with the provisions of Section 6.1 hereof, provided that:
(i) The aggregate maximum number of shares of Common Stock
issuable under such options, rights or warrants shall be deemed to be issued and
outstanding at the time such options, rights or warrants were issued, and for a
consideration equal to the minimum purchase price per share provided for in such
options, rights or warrants at the time of issuance, plus the consideration, if
any, received by the Company for the issuance of such options, rights or
warrants;
(ii) The aggregate maximum number of shares of Common Stock
issuable upon conversion or exchange of any convertible or exchangeable
securities shall be deemed to be issued and outstanding at the time of issuance
of such securities, and for a consideration equal to the consideration received
by the Company for the issuance of such securities, plus the minimum
consideration, if any, receivable by the Company upon the conversion or exchange
thereof; and
(iii) If any change shall occur in the exercise price per
share provided for in any of the options, rights or warrants referred to in
clause (i) of Section 6.3, or in the price per share at which the securities
referred to in clause (ii) of Section 6.3 are convertible or exchangeable, such
options, rights or warrants or conversion or exchange rights, as the case may
be, shall be deemed to have expired or terminated on the date when such price
change became effective in respect of shares not theretofore issued pursuant to
the exercise or conversion or exchange thereof, and the Company shall be deemed
to have issued upon such date new options, rights or warrants or convertible or
exchangeable securities at the new price in respect of the number of shares
issuable upon the exercise of such options, rights or warrants or the conversion
or exchange of such convertible or exchangeable securities.
6.4 Subdivision and Combination. In case the Company shall at
any time subdivide or combine the outstanding shares of Common Stock, the
Exercise Prices shall
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forthwith be proportionately decreased in the case of subdivision or increased
in the case of combination.
6.5 Adjustment in Number of Shares. Upon each adjustment of
any Exercise Price pursuant to the provisions of this Section 6, the number of
shares of Common Stock issuable upon the exercise of this Warrant at such
Exercise Price shall be adjusted to the nearest full number obtained by
multiplying such Exercise Price in effect immediately prior to such adjustment
by the number of shares of Common Stock issuable upon exercise of this Warrant
at such Exercise Price immediately prior to such adjustment and dividing the
product so obtained by the adjusted Exercise Price.
6.6. Recapitalization. For the purpose of this Warrant, the
term "Common Stock" shall also mean any other class of stock resulting from
successive changes or reclassifications of Common Stock consisting solely of
changes in par value, or from par value to no par value, or from no par value to
par value.
6.7 Merger or Consolidation. In case of any consolidation of
the Company with, or merger of the Company with, or merger of the Company into,
another corporation (other than a consolidation or merger which does not result
in any reclassification or change of the outstanding Common Stock), the
corporation formed by such consolidation or merger shall execute and deliver to
the Holder a supplemental warrant providing that the holder of each warrant then
outstanding or to be outstanding shall have the right thereafter (until the
stated expiration of such warrant) to receive, upon exercise of such warrant,
the kind and amount of shares of stock and other securities and property
receivable upon such consolidation or merger, by a holder of the number of
shares of Common Stock of the Company for which such warrants might have been
exercised immediately prior to such consolidation, merger, sale or transfer.
Such supplemental warrant shall provide for adjustments which shall be identical
to the adjustments provided in Section 6. The above provision of this Section
shall similarly apply to successive consolidations or mergers.
6.8 No Adjustment of Exercise Prices in Certain Cases. No
adjustment of the Exercise Prices shall be made:
(i) Upon the issuance or sale of the shares of Common Stock
issuable upon the exercise of (i) this Warrant, (ii) options granted under any
stock option plan or (iii) options granted to officers and directors of the
Company; or
(ii) If the amount of said adjustment shall be less than two
cents ($.02) per share of Common Stock, provided, however, that in such case,
any adjustment that would otherwise be required then to be made shall be carried
forward and shall be made at the time of and together with the next subsequent
adjustment which, together with any adjustment so carried forward, shall amount
to at least two cents ($.02) per share of Common Stock.
6.9 Redemption of Warrants. This Warrant cannot be redeemed by
the Company without the prior written consent of the Holder.
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6.10. Dividends and Other Distributions. In the event that
the Company shall at any time prior to the exercise in full of this Warrant
declare a dividend (other than a dividend consisting solely of shares of Common
Stock) or otherwise distribute to its stockholders any assets, property, rights,
evidences of indebtedness, securities (other than shares of Common Stock),
whether issued by the Company or by another, or any other thing of value, the
Holder of this Warrant shall thereafter be entitled, in addition to the shares
of Common Stock or other securities and property receivable upon the exercise
thereof, to receive, upon the exercise of such Warrant, the same property,
assets , rights, evidences of indebtedness, securities or any other thing of
value that it would have been entitled to receive at the time of such dividend
or distribution as if the Warrant had been exercised immediately prior to such
dividend or distribution. At the time of any such dividend or distribution, the
Company shall make appropriate reserves to ensure the timely performance of the
provisions of this Section 6. 10.
6.11 Elimination of Fractional Interests. The Company shall
not be required to issue certificates representing fractions of shares of Common
Stock upon the exercise of the Warrant, nor shall it be required to issue scrip
or pay cash in lieu of any fractional interests, it being the intent of the
parties that all fractional interests shall be eliminated by rounding any
fraction up to the nearest whole number of shares of Common Stock or other
securities, properties or rights as shall be issuable upon the exercise thereof.
7. Reservation and Listing.
The Company shall at all times reserve and keep available out
of its authorized shares of Common Stock, solely for the purpose of issuance
upon exercise of the Warrant, such number of shares of Common Stock or other
securities, properties or rights as shall be issuable upon the exercise thereof.
The Company covenants and agrees that, upon exercise of the Warrant and payment
of the applicable Exercise Price therefor, all shares of Common Stock and other
securities issuable, properties and rights upon such exercise shall be duly and
validly issued, fully paid and nonassessable and not subject to preemptive
rights of any stockholder. The Company further covenants and agrees that upon
exercise of this Warrant and payment of the applicable Exercise Price therefor,
all shares of Common Stock and other securities issuable upon such exercises
shall be duly and validly issued, fully paid and nonassessable and not subject
to preemptive rights of any stockholder. As long as this Warrant shall be
outstanding, the Company shall use its best efforts to cause all shares of
Common Stock issuable upon exercise of the Warrant to be listed (subject to
official notice of issuance) on all securities exchanges (or, if applicable on
NASDAQ) on which the Common Stock may then be listed and/or quoted.
8. Certain Notice Requirements.
8.1 Holder's Right to Receive Notice. Nothing herein shall be
construed as conferring upon the Holder the right to vote or consent or to
receive notice as a stockholder for the election of directors or any other
matter, or as having any rights whatsoever as a stockholder of the Company
(including the right to receive dividends). If, however, at any time prior to
the expiration of the Warrant and its exercise, any of the events described in
Section 8.2 shall occur,
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then, in one or more of said events, the Company shall give written notice of
such event at least fifteen (15) days prior to the date fixed as a record date
or the date of closing the transfer books for the determination of the
stockholders entitled to such dividend, distribution, conversion or exchange of
securities or subscription rights, or entitled to vote on such proposed
dissolution, liquidation, winding up or sale. Such notice shall specify such
record date or the date of the closing of the transfer books, as the case may
be.
8.2 Events Requiring Notice. The Company shall be required to
give the notice described in this Section 8 upon one or more of the following
events: (i) if the Company shall take a record of the holders of its shares of
Common Stock for the purpose of entitling them to receive a dividend or
distribution payable otherwise than in cash, or a cash dividend or distribution
payable otherwise than out of retained earnings, as indicated by the accounting
treatment of such dividend or distribution on the books of the Company, or (ii)
the Company shall offer to all the holders of its Common Stock any additional
shares of capital stock of the Company or securities convertible into or
exchangeable for shares of capital stock of the Company, or any option, right or
warrant to subscribe therefor, or (iii) a dissolution, liquidation or winding up
of the Company (other than in connection with a consolidation or merger) or a
sale of all or substantially all of its property, assets and business shall be
proposed.
8.3 Notice of Change in Exercise Prices. The Company shall,
promptly after an event requiring a change in the Exercise Prices pursuant to
Section 6 hereof, send notice to the Holder of such event and change (the "Price
Notice"). The Price Notice shall describe the event causing the change and the
method of calculating same and shall be certified as being true and accurate by
the Company's Chief Executive Officer and Chief Financial Officer.
8.4 Transmittal of Notices. All notices, requests, consents
and other communications under this Warrant shall be in writing and shall be
deemed to have been duly given or made when hand delivered, or when delivered by
telecopier or by responsible overnight courier:
(i) if to the registered Holder of this Warrant, to:
Aesop Financial Corporation 551 Fifth Avenue,
Suite 1625 New York, NY 10176
Attention: Steven W. Bingaman
President
[Telecopier No. (212) 682-61941]
(ii) if to the Company, to:
Integrated Healthcare Systems, Inc.
10700 Parkridge Boulevard, Suite 410
Reston, Virginia 22091
Attention: Michael J. Black, Chairman and
Chief Executive Officer
[Telecopier No. (703) 716-05921]
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Either of the Holder or the Company may change the foregoing address by notice
given pursuant to this Section 8.4.
9. Miscellaneous.
9.1 Amendments. The Company and the Holder may from time to
time supplement or amend this Warrant in order to cure any ambiguity, to correct
or supplement any provision contained herein which may be defective or
inconsistent with any other provisions herein, or to make any other provisions
in regard to matters or questions arising hereunder which the Company and the
Bank may deem necessary or desirable and which the Company and the Bank deem
shall not adversely affect the interest of the Holder. All other modifications
or amendments shall require the written consent of the party against whom
enforcement of the modification or amendment is sought.
9.2 Headings. The headings contained herein are for the sole
purpose of convenience of reference, and shall not in any way limit or affect
the meaning or interpretation of any of the terms or provisions of this Warrant.
9.3 Entire Agreement. This Warrant (together with the other
agreements and documents being delivered pursuant to or in connection with this
Warrant) constitute the entire agreement of the parties hereto with respect to
the subject matter hereof, and supersede all prior agreements and understandings
of the parties, oral and written, with respect to the subject matter hereof.
9.4 Binding Effect. This Warrant shall inure solely to the
benefit of and shall be binding upon, the Holder and the Company and their
permitted assignees, respective successors, legal representatives and assigns,
and no other person shall have or be construed to have any legal or equitable
right, remedy or claim under or in respect of or by virtue of this Warrant or
any provisions herein contained.
9.5 Governing Law. This Warrant shall be governed by and
construed and enforced in accordance with the laws of the State of Delaware,
without giving effect to conflict of laws.
9.6 Waiver. Etc. The failure of the Company or the Holder to
at any time enforce any of the provisions of this Warrant shall not be deemed or
construed to be a waiver of any such provision, nor to in any way affect the
validity of this Warrant or any provision hereof or the right of the Company or
any Holder to thereafter enforce each and every provision of this Warrant. No
waiver of any breach, noncompliance or nonfulfillment of any of the provisions
of this Warrant shall be effective unless set forth in a written instrument
executed by the party or parties against whom or which enforcement of such
waiver is sought; and no waiver of any such breach, noncompliance or
nonfulfillment shall be construed or deemed to be a waiver of any other or
subsequent breach, noncompliance or nonfulfillment.
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IN WITNESS WHEREOF, the Company has caused this Warrant to be
signed by its duly authorized officer as of the 10th day of January, 1997.
INTEGRATED HEALTHCARE SYSTEMS, INC.
By: /s/ Michael J. Black
------------------------------------------
Name: Michael J. Black
Title: Chairman & Chief Executive Officer
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Exhibit A
Form to be used to exercise Warrant:
Integrated Healthcare Systems, Inc.
10700 Parkridge Boulevard, Suite 410
Reston, Virginia 22091
Attention: Chairman & Chief Executive Officer
Date: _______________________
The Undersigned hereby elects irrevocably to exercise the
within Warrant and to purchase shares of Common Stock of Integrated Healthcare
Systems, Inc. and hereby makes payment of $ __________ (at the rate of
$_________ per share) in payment of the Exercise Price pursuant thereto. Please
issue the shares as to which this Warrant is exercised in accordance with the
instructions given below.
Signature
Signature Guaranteed
INSTRUCTIONS FOR REGISTRATION OF SECURITIES
Name
(Print in Block Letters)
Address
NOTICE: The signature to this form must correspond with the
name as written upon the face of the within Warrant in every particular without
alteration or enlargement or any change whatsoever, and must be guaranteed by a
bank, other than a savings bank, or by a trust company or by a firm having
membership on a registered national securities exchange.
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Form to be used to assign Warrant:
ASSIGNMENT
(To be executed by the registered Holder to effect a transfer
of the within Warrant):
FOR VALUE RECEIVED, Aesop Financial Corporation does hereby
sells, assigns and transfers unto Appleby Partners, Ltd. the right to purchase
up to 1,190,000 shares of Common Stock of Integrated Healthcare Systems, Inc.
(the "Company") evidenced by the within Warrant and does hereby authorize the
Company to transfer such right on the books of the Company.
Dated: as of October 31, 1997
Signature
Aesop Financial Corporation
By: /s/ Steven W. Bingaman
---------------------------------
Steven W. Bingaman, President
Signature Guaranteed
SIGNATURE GUARANTEED
MEDALLION GUARANTEED
CITIBANK N.A. - NED
/s/ Mary Cunningham
-------------------------------------
Mary Cunningham
Assistant Vice President
Branch #002
Madison/42nd Street
NOTICE: The signature to this form must correspond with the name as
written upon the face of the within Warrant in every particular without
alteration or enlargement or any change whatsoever, and must be guaranteed by a
bank, other than a savings bank, or by a trust company or by a firm having
membership on a registered national securities exchange.
<PAGE>
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), OR APPLICABLE STATE SECURITIES LAWS
(COLLECTIVELY, THE "LAWS"). THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND
MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF
EITHER (I) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE
LAWS, OR (II) AN OPINION OF COUNSEL PROVIDED TO THE ISSUER IN FORM, SUBSTANCE
AND SCOPE REASONABLY ACCEPTABLE TO THE ISSUER TO THE EFFECT THAT REGISTRATION IS
NOT REQUIRED UNDER THE LAWS DUE TO AN AVAILABLE EXCEPTION TO OR EXEMPTION FROM
THE REGISTRATION REQUIREMENTS OF THE LAWS.
INTEGRATED HEALTHCARE SYSTEMS, INC
REDEEMABLE BRIDGE LOAN WARRANT TO PURCHASE COMMON STOCK
Warrant BL No.__ Number of Shares: ______
Date of Issuance: as of ______ __, 1995
Integrated Healthcare Systems, Inc., a Delaware corporation (the
"Company"), hereby certifies that, for value received, __________________ and
permitted assigns, the registered Holder hereof ("Holder"), is entitled, subject
to the terms set forth below, to purchase from the Company upon surrender of
this Warrant, at any time after the date hereof, but not after 5:00 P.M.
_________ time on the Expiration Date (as defined herein) _________ fully paid
and nonassessable shares of Common Stock (as defined herein) of the Company
(each a "Warrant Share" and collectively the "Warrant Shares") at a purchase
price of U.S.______ per share (the "Exercise Price") in lawful money of the
United States. The number of Warrant Shares purchasable hereunder and the
Exercise Price are subject to adjustment as provided in Section 9 below.
Section 1.
(a) Definitions. The following words and terms used in this Warrant shall
have the following meanings:
"Common Stock" means (a) the Company's common stock and (b) any capital
stock into which such Common Stock shall have been changed or any capital stock
resulting from a reclassification of such Common Stock.
"Convertible Securities" mean any securities issued by the Company which
are convertible into or exchangeable for, directly or indirectly, shares of
Common Stock.
<PAGE>
"Expiration Date" means the date which is sixty (60) calendar months from
the date of this Warrant or, if such date falls on a Saturday, Sunday or other
day on which banks are required or authorized to be closed in the State of
Delaware (a "Holiday"), the next preceding date that is not a Holiday.
"Market Price" means the closing bid price on the day prior to the date
on which the Exercise Form is delivered to the Company, as quoted on the
[National Association of Securities Dealers' OTC Bulletin Board Market] or such
other national securities exchange or market on which the Common Stock may then
be listed.
"Securities Act" means the Securities Act of 1933, as amended.
"Transfer" shall include any disposition of this Warrant or any Warrant
Shares, or of any interest in either thereof which would constitute a sale
thereof within the meaning of the Securities Act or applicable state securities
laws.
"Warrant" shall mean this Warrant and all Warrants issued in exchange,
transfer or replacement of any thereof.
"Warrant Exercise Price" shall be U.S.$7.00 per share.
"Initial Warrant Redemption Date" shall mean __________, [the 1st
anniversary date of this Warrant]
(b) Other Definitional Provisions.
(i) Except as otherwise specified herein, all references herein (A) to
the Company shall be deemed to include the Company's successors; and (B) to any
applicable law defined or referred to herein, shall be deemed references to such
applicable law as the same may have been or may be amended or supplemented from
time to time.
(ii) When used in this Warrant, unless the otherwise specified in a
particular instance, the words "herein," "hereof," and "hereunder," and words of
similar import, shall refer to this Warrant as a whole and not to any provision
of this Warrant, and the words "Section," "Schedule," and "Exhibit" shall refer
to Sections of, and Schedules and Exhibits to, this Warrant unless otherwise
specified.
(iii) Whenever the context so requires the neuter gender includes the
masculine or feminine, and the singular number includes the plural, and vice
versa.
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<PAGE>
Section 2. Exercise of Warrant.
(a) Subject to the terms and conditions hereof, this Warrant may be
exercised by the Holder, as a whole or in part, at any time prior to 5:00 P.M.
Delaware Time on the Expiration Date. The rights represented by this Warrant may
be exercised by the Holder, as a whole or from time to time in part (except that
this Warrant shall not be exercisable as to a fractional share) by (i) delivery
of a written notice, in the form of the exercise form attached as Exhibit I
hereto (an "Exercise Form"), of the Holder's election to exercise this Warrant,
which notice shall specify the number of Warrant Shares to be purchased, (ii)
payment to the Company of an amount equal to the Warrant Exercise Price
multiplied by the number of Warrant Shares as to which the Warrant is being
exercised (plus any applicable issue or transfer taxes) in immediately available
funds (either by wire transfer or a certified or cashier's check drawn on a
United States bank), for the number of Warrant Shares as to which this Warrant
shall have been exercised, and (iii) the surrender of this Warrant, properly
endorsed, at the principal office of the Company (or at such other agency or
office of the Company as the Company may designate by notice to the Holder).
The Warrant Shares so purchased shall be deemed to be issued to the
Holder or Holder's designees, as the record owner of such Warrant Shares, as of
the date on which this Warrant shall have been surrendered, the completed
Exercise Agreement shall have been delivered, and payment shall have been made
for such Warrant Shares as set forth above.
In the event of any exercise of the rights represented by this Warrant
in compliance with this Section 2(a), a certificate or certificates for the
Warrant Shares so purchased, registered in the name of, or as directed by, the
Holder, shall be delivered to, or as directed by, the Holder within five (5)
business days after such rights shall have been so exercised.
(b) Unless this Warrant shall have expired or shall have been fully
exercised, the Company shall issue a new Warrant identical in all respects to
the Warrant exercised except (i) it shall represent rights to purchase the
number of Warrant Shares purchasable immediately prior to such exercise under
the Warrant exercised, less the number of Warrant Shares with respect to which
such Warrant is exercised, and (ii) the Holder thereof shall be deemed to have
become the Holder of record of such Warrant Shares immediately prior to the
close of business on the date on which the Warrant is surrendered and payment of
the amount due in respect of such exercise and any applicable taxes is made,
irrespective of the date of delivery of such share certificate, except that, if
the date of such surrender and payment is a date when the stock transfer books
of the Company are properly closed, such person shall be deemed to have become
the Holder of such Warrant Shares at the opening of business on the next
succeeding date on which the stock transfer books are open.
Section 3. Covenants as to Common Stock. The Company covenants and agrees
that all Warrant Shares which may be issued upon the exercise of the rights
represented by this Warrant will, upon issuance, be validly issued, fully paid
and nonassessable. The Company further covenants and agrees that during the
period within which the rights represented by this Warrant may be exercised, the
Company will at all times have authorized and reserved a sufficient number of
shares of Common Stock to provide for the exercise of the rights then
represented by this Warrant.
Section 4. Taxes. The Company shall not be required to pay any tax or
taxes attributable to the initial issuance of the Warrant Shares or any
permitted transfer involved in the issue or delivery of any certificates for
Warrant Shares in a name other than that of the registered Holder hereof or upon
any permitted transfer of this Warrant.
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<PAGE>
Section 5. Warrant Holder Not Deemed a Stockholder. No Holder, as such,
of this Warrant shall be entitled to vote or receive dividends or be deemed the
Holder of shares of the Company for any purpose, nor shall anything contained in
this Warrant be construed to confer upon the Holder hereof, as such, any of the
rights of a stockholder of the Company or any right to vote, give or withhold
consent to any corporate action (whether any reorganization, issue of stock,
reclassification of stock, consolidation, merger, conveyance or otherwise),
receive notice of meetings, receive dividends or subscription rights, or
otherwise, prior to the issuance to the Holder of this Warrant of the Warrant
Shares which he or she is then entitled to receive upon the due exercise of this
Warrant. Notwithstanding the foregoing, the Company will provide the Holder of
this Warrant with copies of the same notices and other information given to the
stockholders of the Company generally, contemporaneously with the giving thereof
to the stockholders.
Section 6. No Limitation on Corporate Action. No provisions of this
Warrant and no right or option granted or conferred hereunder shall in any way
limit, affect or abridge the exercise by the Company of any of its corporate
rights or powers to recapitalize, amend its certificate or articles of
incorporation, reorganize, consolidate or merge with or into another
corporation, or to transfer all or any part of its property or assets, or the
exercise of any other of its corporate rights and powers.
Section 7. Representations of Holder. The Holder of this Warrant, by the
acceptance hereof, represents that it is acquiring this Warrant and the Warrant
Shares for its own account for investment and not with a view to, or for sale in
connection with, any distribution hereof or of any of the shares of Common Stock
or other securities issuable upon the exercise thereof, and not with any present
intention of distributing any of the same. Upon exercise of this Warrant, the
Holder shall, if requested by the Company, confirm in writing, in a form
satisfactory to the Company, that the Warrant Shares so purchased are being
acquired solely for the Holder's own account and not as a nominee for any other
party, for investment, and not with a view toward distribution or resale. If
such Holder cannot make such representations because they would be factually
incorrect, it shall be a condition to such Holder's exercise of the Warrant that
the Company receive such other representations as the Company considers
reasonably necessary to assure the Company that the issuance of its securities
upon exercise of the Warrant shall not violate any United States or state
securities laws.
Section 8. Transfer; Opinions of Counsel; Restrictive Legends and
Piggy-Back Registration Rights.
(a). The Holder of this Warrant understands that (i) this
Warrant and the Warrant Shares have not been and are not being registered under
the Securities Act or any state securities laws and may not be offered for sale,
sold, assigned or transferred unless (a) subsequently registered thereunder, or
(b) pursuant to an exemption from such registration; (ii) any sale of such
securities made in reliance on Rule 144 promulgated under the Securities Act may
be made only in accordance with the terms of said Rule and further, if said Rule
is not applicable, any resale of such securities under circumstances in which
the seller (or the person through whom the sale is made) may be deemed to be an
underwriter (as that term is defined in the Securities Act) may require
compliance with some other exemption under the Securities Act or the rules and
regulations of the Securities and Exchange Commission thereunder; and (iii)
neither the Company nor any other person is under any obligation to register
such securities under the Securities Act or any state securities laws or to
comply with the terms and conditions of any exemption thereunder.
4
<PAGE>
(b)(i). The Holder of this Class A Warrant shall have the
right for a period of five (5) years from the date this Warrant Certificate
defined below, to include all of the shares of Common Stock underlying this
Warrant (the "Registrable Securities") as part of any registration of securities
filed by the Company (other than in connection with a transaction contemplated
by Rule 145(a) promulgated under the Act or pursuant to Form S-8 or Form S-4);
provided, however, that if, in the written opinion of the Company's managing
underwriter or underwriters, if any, for such offering, the inclusion of the
Registrable Securities, when added to the securities being registered by the
Company or the selling shareHolder(s), will adversely affect the distribution of
the securities to be sold, the Company shall nevertheless register all or any
portion of the Registrable Securities required to be so registered, but such
Registrable Securities, at the option of the Company, shall not be sold by the
Holder(s) until 180 days after the registration statement for such offering has
become effective and provided further that, if any securities are registered for
sale on behalf of other Holders in such offering and such Holders have not
agreed to defer such sale until the expiration of such 180-day period, the
number of securities to be sold by all Holders in such public offering during
such 180-day period shall be apportioned pro rata among all such selling
Holders, including all Holders of the Registrable Securities, according to the
total amount of securities of the Company owned by said selling Holders,
including all Holders of the Registrable Securities.
(ii). The Company shall bear all fees and expenses attendant
to registering the Registrable Securities, but the Holder shall pay any and all
underwriting commissions, the expenses of any legal counsel selected by the
Holder to represent him in connection with the sale of the Registrable
Securities and applicable transfer taxes, if any. In the event of such a
proposed registration, the Company shall furnish the then Holder with not less
than twenty (20) days' written notice prior to the proposed date of filing of
such registration statement. Such notice to the Holder shall continue to be
given for each registration statement filed by the Company until such time as
all of the Registrable Securities have been registered and sold. The Holder of
Registrable Securities shall exercise the "piggyback" rights provided for herein
by giving written notice, within fifteen (15) days after the receipt of the
Company's notice of its intention to file a registration statement. The Company
shall cause any registration statement filed pursuant to the above "piggyback"
rights (a "Registration Statement") to remain effective for at least eight [(8)
months] from the date that a Holder of Registrable Securities is first given the
opportunity to sell all of such securities.
(iii). The Company shall indemnify the Holder of the
Registrable Securities to be sold pursuant to any Registration Statement
hereunder and each person, if any, who controls such Holder within the meaning
of Section 15 of the Act or Section 20(a) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), against all loss, claim, damage, expense
or liability (including all reasonable attorneys' fees and other expenses
reasonably incurred in investigating, preparing or defending against any claim
whatsoever) to which any of them may become subject under the Act, the Exchange
Act or otherwise, arising out of or based upon any untrue statement or alleged
untrue statement of a material fact contained in a Registration Statement or
related preliminary or final prospectus (the "Prospectus") (as from time to time
amended and supplemented) or the omission or alleged omission therefrom of a
material fact required to be stated therein or necessary to make the statements
therein not misleading, unless such statement or omission was made in reliance
upon and in conformity with written information furnished to the Company with
respect to such Holder by or on behalf of such Holder expressly for use in the
Registration Statement or Prospectus, or any amendment or supplement thereof, as
the case may be.
5
<PAGE>
If any action is brought against any Holder or a controlling
person in respect of which indemnity may be sought against the Company pursuant
to the foregoing, such Holder shall promptly give notice to the Company of the
institution of such action and the Company shall assume the defense and control
of such action, including the employment of counsel and payment of reasonable
fees and expenses. The Holder or such controlling person shall have the right to
employ its own counsel in any such case, but the fees and expenses of such
counsel shall be at the expense of such Holder or such controlling person unless
the employment of such counsel shall have been authorized in writing by the
Company in connection with the defense of such action, or the Company shall not
have employed counsel to have charge of the defense of such action, or counsel
for such indemnified party or parties shall have reasonably concluded that there
may be defenses available to it or them which are different from or additional
to those available to the Company (in which case the Company shall not have the
right to direct the defense of such action on behalf of the indemnified party or
parties), in any of which events such fees and expenses shall be borne by the
Company. It is understood, however, that the Company shall not, in connection
with any one action or separate but substantially similar or related actions
arising out of the same general allegations or circumstances, be liable for the
reasonable fees and expenses of more than one separate counsel for the Holders
and controlling persons, which firm shall be designated in writing by a majority
in interest of the Holders based upon the value of the Registrable Securities
included in the relevant Registration Statement. Anything in this paragraph to
the contrary notwithstanding, the Company shall not be liable for any settlement
of any such claim or action effected without its written consent. The Company
agrees promptly to notify the Holder of the commencement of any litigation or
proceedings against him or any of his officers or directors, in connection with
the Registration Statement or Prospectus, or any amendment or supplement
thereto. Each party entitled to indemnification hereunder shall give notice to
the Company promptly after such party has knowledge of any claim as to which
indemnity may be sought. With respect to any untrue statement or alleged untrue
statement made in, or omission or alleged omission from, any Prospectus, the
indemnity agreement contained in this Section 8(iii) with respect to such
Prospectus shall not inure to the benefit of any Holder (or to the benefit of
any person controlling Holder) if the Prospectus (or the Prospectus as amended
or supplemented if the Company shall have made any amendments thereof or
supplement thereto which shall have been furnished to such Holder prior to the
time of confirmation of such sale) does not contain such statement, alleged
statement, omission or alleged omission, and a copy of such Prospectus shall not
have been sent or given to such person at or prior to the written confirmation
of such sale to such person.
6
<PAGE>
(b). The Holder agrees to indemnify and hold harmless the
Company, each of the directors of the Company, each of the officers of the
Company who shall have signed a Registration Statement and each other person, if
any, who controls the Company within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act to the same extent as the foregoing indemnity
from the Company to the Holder but only as to each such Holder with respect to
statements or omissions, or alleged statements or omissions, if any, made in any
Registration Statement or Prospectus or any amendment or supplement thereto or
any application in reliance upon, and in conformity with, written information
furnished to the Company with respect to the Holder by or on behalf of such
Holder expressly for use in any Registration Statement or Prospectus or any
amendment or supplement thereto or in any application, as the case may be. The
Company shall give notice to each Holder entitled to indemnity hereunder
promptly after the Company has knowledge of any claim as to which indemnity may
be sought. In case any action shall be brought against the Company, or any
person so indemnified, based on any Registration Statement or Prospectus or any
amendment or supplement thereto or any application, and in respect of which
indemnity may be sought against any Holder, such Holder shall have the rights
and duties given to the Company, and the Company, and each other person so
indemnified shall have the rights and duties given to the Holder(s) by the
provisions of subsection (a) above.
(iv). Upon request, the Company shall furnish (and, in the
case of clause (ii) below, shall use its reasonable best efforts to furnish) to
each Holder participating in any of the foregoing offerings and to each
underwriter of any such offering, if any, a signed counterpart, addressed to
such Holder or underwriter, of (1) an opinion of counsel to the Company, dated
the effective date of such Registration Statement (and, if such registration
includes an underwritten public offering, an opinion dated the date of the
closing under any underwriting agreement related thereto), and (2) a "cold
comfort" letter dated the effective date of such Registration Statement (and, if
such registration includes an underwritten public offering, a letter dated the
date of closing under the underwriting agreement) signed by independent public
accountants who have issued a report on the Company's financial statements
included in such Registration Statement, in each case covering substantially the
same matters with respect to such Registration Statement (and the Prospectus
included therein) and, in the case of such accountants' letter, with respect to
events subsequent to the date of such financial statements, as are customarily
covered in opinions of issuer's counsel and in accountants' letters delivered to
underwriters in underwritten public offerings of securities, with such changes
or omissions therefrom as are appropriate under the circumstances. The Company
shall also deliver promptly to each Holder participating in the offering
requesting the correspondence and memoranda described below and to the managing
underwriter copies of all correspondence between the Commission and the Company,
its counsel or auditors and all memoranda relating to discussions with the
Commission or its staff with respect to the Registration Statement and permit
each Holder and underwriter to do such investigation, upon reasonable advance
notice, with respect to information contained in or omitted from the
Registration Statement as it deems reasonably necessary to comply with
applicable securities laws or rules of the National Association of Securities
Dealers, Inc. ("NASD"). Such investigation shall include access to books,
records and properties and opportunities to discuss the business of the Company
with its officers and independent auditors, all to such reasonable extent and at
such reasonable times and as often as any such Holder shall reasonably request
and all of which shall be subject to any confidential restrictions as may be
reasonably imposed by the Company. Following the effective date of any such
registration, the Company shall upon the request of the Holder forthwith supply
such a number of Prospectuses meeting the requirements of the Act, as shall be
reasonably requested to make a public offering of the Registrable Securities
from time to time offered or sold by such Holder.
7
<PAGE>
(v). The Holder shall be a party to any underwriting agreement
relating to an underwritten sale of his Registrable Securities and may, at his
option, require that any or all of the covenants of the Company to or for the
benefit of the underwriters in such offerings shall also be made to and for the
benefit of such Holder. Such Holder shall not be required to make any
representations or warranties to or agreements with the Company or the
underwriters except as they may relate to such Holder, the Registrable
Securities and their intended methods of distribution. The Holder may not
participate in any underwritten registration provided for herein unless such
Holder (x) agrees to sell his Registrable Securities being registered on the
basis provided in any underwriting arrangements approved by the Company or
selling securityHolder and (y) completes and executes all reasonable and
customary indemnities, questionnaires, powers of attorney, underwriting
agreements and other documents reasonably required under the terns of such
underwriting arrangements contemplated hereby.
(vi). The Company by written notice may require the Holder to
promptly furnish in writing to the Company such information regarding the Holder
and his distribution of the Registrable Securities as it may from time to time
reasonably request and such other information as may be reasonably required or
advisable in connection with such registration. The Company shall have the right
to exclude from any offering the Registrable Securities of the Holder if he does
not comply with the provisions of the immediately preceding sentence. The Holder
agrees that upon receipt of any notice from the Company of the happening of any
event which makes any statement in a Registration Statement or Prospectus
(including supplements and amendments) or any document incorporated or deemed to
be incorporated therein by reference untrue in any material respect or that
requires the making of any changes in such Registration Statement, prospectus or
documents so that, in the case of the Registration Statement it will not contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, the
Holder will forthwith discontinue disposition of Registrable Securities pursuant
to the Registration Statement covering such Registrable Securities until the
Holder's receipt of the copies of a supplemented or amended Prospectus and, if
so directed by the Company, the Holder will deliver to the Company all copies,
other than permanent file copies, then in the Holder's possession, of the most
recent prospectus covering such Registrable Securities at the time of receipt of
such notice.
Section 9. Adjustments.
(a) In case of any reclassification, capital reorganization or
other change of outstanding shares of the Common Stock, or in case of any
consolidation or merger of the Company with or into another corporation (other
than a consolidation or merger in which the Company is the continuing
corporation and which does not result in any reclassification, capital
reorganization or other change of outstanding shares of Common Stock), the
Company shall cause effective provision to be made so that the Holder shall have
the right thereafter, by exercising this Warrant, to purchase the kind and
number of shares of stock or other securities or property (including cash)
receivable upon such reclassification, capital reorganization or other change,
consolidation or merger by a Holder of the number of shares of Common Stock that
could have been purchased upon exercise of the Warrant immediately prior to such
reclassification, capital reorganization or other change, consolidation or
merger. Any such provision shall include provision for adjustments that shall be
as nearly equivalent as may be practicable to the adjustments provided for in
this Section 9. The foregoing provisions shall similarly apply to successive
reclassifications, capital reorganizations and other changes of outstanding
shares of Common Stock and to successive consolidations or mergers. If the
consideration received by the Holders of Common Stock is other than cash, the
value shall be as determined by the Board of Directors of the Company acting in
good faith.
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(b) If and whenever the Company shall effect a stock dividend,
a stock split, a stock combination, or a reverse stock split of the Common
Stock, the number of Warrant Shares purchasable hereunder and the Warrant
Exercise Price shall be proportionately adjusted in the manner determined by the
Company's Board of Directors acting in good faith. The number of shares, as so
adjusted, shall be rounded down to the nearest whole number and the Warrant
Exercise Price shall be rounded to the nearest cent.
Section 10. Redemption.
(a) Commencing on the Initial Warrant Redemption Date, the
Company may on thirty (30) days prior written notice, redeem all of the Warrants
at a redemption price of ten cents ($.10) per Warrant; provided, however, that
before any such call for redemption of Warrants can take place, the (i) average
closing bid price for the Common Stock, as reported by the National Association
of Securities Dealers Automated Quotation System, or (ii) if not so quoted, as
reported by any other recognized quotation system on which the Common Stock is
quoted, shall have for any twenty (20) trading days within a period of thirty
(30) consecutive trading days ending on the fifth(5th) trading day prior to the
date on which the notice contemplated by Sections 10(b) and 10(c) hereof is
given, equaled or exceeded $8.50 per share of Common Stock (subject to
adjustment in the event of any stock splits or other similar events as provided
in Section 9 hereof).
(b) In case the Company shall exercise its right to redeem all
of the Warrants, it shall give or cause to be given notice to the Registered
Holders of the Warrants, by mailing to such Registered Holders a notice of
redemption, first class, postage prepaid, at their last address as shall appear
on the records of the Warrant Agent. Any notice mailed in the manner provided
herein shall be conclusively presumed to have been duly given whether or not the
Registered Holder receives such notice.
(c) The notice of redemption shall specify (i) the redemption
price, (ii) the date fixed for redemption, which shall in no event be less than
thirty (30) days after the date of mailing such notice, (iii) the place where
the Warrant Certificates shall be delivered and the redemption price shall be
paid, and (iv) that the right to exercise the Warrant shall terminate at 5:00
p.m. (Delaware time) on the business day immediately preceding the date fixed
for redemption. The date fixed for the redemption of the Warrants shall be the
"Redemption Date" for purposes of this Agreement. No failure to mail such notice
nor any defect therein or in the mailing thereof shall affect the validity of
the proceedings for such redemption except as to a Holder (A) to whom notice was
not mailed or (B) whose notice was defective. An affidavit of the Warrant Agent
or the Secretary or Assistant Secretary of the Company that notice of redemption
has been mailed shall, in the absence of fraud, be prima facie evidence of the
facts stated therein.
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(d) Any right to exercise a Warrant shall terminate at 5;00
p.m. (Delaware time) on the business day immediately preceding the Redemption
Date. The redemption price payable to the Registered Holders shall be mailed to
such persons at their addresses of record.
(e) The Company shall as soon as practicable after the
Redemption Date, and in any event within fifteen (15) months thereafter, make
"generally available to its security Holders" (within the meaning of Rule 158
under the Act) an earnings statement (which need not be audited) complying with
Section 11(a) of the Act and covering a period of a t least twelve (12)
consecutive months beginning after the Redemption Date.
Section 11. Lost, Stolen, Mutilated or Destroyed Warrant. If this Warrant
Certificateis lost, stolen or destroyed, the Company shall, on receipt of an
indemnification undertaking reasonably satisfactory to the Company, issue a new
Warrant Certificates of like denomination and tenor as the Warrant Certificate
so lost, stolen or destroyed. In the event the Holder hereof asserts such loss,
theft or destruction of this Warrant, the Company may require such Holder to
post a bond issued by a surety reasonably satisfactory to the Company with
respect to the issuance of such new Warrant Certificate.
Section 12. Notice. Any notices required or permitted to be given under
the terms of this Warrant shall be sent by mail or delivered personally or by
courier and shall be effective five days after being placed in the mail, if
mailed, certified or registered, return receipt requested, or upon receipt, if
delivered personally or by courier or by facsimile, in each case properly
addressed to the party to receive the same. The addresses for such
communications shall be:
If to the Company: Integrated Healthcre Systems, Inc.
12030 Sunrise Valley Drive, Site 205
Reston, VA 20191
Telephone: (703 716-0100
Facsimile: (703) 716-0100
Attention: Michael J. Black
If to the Holder:
Section 13. Miscellaneous. This Warrant and any term hereof may be
changed, waived, discharged, or terminated only by an instrument in writing
signed by the party or Holder hereof against which enforcement of such change,
waiver, discharge or termination is sought. This Warrant shall be governed by
and interpreted under the laws of the State of Delaware. Headings are for
convenience only and shall not affect the meaning or construction of any of the
provisions hereof. This Warrant shall be binding upon the Company and its
successors and assigns and shall inure to the benefit of the Holder and its
successors and assigns. The Holder may not assign this Warrant except in
accordance with applicable federal and state securities laws. The Holder shall
immediately notify the Company with respect to any permitted assignment of this
Warrant.
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Section 14. Date. The date of this Warrant Certificate is ______ __,
1995. This Warrant, in all events, shall be wholly void and of no effect after
the close of business on the Expiration Date, except that notwithstanding any
other provisions hereof, the provisions of Section 8 shall continue in full
force and effect after such date as to any Warrant Shares or other securities
issued upon the exercise of this Warrant.
INTEGRATED HEALTHCARE, SYSTEMS, INC.
By: __________________________________
Name: Michael J. Black
Title: Chairman and Chief Executive Officer
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EXHIBIT I
TO
REDEEMABLE BRIDGE LOAN WARRANT TO PURCHASE COMMON STOCK
EXERCISE FORM TO BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE
THIS WARRANT
INTEGRATED HEALTHCARE SYSTEMS, INC.
The undersigned hereby exercises the right to purchase the number of
Warrant Shares covered by the Warrant Certificate attached hereto as specified
below according to the conditions thereof and herewith makes payment of U.S.
$_____ the aggregate Warrant Exercise Price of such Warrant Shares in full
pursuant to the terms and conditions of the Warrant.
(i) The undersigned agrees not to offer, sell, transfer or otherwise
dispose of any Common Stock obtained upon exercise of the Warrant, except under
circumstances that will not result in a violation of any federal or applicable
state securities laws.
(ii) The undersigned requests that the stock certificates for the Warrant
Shares be issued, and a Warrant representing any unexercised portion hereof be
issued, pursuant to the terms of the Warrant in the name of the Holder (or such
other person(s) indicated below) and delivered to the undersigned (or
designee(s)) at the address or addresses set forth below.
Dated:____________ __, 199_.
HOLDER:
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signature
[Name of Business Entity]
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By:
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Name:
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Title:
-----------------------------------
Address:
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---------------------------------
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Number of Warrant Shares
Being Purchased:
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"THE SECURITIES WHICH ARE REPRESENTED BY THE CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
AND THEY MAY NOT BE OFFERED, SOLD, PLEDGED, HYPOTHECATED, ASSIGNED OR
TRANSFERRED EXCEPT (i) PURSUANT TO A REGISTRATION STATEMENT UNDER THE SECURITIES
ACT WHICH HAS BECOME EFFECTIVE AND IS CURRENT WITH RESPECT TO THESE SECURITIES,
OR (ii) PURSUANT TO A SPECIFIC EXEMPTION FROM REGISTRATION UNDER THE SECURITIES
ACT BUT ONLY UPON A HOLDER HEREOF FIRST HAVING OBTAINED THE WRITTEN OPINION OF
COUNSEL TO THE CORPORATION, OR THEIR COUNSEL REASONABLY ACCEPTABLE TO THE
CORPORATION, THAT THE PROPOSED DISPOSITION IS CONSISTENT WITH ALL APPLICABLE
PROVISIONS OF THE SECURITIES ACT AS WELL AS ANY APPLICABLE "BLUE SKY" OR OTHER
STATE SECURITIES LAW."
THE REGISTERED HOLDER OF THIS WARRANT BY ITS ACCEPTANCE HEREOF, AGREES THAT IT
WILL NOT SELL, TRANSFER OR ASSIGN THIS WARRANT EXCEPT AS HEREIN PROVIDED.
NOT EXERCISABLE PRIOR TO October 1,1997. VOID AFTER 5:00 P.M. VIRGINIA TIME
______________, 200_.
COMMON STOCK PURCHASE WARRANT
For the Purchase of _______ Shares of Common Stock
of
INTEGRATED HEALTHCARE SYSTEMS, INC.
(A Delaware Corporation)
1. Warrant.
THIS CERTIFIES THAT __________, (or registered assigns succeeding to
ownership hereof pursuant to the provisions of Section 3.1 hereof) (the
"Holder"), as registered owner of this Warrant, is entitled, at any time and
from time to time on or after March 3, 1998 (the "Effective Date"), and at or
before 5:00 p.m., Virginia Time, on the termination date set forth below, but
not thereafter, to subscribe for, purchase and receive, in whole or in part, up
to ____________ (_______) shares of Common Stock, $.0001 par value ("Common
Stock"), of Integrated Healthcare Systems, Inc., a Delaware corporation (the
"Company"). If such termination date is a day on which banking institutions are
authorized by law to close, then this Warrant may be exercised on the next
succeeding day that is not such a day in accordance with the terms hereof. This
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Warrant is initially exercisable as to shares of Common Stock covered hereby
("Warrant Shares") in the amount and at the per share exercise price ("Exercise
Price") set forth below:
No. of Warrant Shares Exercise Price Termination Date
_____ $0.75 ____________, 200_
The term "Exercise Price" shall mean either the initial per share exercise price
or such exercise price as adjusted in the manner provided herein as the case may
be.
2. Exercise.
In order to exercise this Warrant, the exercise form attached hereto as
Exhibit A must be duly executed, completed and delivered to the Company,
together with this Warrant and payment of the applicable Exercise Price
multiplied by the number of Warrant Shares being purchased. If the rights
represented hereby shall not have been exercised at or before 5:00 p.m.,
Virginia Time, on or before the termination date set forth above this Warrant
shall become and be void and without further force or effect and all rights
represented hereby shall cease and expire.
3. Transfer.
3.1 General Restrictions. The registered Holder of this Warrant, by its
acceptance hereof, agrees that it shall not sell, transfer or assign or
hypothecate this Warrant to anyone other than the permitted persons described in
Section 3.3 hereof. In order to make any permitted assignment, the Holder must
deliver to the Company the assignment form attached hereto as Exhibit B duly
executed and completed, together with this Warrant and payment of all transfer
taxes, if any, payable in connection therewith and an agreement by the
transferee to be bound by the terms hereof together with any other documentation
reasonably requested by the Company. Upon compliance of the Holder with the
provisions hereof, the Company shall immediately transfer the number of Warrants
specified in the assignment form on the books of the Company and shall execute
and deliver a new warrant or warrants of like tenor to the appropriate
assignee(s) expressly evidencing the right to purchase the number of Warrant
Shares purchasable hereunder or such portion of such number as shall be
contemplated by such assignment.
3.2 Restrictions Imposed by the Act. The Holder by accepting this Warrant
confirms that the Warrant was acquired by the Holder solely for investment and
with no present intention to distribute the Warrant or the Warrant Shares
issuable upon the exercise hereof and that the Holder will dispose of such
Warrant and Warrant Shares only in compliance with applicable Federal and state
securities laws. This Warrant and the Warrant Shares purchased upon exercise of
this Warrant shall not be
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transferred unless and until (i) the Company has received an opinion of counsel
for the Holder that this Warrant and/or such Warrant Shares may be sold pursuant
to an exemption from registration under the Securities Act of 1933, as amended
(the "Act"), the availability of which is established to the reasonable
satisfaction of the Company, or (ii) a registration statement relating to the
Warrant and/or the Warrant Shares issuable upon the exercise hereof has been
filed by the Company and declared effective by the Securities and Exchange
Commission (the "Commission").
Each certificate for Warrant Shares purchased upon exercise of this Warrant
shall bear a legend as follows unless such securities have been registered under
the Act:
"THE SECURITIES WHICH ARE REPRESENTED BY THE CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND THEY MAY NOT BE OFFERED, SOLD, PLEDGED, HYPOTHECATED, ASSIGNED OR
TRANSFERRED EXCEPT (i) PURSUANT TO A REGISTRATION STATEMENT UNDER THE
SECURITIES ACT WHICH HAS BECOME EFFECTIVE AND IS CURRENT WITH RESPECT TO
THESE SECURITIES, OR (ii) PURSUANT TO A SPECIFIC EXEMPTION FROM REGISTRATION
UNDER THE SECURITIES ACT BUT ONLY UPON A HOLDER HEREOF FIRST HAVING OBTAINED
THE WRITTEN OPINION OF COUNSEL TO THE CORPORATION, OR THEIR COUNSEL
REASONABLY ACCEPTABLE TO THE CORPORATION, THAT THE PROPOSED DISPOSITION IS
CONSISTENT WITH ALL APPLICABLE PROVISIONS OF THE SECURITIES ACT AS WELL AS
ANY APPLICABLE "BLUE SKY" OR OTHER STATE SECURITIES LAW. COPIES OF THE
WARRANT COVERING SECURITIES AND RESTRICTING THEIR TRANSFER MAY BE OBTAINED AT
NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE
TO THE SECRETARY OF THE COMPANY AT THE PRINCIPAL EXECUTIVE OFFICES OF THE
COMPANY."
The Certificate may also include any legend required by applicable state
securities laws.
3.3 This Warrant and the Warrant Shares may not be sold or otherwise disposed
of except as follows:
(a) Subject to Section 3.1 as to the Warrants, to a person, who, in the
opinion of counsel reasonably satisfactory to the Company, is a person to
whom this Warrant or the underlying Warrant Shares may legally be transferred
without registration and without the delivery of a current prospectus under
the Act;
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(b) to any person in a transaction that, in the opinion of counsel
reasonably satisfactory to the Company, complies with the provisions of Rule
144 under the Act; or
(c) to any person upon delivery of a prospectus included in a then
effective registration statement under the Act relating to the sale or
disposition of the Warrant and/or the Warrant Shares.
4. New Warrants to be Issued.
4.1 Partial Exercise or Transfer. Subject to the restrictions in Section 3
hereof, this Warrant may be exercised or assigned in whole or in part. In the
event of the exercise or assignment hereof in part only, upon surrender of this
Warrant for cancellation, together with the duly executed exercise or assignment
form and funds sufficient to pay any required transfer tax, the Company shall
cause to be delivered to the Holder without charge a new warrant or new warrants
of like tenor in the name of the Holder evidencing the right to purchase, in the
aggregate, the remaining number of underlying Warrant Shares purchasable
hereunder after giving effect to any such partial exercise or assignment.
4.2 Lost Warrant. Upon receipt by the Company of evidence satisfactory to it
of the loss, theft, destruction or mutilation of this Warrant and of an
indemnification in favor of the Company, reasonably satisfactory to it, the
Company shall execute and deliver a new warrant of like tenor and date. Any such
new warrant executed and delivered as a result of such loss, theft, mutilation
or destruction shall constitute an additional contractual obligation on the part
of the Company.
5. Registration Rights Under the Securities Act of 1933.
5.1 "Piggy-Back" Registration.
5.1.1 Grant of Right. (a) The Holder of the Warrant shall have the right
for a period of three (3) years after the Effective Date, to include all of the
Warrant Shares underlying this Warrant but with respect to which this Warrant
has not been terminated (the "Registrable Securities") as part of any
registration of securities filed by the Company (other than in connection with a
transaction contemplated by Rule 145(a) promulgated under the Act or pursuant to
Form S-8 or Form S-4).
5.1.2 Terms. The Company shall bear all fees and expenses attendant to
registering the Registrable Securities, but the Holder shall pay any and all
underwriting commissions, the expenses of any legal counsel selected by the
Holder to represent it in connection with the sale of the Registrable Securities
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and applicable transfer taxes, if any. In the event of such a proposed
registration, the Company shall furnish the then Holder with not less than
thirty (30) days' written notice by registered mail prior to the proposed date
of filing of such registration statement. Such notice to the Holder shall
continue to be given for each registration statement filed by the Company until
such time as all of the Registrable Securities have been registered and sold.
The Holder of Registrable Securities shall exercise the "piggyback" rights
provided for herein by giving written notice, within ten (10) days after the
receipt of the Company's notice of its intention to file a registration
statement. The Company shall cause any registration statement filed pursuant to
the above "piggyback" rights (a "Registration Statement") to remain effective
for at least nine (9) months from the date that a Holder of Registrable
Securities is first given the opportunity to sell all of such securities.
5.2 General Terms.
5.2.1 Indemnification. (a) The Company shall indemnify the Holder of the
Registrable Securities to be sold pursuant to any Registration Statement
hereunder and each person, if any, who controls such Holder within the meaning
of Section 15 of the Act or Section 20(a) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), against all loss, claim, damage, expense
or liability (including all reasonable attorneys' fees and other expenses
reasonably incurred in investigating, preparing or defending against any claim
whatsoever) to which any of them may become subject under the Act, the Exchange
Act or otherwise, arising out of or based upon any untrue statement or alleged
untrue statement of a material fact contained in a Registration Statement or
related preliminary or final prospectus (the "Prospectus") (as from time to time
amended and supplemented) or the omission or alleged omission therefrom of a
material fact required to be stated therein or necessary to make the statements
therein not misleading, unless such statement or omission was made in reliance
upon and in conformity with written information furnished to the Company with
respect to such Holder by or on behalf of such Holder expressly for use in the
Registration Statement or Prospectus, or any amendment or supplement thereof, as
the case may be.
If any action is brought against any Holder or a controlling person in
respect of which indemnity may be sought against the Company pursuant to the
foregoing, such Holder shall promptly give notice to the Company of the
institution of such action and the Company shall assume the defense and control
of such action, including the employment of counsel and payment of reasonable
fees and expenses. The Holder or such controlling person shall have the right to
employ its own counsel in any such case, but the fees and expenses of such
counsel shall be at the expense of such Holder or such controlling person unless
the employment of such counsel shall have been authorized in writing by the
Company in connection with the defense of such action, or the Company shall not
have employed counsel to have charge of the defense of such action, or counsel
for such indemnified party or parties shall have reasonably concluded that there
may be defenses available to it or them which are different from or additional
to those available to the Company (in which case the Company shall not have the
right to direct the defense of such action on behalf of the indemnified party or
parties), in any of which events such fees and expenses shall be borne by the
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Company. It is understood, however, that the Company shall not, in connection
with any one action or separate but substantially similar or related actions
arising out of the same general allegations or circumstances, be liable for the
reasonable fees and expenses of more than one separate counsel for the Holders
and controlling persons, which firm shall be designated in writing by a majority
in interest of the Holders based upon the value of the Registrable Securities
included in the relevant Registration Statement. Anything in this paragraph to
the contrary notwithstanding, the Company shall not be liable for any settlement
of any such claim or action effected without its written consent. The Company
agrees promptly to notify the Holder of the commencement of any litigation or
proceedings against it or any of its officers or directors, in connection with
the Registration Statement or Prospectus, or any amendment or supplement
thereto. Each party entitled to indemnification hereunder shall give notice to
the Company promptly after such party has knowledge of any claim as to which
indemnity may be sought. With respect to any untrue statement or alleged untrue
statement made in, or omission or alleged omission from, any Prospectus, the
indemnity agreement contained in this Section 5.2.1 with respect to such
Prospectus shall not inure to the benefit of any Holder (or to the benefit of
any person controlling Holder) if the Prospectus (or the Prospectus as amended
or supplemented if the Company shall have made any amendments thereof or
supplement thereto which shall have been furnished to such Holder prior to the
time of confirmation of such sale) does not contain such statement, alleged
statement, omission or alleged omission, and a copy of such Prospectus shall not
have been sent or given to such person at or prior to the written confirmation
of such sale to such person.
(b) The Holder agrees to indemnify and hold harmless the Company, each of
the directors of the Company, each of the officers of the Company who shall have
signed a Registration Statement and each other person, if any, who controls the
Company within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act to the same extent as the foregoing indemnity from the Company to
the Holder but only as to each such Holder with respect to statements or
omissions, or alleged statements or omissions, if any, made in any Registration
Statement or Prospectus or any amendment or supplement thereto or any
application in reliance upon, and in conformity with, written information
furnished to the Company with respect to the Holder by or on behalf of such
Holder expressly for use in any Registration Statement or Prospectus or any
amendment or supplement thereto or in any application, as the case may be. The
Company shall give notice to each Holder entitled to indemnity hereunder
promptly after the Company has knowledge of any claim as to which indemnity may
be sought. In case any action shall be brought against the Company, or any
person so indemnified, based on any Registration Statement or Prospectus or any
amendment or supplement thereto or any application, and in respect of which
indemnity may be sought against any Holder, such Holder shall have the rights
and duties given to the Company, and the Company, and each other person so
indemnified shall have the rights and duties given to the Holder(s) by the
provisions of subsection (a) above.
5.2.2 Documents Delivered to Holder. Upon request, the Company shall
furnish (and, in the case of clause (ii) below, shall use its reasonable best
efforts to furnish) to each Holder participating in any of the foregoing
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offerings and to each underwriter of any such offering, if any, a signed
counterpart, addressed to such Holder or underwriter, of (i) an opinion of
counsel to the Company, dated the effective date of such Registration Statement
(and, if such registration includes an underwritten public offering, an opinion
dated the date of the closing under any underwriting agreement related thereto),
and (ii) a "cold comfort" letter dated the effective date of such Registration
Statement (and, if such registration includes an underwritten public offering, a
letter dated the date of closing under the underwriting agreement) signed by
independent public accountants who have issued a report on the Company's
financial statements included in such Registration Statement, in each case
covering substantially the same matters with respect to such Registration
Statement (and the Prospectus included therein) and, in the case of such
accountants' letter, with respect to events subsequent to the date of such
financial statements, as are customarily covered in opinions of issuer's counsel
and in accountants' letters delivered to underwriters in underwritten public
offerings of securities, with such changes or omissions therefrom as are
appropriate under the circumstances. The Company shall also deliver promptly to
each Holder participating in the offering requesting the correspondence and
memoranda described below and to the managing underwriter copies of all
correspondence between the Commission and the Company, its counsel or auditors
and all memoranda relating to discussions with the Commission or its staff with
respect to the Registration Statement and permit each Holder and underwriter to
do such investigation, upon reasonable advance notice, with respect to
information contained in or omitted from the Registration Statement as it deems
reasonably necessary to comply with applicable securities laws or rules of the
National Association of Securities Dealers, Inc. ("NASD"). Such investigation
shall include access to books, records and properties and opportunities to
discuss the business of the Company with its officers and independent auditors,
all to such reasonable extent and at such reasonable times and as often as any
such Holder shall reasonably request and all of which shall be subject to any
confidential restrictions as may be reasonably imposed by the Company. Following
the effective date of any such registration, the Company shall upon the request
of the Holder forthwith supply such a number of Prospectuses meeting the
requirements of the Act, as shall be reasonably requested to make a public
offering of the Registrable Securities from time to time offered or sold by such
Holder.
5.2.3 Underwriting Agreement. The Holder shall be a party to any
underwriting agreement relating to an underwritten sale of his Registrable
Securities and may, at its option, require that any or all of the covenants of
the Company to or for the benefit of the underwriters in such offerings shall
also be made to and for the benefit of such Holder. Such Holder shall not be
required to make any representations or warranties to or agreements with the
Company or the underwriters except as they may relate to such Holder, the
Registrable Securities and their intended methods of distribution. The Holder
may not participate in any underwritten registration provided for herein unless
such Holder (a) agrees to sell his Registrable Securities being registered on
the basis provided in any underwriting arrangements approved by the Company or
selling security holder and (b) completes and executes all reasonable and
customary indemnities, questionnaires, powers of attorney, underwriting
agreements and other documents reasonably required under the terns of such
underwriting arrangements contemplated hereby.
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5.2.4 Cooperation by Holder. The Company by written notice may require
the Holder to promptly furnish in writing to the Company such information
regarding the Holder and his distribution of the Registrable Securities as it
may from time to time reasonably request and such other information as may be
reasonably required or advisable in connection with such registration. The
Company shall have the right to exclude from any offering the Registrable
Securities of the Holder if he does not comply with the provisions of the
immediately preceding sentence. The Holder agrees that upon receipt of any
notice from the Company of the happening of any event which makes any statement
in a Registration Statement or Prospectus (including supplements and amendments)
or any document incorporated or deemed to be incorporated therein by reference
untrue in any material respect or that requires the making of any changes in
such Registration Statement, prospectus or documents so that, in the case of the
Registration Statement it will not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, the Holder will forthwith discontinue
disposition of Registrable Securities pursuant to the Registration Statement
covering such Registrable Securities until the Holder's receipt of the copies of
a supplemented or amended Prospectus and, if so directed by the Company, the
Holder will deliver to the Company all copies, other than permanent file copies,
then in the Holder's possession, of the most recent prospectus covering such
Registrable Securities at the time of receipt of such notice.
6. Adjustments to Exercise Prices and Number of Securities.
6.1 Computation of Adjusted Exercise Prices. For purposes of this Warrant,
the term "Common Stock" shall include each class of common stock of the Company.
Except as hereinafter provided, in case the Company shall at any time after the
date hereof issue or sell any shares of Common Stock (other than the issuances
or sales referred to in Section 6.8 hereof), including shares held in the
Company's treasury and shares of Common Stock issued upon the exercise of any
options, rights or warrants to subscribe for shares of Common Stock and shares
of Common Stock issued upon the direct or indirect conversion or exchange of
securities for shares of Common Stock, for a consideration per share less than
the Exercise Price in effect immediately prior to the issuance or sale of such
shares, or without consideration, then forthwith upon such issuance or sale,
such Exercise Price shall (until another such issuance or sale) be reduced to
the price (calculated to the nearest full cent) equal to the quotient derived by
dividing (i) an amount equal to the sum of (x) the number of shares of Common
Stock outstanding immediately prior to such issuance or sale multiplied by such
Exercise Price in effect immediately prior to such issuance or sale, plus (y)
the aggregate of the amount of all consideration, if any, received by the
Company upon such issuance or sale, by (ii) the number of shares of Common Stock
outstanding immediately after such issuance or sale; provided, however, that in
no event shall any Exercise Price be adjusted pursuant to this computation to an
amount in excess of such Exercise Price in effect immediately prior to such
computation, (except in the case of a combination of outstanding shares of
Common Stock, as provided by Section 6.4 hereof.)
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6.2 General Rules for Computation of Adjustments. For the purposes of any
computation to be made in accordance with Section 6.1, the following provisions
shall be applicable:
6.2.1 Cash Compensation. In the case of the issuance or sale of shares
of Common Stock for a consideration part or all of which shall be cash, the
amount of the cash consideration therefor shall be deemed to be the amount of
cash received by the Company for such shares (or, if shares of Common Stock are
offered by the Company for subscription, the subscription price, or if such
securities shall be sold to underwriters or dealers for public offering without
a subscription offering, the initial public offering price), before deducting
therefrom any compensation paid or discount allowed in the sale, underwriting or
purchase thereof by underwriters or dealers or dealers or others performing
similar services, or any expenses incurred in connection therewith.
6.2.2 Other Than Cash Consideration. In case of the issuance or sale
(otherwise than as a dividend or other distribution on any stock of the Company)
of shares of Common Stock for a consideration part or all of which shall be
other than cash, the amount of the consideration therefor other than cash shall
be deemed to be the value of such consideration as determined in good faith by
the Board of Directors of the Company.
6.2.3 Share Dividends. Shares of Common Stock issuable by way of
dividend or other distribution on any stock of the Company shall be deemed to
have been issued immediately after the opening of business on the day following
the record date for the determination of stockholders entitled to receive such
dividend or other distribution and shall be deemed to have been issued without
consideration.
6.2.4 Reclassification. The reclassification of securities of the
Company other than shares of Common Stock into securities including shares of
Common Stock shall be deemed to involve the issuance of such shares of Common
Stock for a consideration other than cash immediately prior to the close of
business on the date fixed for the determination of security holders entitled to
receive such shares, and the value of the consideration allocable to such shares
of Common Stock shall be determined as provided in Section 6.2.2.
6.2.5 Outstanding Shares. The number of shares of Common Stock at any
one time outstanding shall include the aggregate number of shares issued or
issuable (subject to readjustment upon the actual issuance thereof) upon the
exercise of any and all outstanding options, rights, warrants to purchase shares
of Common Stock and upon the conversion or exchange of any and all outstanding
securities convertible or exchangeable into shares of Common Stock.
6.3 Options, Rights, Warrants and Convertible and Exchangeable Securities.
In case the Company shall at any time after the date hereof issue options,
rights or warrants to subscribe for shares of Common Stock, or issue any
securities
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convertible into or exchangeable for shares of Common Stock, for a consideration
per share less than the lowest Exercise Price in effect immediately prior to the
issuance of such options, rights or warrants, or such convertible or
exchangeable securities, or without consideration, each Exercise Price in effect
immediately prior to the issuance of such options, rights or warrants, or such
convertible or exchangeable securities, as the case may be, shall be reduced to
a price determined by making a computation in accordance with the provisions of
Section 6.1 hereof, provided that:
(i) The aggregate maximum number of shares of Common Stock issuable
under such options, rights or warrants shall be deemed to be issued and
outstanding at the time such options, rights or warrants were issued, and for a
consideration equal to the minimum purchase price per share provided for in such
options, rights or warrants at the time of issuance, plus the consideration, if
any, received by the Company for the issuance of such options, rights or
warrants;
(ii) The aggregate maximum number of shares of Common Stock issuable
upon conversion or exchange of any convertible or exchangeable securities shall
be deemed to be issued and outstanding at the time of issuance of such
securities, and for a consideration equal to the consideration received by the
Company for the issuance of such securities, plus the minimum consideration, if
any, receivable by the Company upon the conversion or exchange thereof; and
(iii) If any change shall occur in the exercise price per share provided
for in any of the options, rights or warrants referred to in clause (i) of
Section 6.3, or in the price per share at which the securities referred to in
clause (ii) of Section 6.3 are convertible or exchangeable, such options, rights
or warrants or conversion or exchange rights, as the case may be, shall be
deemed to have expired or terminated on the date when such price change became
effective in respect of shares not theretofore issued pursuant to the exercise
or conversion or exchange thereof, and the Company shall be deemed to have
issued upon such date new options, rights or warrants or convertible or
exchangeable securities at the new price in respect of the number of shares
issuable upon the exercise of such options, rights or warrants or the conversion
or exchange of such convertible or exchangeable securities.
6.4 Subdivision and Combination. In case the Company shall at any time
subdivide or combine the outstanding shares of Common Stock, the Exercise Prices
shall forthwith be proportionately decreased in the case of subdivision or
increased in the case of combination.
6.5 Adjustment in Number of Shares. Upon each adjustment of any Exercise
Price pursuant to the provisions of this Section 6, the number of shares of
Common Stock issuable upon the exercise of this Warrant at such Exercise Price
shall be adjusted to the nearest full number obtained by multiplying such
Exercise Price in effect immediately prior to such adjustment by the number of
shares of Common Stock issuable upon exercise of this Warrant at such Exercise
Price immediately prior to such adjustment and dividing the product so obtained
by the adjusted Exercise Price.
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6.6 Recapitalization. For the purpose of this Warrant, the term "Common
Stock" shall also mean any other class of stock resulting from successive
changes or reclassifications of Common Stock consisting solely of changes in par
value, or from par value to no par value, or from no par value to par value.
6.7 Merger or Consolidation. In case of any consolidation of the Company
with, or merger of the Company with, or merger of the Company into, another
corporation (other than a consolidation or merger which does not result in any
reclassification or change of the outstanding Common Stock), the corporation
formed by such consolidation or merger shall execute and deliver to the Holder a
supplemental warrant providing that the holder of each warrant then outstanding
or to be outstanding shall have the right thereafter (until the stated
expiration of such warrant) to receive, upon exercise of such warrant, the kind
and amount of shares of stock and other securities and property receivable upon
such consolidation or merger, by a holder of the number of shares of Common
Stock of the Company for which such warrants might have been exercised
immediately prior to such consolidation, merger, sale or transfer. Such
supplemental warrant shall provide for adjustments which shall be identical to
the adjustments provided in Section 6. The above provision of this Section shall
similarly apply to successive consolidations or mergers.
6.8 No Adjustment of Exercise Prices in Certain Cases. No adjustment of the
Exercise Prices shall be made:
(i) Upon the issuance or sale of the shares of Common Stock issuable
upon the exercise of (i) this Warrant, (ii) options granted under any stock
option plan or (iii) options granted to officers and directors of the Company;
or
(ii) If the amount of said adjustment shall be less than two cents
($.02) per share of Common Stock, provided, however, that in such case, any
adjustment that would otherwise be required then to be made shall be carried
forward and shall be made at the time of and together with the next subsequent
adjustment which, together with any adjustment so carried forward, shall amount
to at least two cents ($.02) per share of Common Stock.
6.9 Redemption of Warrants. This Warrant cannot be redeemed by the Company
without the prior written consent of the Holder.
6.10 Dividends and Other Distributions. In the event that the Company shall
at any time prior to the exercise in full of this Warrant declare a dividend
(other than a dividend consisting solely of shares of Common Stock) or otherwise
distribute to its stockholders any assets, property, rights, evidences of
indebtedness, securities (other than shares of Common Stock), whether issued by
the Company or by another, or any other thing of value, the Holder of this
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Warrant shall thereafter be entitled, in addition to the shares of Common Stock
or other securities and property receivable upon the exercise thereof, to
receive, upon the exercise of such Warrant, the same property, assets, rights,
evidences of indebtedness, securities or any other thing of value that it would
have been entitled to receive at the time of such dividend or distribution as if
the Warrant had been exercised immediately prior to such dividend or
distribution. At the time of any such dividend or distribution, the Company
shall make appropriate reserves to ensure the timely performance of the
provisions of this Section 6.10.
6.11 Elimination of Fractional Interests. The Company shall not be required
to issue certificates representing fractions of shares of Common Stock upon the
exercise of the Warrant, nor shall it be required to issue scrip or pay cash in
lieu of any fractional interests, it being the intent of the parties that all
fractional interests shall be eliminated by rounding any fraction up to the
nearest whole number of shares of Common Stock or other securities, properties
or rights as shall be issuable upon the exercise thereof.
7. Reservation and Listing. The Company shall at all times reserve and keep
available out of its authorized shares of Common Stock, solely for the purpose
of issuance upon exercise of the Warrant, such number of shares of Common Stock
or other securities, properties or rights as shall be issuable upon the exercise
thereof. The Company covenants and agrees that, upon exercise of the Warrant and
payment of the applicable Exercise Price therefor, all shares of Common Stock
and other securities issuable, properties and rights upon such exercise shall be
duly and validly issued, fully paid and nonassessable and not subject to
preemptive rights of any stockholder. The Company further covenants and agrees
that upon exercise of this Warrant and payment of the applicable Exercise Price
therefor, all shares of Common Stock and other securities issuable upon such
exercises shall be duly and validly issued, fully paid and nonassessable and not
subject to preemptive rights of any stockholder. As long as this Warrant shall
be outstanding, the Company shall use its best efforts to cause all shares of
Common Stock issuable upon exercise of the Warrant to be listed (subject to
official notice of issuance) on all securities exchanges (or, if applicable on
NASDAQ) on which the Common Stock may then be listed and/or quoted.
8. Certain Notice Requirements.
8.1 Holder's Right to Receive Notice. Nothing herein shall be construed as
conferring upon the Holder the right to vote or consent or to receive notice as
a stockholder for the election of directors or any other matter, or as having
any rights whatsoever as a stockholder of the Company (including the right to
receive dividends). If, however, at any time prior to the expiration of the
Warrant and its exercise, any of the events described in Section 8.2 shall
occur, then, in one or more of said events, the Company shall give written
notice of such event at least fifteen (15) days prior to the date fixed as a
record date or the date of closing the transfer books for the determination of
the stockholders entitled to such dividend, distribution, conversion or exchange
of securities or subscription rights, or entitled to vote on such proposed
dissolution, liquidation, winding up or sale. Such notice shall specify such
record date or the date of the closing of the transfer books, as the case may
be.
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8.2 Events Requiring Notice. The Company shall be required to give the notice
described in this Section 8 upon one or more of the following events: (i) if the
Company shall take a record of the holders of its shares of Common Stock for the
purpose of entitling them to receive a dividend or distribution payable
otherwise than in cash, or a cash dividend or distribution payable otherwise
than out of retained earnings, as indicated by the accounting treatment of such
dividend or distribution on the books of the Company, or (ii) the Company shall
offer to all the holders of its Common Stock any additional shares of capital
stock of the Company or securities convertible into or exchangeable for shares
of capital stock of the Company, or any option, right or warrant to subscribe
therefor, or (iii) a dissolution, liquidation or winding up of the Company
(other than in connection with a consolidation or merger) or a sale of all or
substantially all of its property, assets and business shall be proposed.
8.3 Notice of Change in Exercise Prices. The Company shall, promptly after an
event requiring a change in the Exercise Prices pursuant to Section 6 hereof,
send notice to the Holder of such event and change (the "Price Notice"). The
Price Notice shall describe the event causing the change and the method of
calculating same and shall be certified as being true and accurate by the
Company's Chief Executive Officer and Chief Financial Officer.
8.4 Transmittal of Notices. All notices, requests, consents and other
communications under this Warrant shall be in writing and shall be deemed to
have been duly given or made when hand delivered, or when delivered by
telecopier or by responsible overnight courier:
(i) If to the registered Holder of this Warrant, to:
(ii) if to the Company, to:
Integrated Healthcare Systems, Inc.
12007 Sunrise Valley Drive
Reston, Virginia 20191
Attention: Michael J. Black, Chairman and
Chief Executive Officer
[Telecopier No. (703) 716-0592]
Either of the Holder or the Company may change the foregoing address by notice
given pursuant to this Section 8.4.
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9. Miscellaneous.
9.1 Amendments. The Company and the Holder may from time to time supplement
or amend this Warrant in order to cure any ambiguity, to correct or supplement
any provision contained herein which may be defective or inconsistent with any
other provisions herein, or to make any other provisions in regard to matters or
questions arising hereunder which the Company and the Bank may deem necessary or
desirable and which the Company and the Bank deem shall not adversely affect the
interest of the Holder. All other modifications or amendments shall require the
written consent of the party against whom enforcement of the modification or
amendment is sought.
9.2 Headings. The headings contained herein are for the sole purpose of
convenience of reference, and shall not in any way limit or affect the meaning
or interpretation of any of the terms or provisions of this Warrant.
9.3 Entire Agreement. This Warrant (together with the other agreements and
documents being delivered pursuant to or in connection with this Warrant)
constitute the entire agreement of the parties hereto with respect to the
subject matter hereof, and supersede all prior agreements and understandings of
the parties, oral and written, with respect to the subject matter hereof.
9.4 Binding Effect. This Warrant shall inure solely to the benefit of and
shall be binding upon, the Holder and the Company and their permitted assignees,
respective successors, legal representatives and assigns, and no other person
shall have or be construed to have any legal or equitable right, remedy or claim
under or in respect of or by virtue of this Warrant or any provisions herein
contained.
9.5 Governing Law. This Warrant shall be governed by and construed and
enforced in accordance with the laws of the State of Delaware, without giving
effect to conflict of laws.
9.6 Waiver, Etc. The failure of the Company or the Holder to at any time
enforce any of the provisions of this Warrant shall not be deemed or construed
to be a waiver of any such provision, nor to in any way affect the validity of
this Warrant or any provision hereof or the right of the Company or any Holder
to thereafter enforce each and every provision of this Warrant. No waiver of any
breach, noncompliance or nonfulfillment of any of the provisions of this Warrant
shall be effective unless set forth in a written instrument executed by the
party or parties against whom or which enforcement of such waiver is sought; and
no waiver of any such breach, noncompliance or nonfulfillment shall be construed
or deemed to be a waiver of any other or subsequent breach, noncompliance or
nonfulfillment.
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IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its
duly authorized officer as of the 3rd day of March, 1998.
INTEGRATED HEALTHCARE SYSTEMS, INC.
By:________________________________________
Name: Michael J. Black
Title: Chairman and Chief Executive Officer
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Exhibit A
Form to be used to exercise Warrant:
Integrated Healthcare Systems, Inc.
12007 Sunrise Valley Drive
Reston, Virginia 20191
Attention: Chief Executive Officer
Date: ________________
The Undersigned hereby elects irrevocably to exercise the within Warrant and
to purchase __________ shares of Common Stock of Integrated Healthcare Systems,
Inc. and hereby makes payment of $_____________ (at the rate of $______________
per share) in payment of the Exercise Price pursuant thereto. Please issue the
shares as to which this Warrant is exercised in accordance with the instructions
given below.
Signature
Signature Guaranteed
INSTRUCTIONS FOR REGISTRATION OF SECURITIES
Name
(Print in Block Letters)
Address
NOTICE: The signature to this form must correspond with the name as written
upon the face of the within Warrant in every particular without alteration or
enlargement or any change whatsoever, and must be guaranteed by a bank, other
than a savings bank, or by a trust company or by a firm having membership on a
registered national securities exchange.
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Exhibit B
Form to be used to assign Warrant:
ASSIGNMENT
(To be executed by the registered Holder to effect a transfer of the within
Warrant):
FOR VALUE RECEIVED, ________________________________ does hereby sell, assign
and transfer unto __________________________ the right to purchase shares of
Common Stock of Integrated Healthcare Systems, Inc. (the "Company") evidenced by
the within Warrant and does hereby authorize the Company to transfer such right
on the books of the Company.
Dated:__________________
Signature
Signature Guaranteed
NOTICE: The signature to this form must correspond with the name as written
upon the face of the within Warrant in every particular without alteration or
enlargement or any change whatsoever, and must be guaranteed by a bank, other
than a savings bank, or by a trust company or by a firm having membership on a
registered national securities exchange.
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THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), OR APPLICABLE STATE SECURITIES LAWS
(COLLECTIVELY, THE "LAWS"). THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND
MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF
EITHER (I) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE
LAWS, OR (II) AN OPINION OF COUNSEL PROVIDED TO THE ISSUER IN FORM, SUBSTANCE
AND SCOPE REASONABLY ACCEPTABLE TO THE ISSUER TO THE EFFECT THAT REGISTRATION IS
NOT REQUIRED UNDER THE LAWS DUE TO AN AVAILABLE EXCEPTION TO OR EXEMPTION FROM
THE REGISTRATION REQUIREMENTS OF THE LAWS.
INTEGRATED HEALTHCARE SYSTEMS, INC
EXECUTIVE MANAGEMENT WARRANT TO PURCHASE COMMON STOCK
EM Warrant No.__ Number of Shares: ______
Date of Issuance: as of ______ __, 199_
Integrated Healthcare Systems, Inc., a Delaware corporation (the
"Company"), hereby certifies that, for value received, __________________ and
permitted assigns, the registered Holder hereof ("Holder"), is entitled, subject
to the terms set forth below, to purchase from the Company upon surrender of
this Warrant, at any time after the date hereof, but not after 5:00 P.M.
_________ time on the Expiration Date (as defined herein) _________ fully paid
and nonassessable shares of Common Stock (as defined herein) of the Company
(each a "Warrant Share" and collectively the "Warrant Shares") at a purchase
price of U.S.______ per share (the "Exercise Price") in lawful money of the
United States. The number of Warrant Shares purchasable hereunder and the
Exercise Price are subject to adjustment as provided in Section 9 below.
Section 1.
(a) Definitions. The following words and terms used in this Warrant shall
have the following meanings:
"Common Stock" means (a) the Company's common stock and (b) any capital
stock into which such Common Stock shall have been changed or any capital stock
resulting from a reclassification of such Common Stock.
"Convertible Securities" mean any securities issued by the Company which
are convertible into or exchangeable for, directly or indirectly, shares of
Common Stock.
<PAGE>
"Expiration Date" means the date which is sixty (60) calendar months from
the date of this Warrant or, if such date falls on a Saturday, Sunday or other
day on which banks are required or authorized to be closed in the State of
Delaware (a "Holiday"), the next preceding date that is not a Holiday.
"Market Price" means the closing bid price on the day prior to the date
on which the Exercise Form is delivered to the Company, as quoted on the
[National Association of Securities Dealers' OTC Bulletin Board Market] or such
other national securities exchange or market on which the Common Stock may then
be listed.
"Securities Act" means the Securities Act of 1933, as amended.
"Transfer" shall include any disposition of this Warrant or any Warrant
Shares, or of any interest in either thereof which would constitute a sale
thereof within the meaning of the Securities Act or applicable state securities
laws.
"Warrant" shall mean this Warrant and all Warrants issued in exchange,
transfer or replacement of any thereof.
"Warrant Exercise Price" shall be U.S.$_____ per share.
(b) Other Definitional Provisions.
(i) Except as otherwise specified herein, all references herein (A) to
the Company shall be deemed to include the Company's successors; and (B) to any
applicable law defined or referred to herein, shall be deemed references to such
applicable law as the same may have been or may be amended or supplemented from
time to time.
(ii) When used in this Warrant, unless the otherwise specified in a
particular instance, the words "herein," "hereof," and "hereunder," and words of
similar import, shall refer to this Warrant as a whole and not to any provision
of this Warrant, and the words "Section," "Schedule," and "Exhibit" shall refer
to Sections of, and Schedules and Exhibits to, this Warrant unless otherwise
specified.
(iii) Whenever the context so requires the neuter gender includes the
masculine or feminine, and the singular number includes the plural, and vice
versa.
Section 2. Exercise of Warrant.
(a) Subject to the terms and conditions hereof, this Warrant may be
exercised by the Holder, as a whole or in part, at any time prior to 5:00 P.M.
Delaware Time on the Expiration Date. The rights represented by this Warrant may
be exercised by the Holder, as a whole or from time to time in part (except that
this Warrant shall not be exercisable as to a fractional share) by (i) delivery
of a written notice, in the form of the exercise form attached as Exhibit I
hereto (an "Exercise Form"), of the Holder's election to exercise this Warrant,
which notice shall specify the number of Warrant Shares to be purchased, (ii)
payment to the Company of an amount equal to the Warrant Exercise
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Price multiplied by the number of Warrant Shares as to which the Warrant is
being exercised (plus any applicable issue or transfer taxes) in immediately
available funds (either by wire transfer or a certified or cashier's check drawn
on a United States bank), for the number of Warrant Shares as to which this
Warrant shall have been exercised, and (iii) the surrender of this Warrant,
properly endorsed, at the principal office of the Company (or at such other
agency or office of the Company as the Company may designate by notice to the
Holder).
The Warrant Shares so purchased shall be deemed to be issued to the
Holder or Holder's designees, as the record owner of such Warrant Shares, as of
the date on which this Warrant shall have been surrendered, the completed
Exercise Agreement shall have been delivered, and payment shall have been made
for such Warrant Shares as set forth above.
In the event of any exercise of the rights represented by this Warrant
in compliance with this Section 2(a), a certificate or certificates for the
Warrant Shares so purchased, registered in the name of, or as directed by, the
Holder, shall be delivered to, or as directed by, the Holder within five (5)
business days after such rights shall have been so exercised.
(b) Unless this Warrant shall have expired or shall have been fully
exercised, the Company shall issue a new Warrant identical in all respects to
the Warrant exercised except (i) it shall represent rights to purchase the
number of Warrant Shares purchasable immediately prior to such exercise under
the Warrant exercised, less the number of Warrant Shares with respect to which
such Warrant is exercised, and (ii) the Holder thereof shall be deemed to have
become the Holder of record of such Warrant Shares immediately prior to the
close of business on the date on which the Warrant is surrendered and payment of
the amount due in respect of such exercise and any applicable taxes is made,
irrespective of the date of delivery of such share certificate, except that, if
the date of such surrender and payment is a date when the stock transfer books
of the Company are properly closed, such person shall be deemed to have become
the Holder of such Warrant Shares at the opening of business on the next
succeeding date on which the stock transfer books are open.
Section 3. Covenants as to Common Stock. The Company covenants and agrees
that all Warrant Shares which may be issued upon the exercise of the rights
represented by this Warrant will, upon issuance, be validly issued, fully paid
and nonassessable. The Company further covenants and agrees that during the
period within which the rights represented by this Warrant may be exercised, the
Company will at all times have authorized and reserved a sufficient number of
shares of Common Stock to provide for the exercise of the rights then
represented by this Warrant.
Section 4. Taxes. The Company shall not be required to pay any tax or
taxes attributable to the initial issuance of the Warrant Shares or any
permitted transfer involved in the issue or delivery of any certificates for
Warrant Shares in a name other than that of the registered Holder hereof or upon
any permitted transfer of this Warrant.
Section 5. Warrant Holder Not Deemed a StockHolder. No Holder, as such,
of this Warrant shall be entitled to vote or receive dividends or be deemed the
Holder of shares of the Company for any purpose, nor shall anything contained in
this Warrant be construed to confer upon the Holder hereof, as such, any of the
rights of a stockHolder of the Company or any right to vote, give or
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<PAGE>
withhold consent to any corporate action (whether any reorganization, issue of
stock, reclassification of stock, consolidation, merger, conveyance or
otherwise), receive notice of meetings, receive dividends or subscription
rights, or otherwise, prior to the issuance to the Holder of this Warrant of the
Warrant Shares which he or she is then entitled to receive upon the due exercise
of this Warrant. Notwithstanding the foregoing, the Company will provide the
Holder of this Warrant with copies of the same notices and other information
given to the stockHolders of the Company generally, contemporaneously with the
giving thereof to the stockHolders.
Section 6. No Limitation on Corporate Action. No provisions of this
Warrant and no right or option granted or conferred hereunder shall in any way
limit, affect or abridge the exercise by the Company of any of its corporate
rights or powers to recapitalize, amend its certificate or articles of
incorporation, reorganize, consolidate or merge with or into another
corporation, or to transfer all or any part of its property or assets, or the
exercise of any other of its corporate rights and powers.
Section 7. Representations of Holder. The Holder of this Warrant, by the
acceptance hereof, represents that it is acquiring this Warrant and the Warrant
Shares for its own account for investment and not with a view to, or for sale in
connection with, any distribution hereof or of any of the shares of Common Stock
or other securities issuable upon the exercise thereof, and not with any present
intention of distributing any of the same. Upon exercise of this Warrant, the
Holder shall, if requested by the Company, confirm in writing, in a form
satisfactory to the Company, that the Warrant Shares so purchased are being
acquired solely for the Holder's own account and not as a nominee for any other
party, for investment, and not with a view toward distribution or resale. If
such Holder cannot make such representations because they would be factually
incorrect, it shall be a condition to such Holder's exercise of the Warrant that
the Company receive such other representations as the Company considers
reasonably necessary to assure the Company that the issuance of its securities
upon exercise of the Warrant shall not violate any United States or state
securities laws.
Section 8. Transfer; Opinions of Counsel; Restrictive Legends and
Piggy-Back Registration Rights.
(a). The Holder of this Warrant understands that (i) this
Warrant and the Warrant Shares have not been and are not being registered under
the Securities Act or any state securities laws and may not be offered for sale,
sold, assigned or transferred unless (a) subsequently registered thereunder, or
(b) pursuant to an exemption from such registration; (ii) any sale of such
securities made in reliance on Rule 144 promulgated under the Securities Act may
be made only in accordance with the terms of said Rule and further, if said Rule
is not applicable, any resale of such securities under circumstances in which
the seller (or the person through whom the sale is made) may be deemed to be an
underwriter (as that term is defined in the Securities Act) may require
compliance with some other exemption under the Securities Act or the rules and
regulations of the Securities and Exchange Commission thereunder; and (iii)
neither the Company nor any other person is under any obligation to register
such securities under the Securities Act or any state securities laws or to
comply with the terms and conditions of any exemption thereunder.
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(b)(i). The Holder of this Class A Warrant shall have
the right for a period of five (5) years from the date this Warrant Certificate
defined below, to include all of the shares of Common Stock underlying this
Warrant (the "Registrable Securities") as part of any registration of securities
filed by the Company (other than in connection with a transaction contemplated
by Rule 145(a) promulgated under the Act or pursuant to Form S-8 or Form S-4);
provided, however, that if, in the written opinion of the Company's managing
underwriter or underwriters, if any, for such offering, the inclusion of the
Registrable Securities, when added to the securities being registered by the
Company or the selling shareHolder(s), will adversely affect the distribution of
the securities to be sold, the Company shall nevertheless register all or any
portion of the Registrable Securities required to be so registered, but such
Registrable Securities, at the option of the Company, shall not be sold by the
Holder(s) until 180 days after the registration statement for such offering has
become effective and provided further that, if any securities are registered for
sale on behalf of other Holders in such offering and such Holders have not
agreed to defer such sale until the expiration of such 180-day period, the
number of securities to be sold by all Holders in such public offering during
such 180-day period shall be apportioned pro rata among all such selling
Holders, including all Holders of the Registrable Securities, according to the
total amount of securities of the Company owned by said selling Holders,
including all Holders of the Registrable Securities.
(ii). The Company shall bear all fees and expenses
attendant to registering the Registrable Securities, but the Holder shall pay
any and all underwriting commissions, the expenses of any legal counsel selected
by the Holder to represent him in connection with the sale of the Registrable
Securities and applicable transfer taxes, if any. In the event of such a
proposed registration, the Company shall furnish the then Holder with not less
than twenty (20) days' written notice prior to the proposed date of filing of
such registration statement. Such notice to the Holder shall continue to be
given for each registration statement filed by the Company until such time as
all of the Registrable Securities have been registered and sold. The Holder of
Registrable Securities shall exercise the "piggyback" rights provided for herein
by giving written notice, within fifteen (15) days after the receipt of the
Company's notice of its intention to file a registration statement. The Company
shall cause any registration statement filed pursuant to the above "piggyback"
rights (a "Registration Statement") to remain effective for at least eight [(8)
months] from the date that a Holder of Registrable Securities is first given the
opportunity to sell all of such securities.
(iii). The Company shall indemnify the Holder of the
Registrable Securities to be sold pursuant to any Registration Statement
hereunder and each person, if any, who controls such Holder within the meaning
of Section 15 of the Act or Section 20(a) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), against all loss, claim, damage, expense
or liability (including all reasonable attorneys' fees and other expenses
reasonably incurred in investigating, preparing or defending against any claim
whatsoever) to which any of them may become subject under the Act, the Exchange
Act or otherwise, arising out of or based upon any untrue statement or alleged
untrue statement of a material fact contained in a Registration Statement or
related preliminary or final prospectus (the "Prospectus") (as from time to time
amended and supplemented) or the omission or alleged omission therefrom of a
material fact required to be stated therein or necessary to make the
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statements therein not misleading, unless such statement or omission was made in
reliance upon and in conformity with written information furnished to the
Company with respect to such Holder by or on behalf of such Holder expressly for
use in the Registration Statement or Prospectus, or any amendment or supplement
thereof, as the case may be.
If any action is brought against any Holder or a controlling
person in respect of which indemnity may be sought against the Company pursuant
to the foregoing, such Holder shall promptly give notice to the Company of the
institution of such action and the Company shall assume the defense and control
of such action, including the employment of counsel and payment of reasonable
fees and expenses. The Holder or such controlling person shall have the right to
employ its own counsel in any such case, but the fees and expenses of such
counsel shall be at the expense of such Holder or such controlling person unless
the employment of such counsel shall have been authorized in writing by the
Company in connection with the defense of such action, or the Company shall not
have employed counsel to have charge of the defense of such action, or counsel
for such indemnified party or parties shall have reasonably concluded that there
may be defenses available to it or them which are different from or additional
to those available to the Company (in which case the Company shall not have the
right to direct the defense of such action on behalf of the indemnified party or
parties), in any of which events such fees and expenses shall be borne by the
Company. It is understood, however, that the Company shall not, in connection
with any one action or separate but substantially similar or related actions
arising out of the same general allegations or circumstances, be liable for the
reasonable fees and expenses of more than one separate counsel for the Holders
and controlling persons, which firm shall be designated in writing by a majority
in interest of the Holders based upon the value of the Registrable Securities
included in the relevant Registration Statement. Anything in this paragraph to
the contrary notwithstanding, the Company shall not be liable for any settlement
of any such claim or action effected without its written consent. The Company
agrees promptly to notify the Holder of the commencement of any litigation or
proceedings against him or any of his officers or directors, in connection with
the Registration Statement or Prospectus, or any amendment or supplement
thereto. Each party entitled to indemnification hereunder shall give notice to
the Company promptly after such party has knowledge of any claim as to which
indemnity may be sought. With respect to any untrue statement or alleged untrue
statement made in, or omission or alleged omission from, any Prospectus, the
indemnity agreement contained in this Section 8(iii) with respect to such
Prospectus shall not inure to the benefit of any Holder (or to the benefit of
any person controlling Holder) if the Prospectus (or the Prospectus as amended
or supplemented if the Company shall have made any amendments thereof or
supplement thereto which shall have been furnished to such Holder prior to the
time of confirmation of such sale) does not contain such statement, alleged
statement, omission or alleged omission, and a copy of such Prospectus shall not
have been sent or given to such person at or prior to the written confirmation
of such sale to such person.
(b). The Holder agrees to indemnify and hold harmless the
Company, each of the directors of the Company, each of the officers of the
Company who shall have signed a Registration Statement and each other person, if
any, who controls the Company within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act to the same extent as the foregoing indemnity
from the Company to the Holder but only as to each such Holder with respect to
statements or omissions, or alleged statements or omissions, if any, made in any
6
<PAGE>
Registration Statement or Prospectus or any amendment or supplement thereto or
any application in reliance upon, and in conformity with, written information
furnished to the Company with respect to the Holder by or on behalf of such
Holder expressly for use in any Registration Statement or Prospectus or any
amendment or supplement thereto or in any application, as the case may be. The
Company shall give notice to each Holder entitled to indemnity hereunder
promptly after the Company has knowledge of any claim as to which indemnity may
be sought. In case any action shall be brought against the Company, or any
person so indemnified, based on any Registration Statement or Prospectus or any
amendment or supplement thereto or any application, and in respect of which
indemnity may be sought against any Holder, such Holder shall have the rights
and duties given to the Company, and the Company, and each other person so
indemnified shall have the rights and duties given to the Holder(s) by the
provisions of subsection (a) above.
(iv). Upon request, the Company shall furnish (and, in the
case of clause (ii) below, shall use its reasonable best efforts to furnish) to
each Holder participating in any of the foregoing offerings and to each
underwriter of any such offering, if any, a signed counterpart, addressed to
such Holder or underwriter, of (1) an opinion of counsel to the Company, dated
the effective date of such Registration Statement (and, if such registration
includes an underwritten public offering, an opinion dated the date of the
closing under any underwriting agreement related thereto), and (2) a "cold
comfort" letter dated the effective date of such Registration Statement (and, if
such registration includes an underwritten public offering, a letter dated the
date of closing under the underwriting agreement) signed by independent public
accountants who have issued a report on the Company's financial statements
included in such Registration Statement, in each case covering substantially the
same matters with respect to such Registration Statement (and the Prospectus
included therein) and, in the case of such accountants' letter, with respect to
events subsequent to the date of such financial statements, as are customarily
covered in opinions of issuer's counsel and in accountants' letters delivered to
underwriters in underwritten public offerings of securities, with such changes
or omissions therefrom as are appropriate under the circumstances. The Company
shall also deliver promptly to each Holder participating in the offering
requesting the correspondence and memoranda described below and to the managing
underwriter copies of all correspondence between the Commission and the Company,
its counsel or auditors and all memoranda relating to discussions with the
Commission or its staff with respect to the Registration Statement and permit
each Holder and underwriter to do such investigation, upon reasonable advance
notice, with respect to information contained in or omitted from the
Registration Statement as it deems reasonably necessary to comply with
applicable securities laws or rules of the National Association of Securities
Dealers, Inc. ("NASD"). Such investigation shall include access to books,
records and properties and opportunities to discuss the business of the Company
with its officers and independent auditors, all to such reasonable extent and at
such reasonable times and as often as any such Holder shall reasonably request
and all of which shall be subject to any confidential restrictions as may be
reasonably imposed by the Company. Following the effective date of any such
registration, the Company shall upon the request of the Holder forthwith supply
such a number of Prospectuses meeting the requirements of the Act, as shall be
reasonably requested to make a public offering of the Registrable Securities
from time to time offered or sold by such Holder.
7
<PAGE>
(v). The Holder shall be a party to any underwriting agreement
relating to an underwritten sale of his Registrable Securities and may, at his
option, require that any or all of the covenants of the Company to or for the
benefit of the underwriters in such offerings shall also be made to and for the
benefit of such Holder. Such Holder shall not be required to make any
representations or warranties to or agreements with the Company or the
underwriters except as they may relate to such Holder, the Registrable
Securities and their intended methods of distribution. The Holder may not
participate in any underwritten registration provided for herein unless such
Holder (x) agrees to sell his Registrable Securities being registered on the
basis provided in any underwriting arrangements approved by the Company or
selling securityHolder and (y) completes and executes all reasonable and
customary indemnities, questionnaires, powers of attorney, underwriting
agreements and other documents reasonably required under the terns of such
underwriting arrangements contemplated hereby.
(vi). The Company by written notice may require the Holder to
promptly furnish in writing to the Company such information regarding the Holder
and his distribution of the Registrable Securities as it may from time to time
reasonably request and such other information as may be reasonably required or
advisable in connection with such registration. The Company shall have the right
to exclude from any offering the Registrable Securities of the Holder if he does
not comply with the provisions of the immediately preceding sentence. The Holder
agrees that upon receipt of any notice from the Company of the happening of any
event which makes any statement in a Registration Statement or Prospectus
(including supplements and amendments) or any document incorporated or deemed to
be incorporated therein by reference untrue in any material respect or that
requires the making of any changes in such Registration Statement, prospectus or
documents so that, in the case of the Registration Statement it will not contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, the
Holder will forthwith discontinue disposition of Registrable Securities pursuant
to the Registration Statement covering such Registrable Securities until the
Holder's receipt of the copies of a supplemented or amended Prospectus and, if
so directed by the Company, the Holder will deliver to the Company all copies,
other than permanent file copies, then in the Holder's possession, of the most
recent prospectus covering such Registrable Securities at the time of receipt of
such notice.
Section 9. Adjustments.
(a) In case of any reclassification, capital reorganization or
other change of outstanding shares of the Common Stock, or in case of any
consolidation or merger of the Company with or into another corporation (other
than a consolidation or merger in which the Company is the continuing
corporation and which does not result in any reclassification, capital
reorganization or other change of outstanding shares of Common Stock), the
Company shall cause effective provision to be made so that the Holder shall have
the right thereafter, by exercising this Warrant, to purchase the kind and
number of shares of stock or other securities or property (including cash)
receivable upon such reclassification, capital reorganization or other change,
consolidation or merger by a Holder of the number of shares of Common Stock that
could have been purchased upon exercise of the Warrant immediately prior to such
reclassification, capital
8
<PAGE>
reorganization or other change, consolidation or merger. Any such provision
shall include provision for adjustments that shall be as nearly equivalent as
may be practicable to the adjustments provided for in this Section 9. The
foregoing provisions shall similarly apply to successive reclassifications,
capital reorganizations and other changes of outstanding shares of Common Stock
and to successive consolidations or mergers. If the consideration received by
the Holders of Common Stock is other than cash, the value shall be as determined
by the Board of Directors of the Company acting in good faith.
(b) If and whenever the Company shall effect a stock dividend,
a stock split, a stock combination, or a reverse stock split of the Common
Stock, the number of Warrant Shares purchasable hereunder and the Warrant
Exercise Price shall be proportionately adjusted in the manner determined by the
Company's Board of Directors acting in good faith. The number of shares, as so
adjusted, shall be rounded down to the nearest whole number and the Warrant
Exercise Price shall be rounded to the nearest cent.
Section 10 Lost, Stolen, Mutilated or Destroyed Warrant. If this Warrant
Certificate is lost, stolen or destroyed, the Company shall, on receipt of an
indemnification undertaking reasonably satisfactory to the Company, issue a new
Warrant Certificates of like denomination and tenor as the Warrant Certificate
so lost, stolen or destroyed. In the event the holder hereof asserts such loss,
theft or destruction of this Warrant, the Company may require such holder to
post a bond issued by a surety reasonably satisfactory to the Company with
respect to the issuance of such new Warrant Certificate.
Section 11. Notice. Any notices required or permitted to be given under
the terms of this Warrant shall be sent by mail or delivered personally or by
courier and shall be effective five days after being placed in the mail, if
mailed, certified or registered, return receipt requested, or upon receipt, if
delivered personally or by courier or by facsimile, in each case properly
addressed to the party to receive the same. The addresses for such
communications shall be:
If to the Company: Integrated Healthcre Systems, Inc.
12030 Sunrise Valley Drive, Site 205
Reston, VA 20191
Telephone: (703 716-0100
Facsimile: (703) 716-0100
Attention: Michael J. Black
If to the Holder:
Section 12. Miscellaneous. This Warrant and any term hereof may be
changed, waived, discharged, or terminated only by an instrument in writing
signed by the party or Holder hereof
9
<PAGE>
against which enforcement of such change, waiver, discharge or termination is
sought. This Warrant shall be governed by and interpreted under the laws of the
State of Delaware. Headings are for convenience only and shall not affect the
meaning or construction of any of the provisions hereof. This Warrant shall be
binding upon the Company and its successors and assigns and shall inure to the
benefit of the Holder and its successors and assigns. The Holder may not assign
this Warrant except in accordance with applicable federal and state securities
laws. The Holder shall immediately notify the Company with respect to any
permitted assignment of this Warrant.
Section 13. Date. The date of this Warrant Certificate is ______ __,
199_. This Warrant, in all events, shall be wholly void and of no effect after
the close of business on the Expiration Date, except that notwithstanding any
other provisions hereof, the provisions of Section 8 shall continue in full
force and effect after such date as to any Warrant Shares or other securities
issued upon the exercise of this Warrant.
INTEGRATED HEALTHCARE, SYSTEMS, INC.
By:
--------------------------------------------
Name: Michael J. Black
Title: Chairman and Chief Executive Officer
10
<PAGE>
EXHIBIT I
TO
EXECUTIVE MANAGMENT WARRANT TO PURCHASE COMMON STOCK
EXERCISE FORM TO BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE
THIS WARRANT
INTEGRATED HEALTHCARE SYSTEMS, INC.
The undersigned hereby exercises the right to purchase the number of
Warrant Shares covered by the Warrant Certificate attached hereto as specified
below according to the conditions thereof and herewith makes payment of U.S. $
the aggregate Warrant Exercise Price of such Warrant Shares in full pursuant to
the terms and conditions of the Warrant.
(i) The undersigned agrees not to offer, sell, transfer or otherwise
dispose of any Common Stock obtained upon exercise of the Warrant, except under
circumstances that will not result in a violation of any federal or applicable
state securities laws.
(ii) The undersigned requests that the stock certificates for the Warrant
Shares be issued, and a Warrant representing any unexercised portion hereof be
issued, pursuant to the terms of the Warrant in the name of the Holder (or such
other person(s) indicated below) and delivered to the undersigned (or
designee(s)) at the address or addresses set forth below.
Dated: , 199_.
HOLDER:
------------------------------------------
signature
[Name of Business Entity]
------------------------------------------
By:
--------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
Address:
----------------------------------
----------------------------------
----------------------------------
Number of Warrant Shares
Being Purchased: ________________________
11
<PAGE>
================================================================================
VOID AFTER JUNE 11, 2004
CLASS A REDEEMABLE WARRANT CERTIFICATE
NUMBER H-QUOTIENT, INC. CLASS A WARRANTS
HQI-
This certifies that FOR VALUE RECEIVED
or registered assigns (the "Registered Holder") is the owner of the number of
Class A Redeemable Warrants ("Class A Warrants") specified above. Each Class A
Warrant initially entitles the Registered Holder to purchase, subject to the
terms and conditions set forth in this Certificate and the Warrant Agreement (as
hereinafter defined), one fully paid and nonassessable share of Common Stock,
$.0001 par value per share (a "Share") of H-Quotient, Inc., a Virginia
corporation (the "Company"), at any time until the Expiration Date (as
hereinafter defined), upon the presentation and surrender of this Warrant
Certificate with the Subscription Form on the reverse hereof duly executed, at
the corporate office of Continental Stock Transfer & Trust Company, 2 Broadway
Street, New York, New York 10004, as Warrant Agent, or its successor (the
"Warrant Agent"), accompanied by payment of five dollars ($5.00) (the "Purchase
Price") in lawful money of the United States of America in cash or by official
bank or certified check made payable to H-Quotient, Inc.
This Warrant Certificate and each Class A Warrant represented hereby are
issued pursuant to and are subject in all respects to the terms and conditions
set forth in the Warrant Agreement (the "Warrant Agreement"), dated June 14,
1999, by and between the Company and the Warrant Agent.
In the event of certain contingencies provided for in the Warrant
Agreement, the Purchase Price or the number of Shares subject to purchase upon
the exercise of each Class A Warrant represented hereby are subject to
modification or adjustment.
Each Class A Warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional Shares will be issued. In the case of the
exercise of less than all the Class A Warrants represented hereby, the Company
shall cancel this Warrant Certificate upon the surrender hereof and shall
execute and deliver a new Warrant Certificate or Warrant Certificates of like
tenor, which the Warrant Agent shall countersign, for the balance of such
Warrants.
The term "Expiration Date" shall mean 5:00 P.M. (New York time) on June 11,
2004 or such earlier date as the Warrants shall be redeemed. If such date shall
in the State of New York be a holiday or a day on which the banks are authorized
to close, then the Expiration Date shall mean 5:00 P.M. (New York time) the next
following day which in the State of New York is not a holiday or a day on which
banks are authorized to close.
The Company shall not be obligated to deliver any securities pursuant to
the exercise of this Class A Warrant Certificate unless a registration statement
under the Securities Act of 1933, as amended, with respect to such securities is
effective. The Company has covenanted and agreed that it will file a
registration statement and will use its best efforts to cause the same to become
effective and to keep such registration statement current while any of the Class
A Warrants are outstanding. This Class A Warrant shall not be exercisable by a
Registered Holder in any state where such exercise would be unlawful.
This Warrant Certificate is exchangeable, upon the surrender hereof by the
Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Class A Warrants, each of such new Warrant Certificates to
represent such number of Class A Warrants as shall be designated by such
Registered Holder at the time of such surrender. Upon due presentment for
registration of transfer of this Warrant Certificate at such office, a new
Warrant Certificate or Warrant Certificates representing an equal aggregate
number of Class A Warrants will be issued to the transferee in exchange
therefor, subject to the limitations provided in the Warrant Agreement.
<PAGE>
Prior to the exercise of any Class A Warrant represented hereby, the
Registered Holder shall not be entitled to any rights of a stockholder of the
Company, including, without limitation, the right to vote or to receive
dividends or other distributions, and shall not be entitled to receive any
notice of any proceedings of the Company, except as provided in the Warrant
Agreement.
This Class A Warrant may be redeemed at the option of the Company at any
time at a redemption price of $.10 per Class A Warrant during the exercise
period hereof provided the market price (as defined in the Warrant Agreement)
for the Shares issuable upon exercise of such Class A Warrant shall equal or
exceed $6.00 for any five (5) trading days within a period of thirty consecutive
trading days prior to any such call for redemption. Notice of redemption shall
be given not later than the thirtieth day before the day fixed for redemption,
all as provided in the Warrant Agreement. On and after the date fixed for
redemption, the Registered Holder shall have not rights with respect to this
Class A Warrant except to receive the $0.10 per Class A Warrant upon surrender
of this Certificate.
Prior to due presentment for registration or transfer hereof, the Company
and the Warrant Agent may deem and treat the Registered Holder as the absolute
owner hereof and of each Class A Warrant represented hereby (notwithstanding any
notations of ownership or writing hereon made by anyone other than a duly
authorized officer of the Company or the Warrant Agent) for all purposes and
shall not be affected by any notice to the Contrary.
This Warrant Certificate shall be governed by and construed in accordance
with the laws of the State of Virginia.
This Warrant Certificate is not valid unless countersigned by the Warrant
Agent.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed, manually or in facsimile by two of its officers thereunto duly
authorized and a facsimile of its corporate seal to be imprinted hereon.
Dated:
H-QUOTIENT, INC.
By: [SEAL] H-QUOTIENT, INC.
CORPORATE
/s/ Alan W. Grofe /s/ xxxxxxxxxxxxx
---------------------- -------------------
SEAL
President Secretary
1999
VIRGINIA
*
COUNTERSIGNED:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
(JERSEY CITY, N.J.)
BY: AS WARRANT AGENT
AUTHORIZED OFFICER
================================================================================
<PAGE>
SUBSCRIPTION FORM
To Be Executed by the Registered Holder in Order to Exercise Class A Warrants
The undersigned Registered Holder hereby irrevocably elects to exercise
____________________ Class A Warrants represented by this Warrant Certificate,
and to purchase the securities issuable upon the exercise of such Class A
Warrants, and requests that certificates for such securities shall be issued in
the name of
----------------------------------------------------------------
----------------------------------------------------------------
----------------------------------------------------------------
[please print or type name and address]
----------------------------------------------------------------
[please insert social security or other identifying number]
and be delivered to
----------------------------------------------------------------
----------------------------------------------------------------
----------------------------------------------------------------
[please print or type name and address]
and if such number of Class A Warrants shall not be all the Class A Warrants
evidenced by this Warrant Certificate that a new Warrant Certificate for the
balance of such Class A Warrants be registered in the name of, and delivered to,
the Registered Holder at the address stated below.
The undersigned represents that the exercise of the within Class A Warrant
was solicited by a member of the National Association of Securities Dealers,
Inc. If not solicited by an NASD member, please write "unsolicited" in the space
below.
In full payment of the purchase price with respect to the Class A Warrants
exercised and transfer taxes, if any, the undersigned hereby tenders $
by official bank check or certified check payable in United States currency
to the order of "H-Quotient, Inc."
X
- -------------------------------------- --------------------------------------
(Name of NASD Member if other than Signature
Patterson Travis, Inc.)
Dated: X
-------------------------------- --------------------------------------
Signature
--------------------------------------
--------------------------------------
Address
--------------------------------------
Taxpayer Identification Number(s)
--------------------------------------
Signature(s) Guaranteed
<PAGE>
ASSIGNMENT
To Be Executed by the Registered Holder in Order to Assign Class A Warrants
FOR VALUE RECEIVED, hereby sells, assigns and transfers unto
--------------------
----------------------------------------------------------------
----------------------------------------------------------------
----------------------------------------------------------------
[please print or type name and address]
----------------------------------------------------------------
[please insert social security or other identifying number]
of the Class A Warrants represented by this Warrant Certificate, and hereby
irrevocably constitutes and appoints
Attorney
- --------------------------------------------------------------------
to transfer this Warrant Certificate on the books of the Company, with full
power of substitution in the premises.
Dated: X
---------------------------------- -----------------------------------
X
-----------------------------------
Signature(s) Guaranteed
-----------------------------------
THE SIGNATURE(S) TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO
THE NAME(S) AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERNATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND
MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION WHICH IS A PARTICIPANT
IN A SECURITIES TRANSFER ASSOCIATION RECOGNIZED PROGRAM WITH A BOND LIMIT OF
$500,000 OR MORE.
<PAGE>
================================================================================
H-QUOTIENT, INC.
AND
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
--------------
WARRANT AGREEMENT
(CLASS A REDEEMABLE COMMON STOCK PURCHASE WARRANTS)
Dated as of June 14, 1999
================================================================================
<PAGE>
WARRANT AGREEMENT, dated as of the 14th day of June, 1999, by
and between H-QUOTIENT, INC., a New York corporation (the "Company"), and
CONTINENTAL STOCK TRANSFER & TRUST COMPANY, a New York corporation.
WITNESSETH:
WHEREAS, the Company desires to provide for the issuance of
Class A Redeemable Warrants ("Class A Warrants"); and
WHEREAS, the Company desires Continental Stock Transfer &
Trust Company to act on behalf of the Company, and Continental Stock Transfer &
Trust Company is willing to so act, in connection with the issuance,
registration, and transfer of such Class A Warrants and the exercise of the said
Warrants.
NOW, THEREFORE, in consideration of the premises and the
mutual agreements hereinafter set forth and for the purpose of defining the
terms and provisions of the Class A Warrants and the respective rights and
obligations thereunder of the Company, and Continental Stock Transfer & Trust
Company, the parties hereto agree as follows:
SECTION 1. Definitions. As used herein, the following terms
shall have the following meanings, unless the context shall otherwise requires:
(a) "Common Stock" shall mean stock of the Company of any
class, whether now or hereafter authorized, which has the right to participate
in the voting and in the distribution of earnings and assets of the Company
without limit as to amount or percentage.
-2-
<PAGE>
(b) "Corporate Office" shall mean the office of the Warrant
Agent at which at any particular time its principal business in New York, New
York, shall be administered, which office is located on the date hereof at 2
Broadway, 19th Fl., New York, New York 10004.
(c) "Exercise Date" shall mean, subject to the provisions of
Section 5(b) hereof, as to any Class A Warrant, the date on which the Warrant
Agent shall have received both (i) the Class A Warrant Certificate representing
such Warrant, with the exercise form thereon duly executed by the Registered
Holder thereof or his attorney duly authorized in writing, and (ii) payment in
cash or by check made payable to the Company of the amount in lawful money of
the United States of America equal to the applicable Purchase Price in good
funds.
(d) "Initial Class A Warrant Exercise Date" shall mean
July 1, 1999.
(e) "Initial Class A Warrant Redemption Date" shall mean
September 30, 1999
(f) "Purchase Price" shall mean $5.00.
(g) "Registered Holder" shall mean the person in whose name
the Class A Warrants shall be registered on the books maintained by the Warrant
Agent pursuant to Section 6(b) hereof.
(h) "Subsidiary" or "Subsidiaries" shall mean any corporation
or corporations, as the case may be, of which stock having ordinary power to
elect a majority of the board of directors of such corporation or corporations
(regardless of whether or not at the time the stock of any other class, or
classes of such corporation shall have or may have voting power by reason of the
happening of any contingency) is at the time directly or indirectly owned by the
Company or by one or more Subsidiaries, or by, the Company and one or more
Subsidiaries.
-3-
<PAGE>
(i) "Transfer Agent" shall mean Continental Stock Transfer &
Trust Company, New York, New York, or its authorized successor.
(j) "Warrant Agent" shall mean Continental Stock Transfer &
Trust Company, New York, New York or its authorized successor.
(k) "Class A Warrant Certificate" shall mean a Class A Warrant
substantially in the form annexed hereto as Exhibit A.
(l) "Class A Warrant Expiration Date" shall mean, unless the
Class A Warrants are redeemed as provided in Section 9 hereof prior to such
date, 5:00 p.m. (New York time) on June 11, 2004 or, if such date shall in the
State of New York be a holiday or a day on which banks are authorized to close,
then 5:00 p.m. (New York time) on the next following day which in the State of
New York is not a holiday or a day on which banks are authorized to close,
subject to the Company's right, prior to the Class A Warrant Expiration Date to
extend such Class A Warrant Expiration Date on five (5) business days prior
written notice to the Registered Holders.
SECTION 2. CLASS A Warrants and Issuance of Class A Warrant
Certificates.
(a) Each Class A Warrant shall initially entitle the
Registered Holder of the Class A Warrant Certificate representing such Warrant
to purchase at the Purchase Price therefor from the Initial Warrant Exercise
Date until the Warrant Expiration Date one (1) share of Common Stock upon the
exercise thereof, subject to modification and adjustment as provided in Section
8 hereof.
-4-
<PAGE>
(b) Upon execution of this Agreement, Class A Warrants
Certificates representing, inter alia, up to ___________ Class A Warrants to
purchase up to an aggregate of __________ shares of Common Stock (subject to
modification and adjustment as provided in Section 8 hereof) shall be executed
by the Company and delivered to the Warrant Agent.
(c) From time to time, up to the Class A Warrant Expiration
Date, the Warrant Agent shall countersign said Class A Warrants in required
denominations of one or whole number multiples thereof to the person entitled
thereto in connection with any transfer or exchange permitted under this
Agreement. Except as provided in Section 7 hereof, no Class A Warrant
Certificates shall be issued except (i) Certificates initially issued hereunder,
(ii) Certificates issued upon any sale transfer or exchange of such Class A
Warrants (iii) Certificates issued in replacement of lost, stolen, destroyed or
Certificates pursuant to Section 7 hereof, and (iv) at the option of the
Company, Class A Warrant Certificates in such form as may be approved by its
Board of Directors, to reflect any adjustment or change in the number of shares
of Common Stock purchasable upon the exercise of the Class A Warrants made
pursuant to Section 8 hereof.
SECTION 3. Form and Execution of Class A Warrant Certificates.
(a) The Class A Warrant Certificates shall be substantially in
the form annexed hereto as Exhibit A (the provisions of which are hereby
incorporated herein) and may have such letters, numbers or other marks of
identification or designations and legends, summaries or endorsements printed,
lithographed or engraved thereon as the Company may deem appropriate and as are
not inconsistent with the provisions of this Agreement, or as may be required to
comply with any law or with any rule or regulation made pursuant thereto or with
any rule or regulation of any stock exchange on which the Series A Units may be
listed, or to conform to usage. The Class A Warrant Certificates shall be dated
the date of issuance thereof (whether upon initial issuance, transfer, exchange
or in lieu of mutilated, lost, stolen or destroyed Class A Warrant
Certificates).
-5-
<PAGE>
(b) Class A Warrant Certificates shall be executed on behalf
of the Company by its Chairman of the Board, President or any Vice President and
by its Treasurer or an Assistant Treasurer or its Secretary or an Assistant
Secretary, by manual signatures or by facsimile signatures printed thereon, and
shall have imprinted thereon a facsimile of the Company's seal. The Class A
Warrant Certificates shall be manually countersigned by the Warrant Agent and
shall not be valid for any purpose unless so countersigned. In case any officer
of the Company who shall have signed any of the Class A Warrant Certificates
shall cease to be such officer of the Company before the date of issuance
thereof or before countersignature by the Warrant Agent and issue and delivery
thereof, such Warrant Certificates, nevertheless, may be countersigned by the
Warrant Agent, issued and delivered with the same force and effect as though the
officer of the Company who signed such Class A Warrant Certificates had not
ceased to hold such office.
SECTION 4. Exercise.
(a) The Class A Warrants in denominations of one or whole
number multiples thereof may be exercised commencing at any time on or after the
Initial Warrant Exercise Date, but not after the Class A Warrant Expiration
Date, upon the terms and subject to the conditions set forth herein (including
the provisions set forth in Sections 5 and 9 hereof). A Class A Warrant shall be
deemed to have been exercised immediately prior to the close of business on the
Exercise Date, with the exercise form thereon duly executed by the Registered
Holder thereof or his attorney duly authorized in writing, together with payment
in cash or by check made payable to the Company of an amount in lawful money of
the United States of America equal to the applicable Purchase Price, have been
received in good funds by the Warrant Agent. The person entitled to receive the
securities deliverable upon such exercise shall be treated for all purposes as
the holder of such securities as of the close of business on the Exercise Date.
As soon as practicable, on or after the Exercise Date, the Warrant Agent, on
behalf of the Company, shall cause to be issued to the person, or persons
entitled to receive the same, a Common Stock certificate, or certificates, for
the shares of Common Stock deliverable upon such exercise, The Warrant Agent
shall deliver the same to the person, or persons entitled thereto. Upon the
exercise of any Class A Warrants, the Warrant Agent shall promptly notify the
Company in writing of such fact and of the number of securities delivered upon
such exercise, and subject to Section 4(b) hereof, shall cause all payments in
cash, or by check made payable to the order of the Company, in respect of the
Purchase Price to be deposited promptly in the Company's bank account, or
delivered to the Company.
-6-
<PAGE>
(b) The Company shall not be obligated to issue any fractional
share interests or fractional warrant interests upon the exercise of any Class A
Warrant, or Warrants, nor shall it be obligated to issue scrip or pay cash in
lieu of fractional interests. Any fraction equal to or greater than one-half
(1/2) shall be rounded up to the next full share or Class A Warrant, as the case
may be.
SECTION 5. Reservation of Shares, Listing; Payment of Taxes;
etc.
(a) The Company covenants that it will, at all times, reserve
and keep available out of its authorized Common Stock, solely for the purpose of
issuance upon the exercise of Class A Warrants, such number of shares of Common
Stock as shall then be issuable upon the exercise of all outstanding Class A
Warrants. The Company covenants that, upon exercise of the Class A Warrants and
payment of the Purchase Price for the shares of Common Stock underlying said
Warrants, all shares of Common Stock which shall be validly issued, fully paid,
non-assessable, free from all preemptive or similar rights, and free from all
taxes, liens and charges with respect to the issuance thereof, and that upon
issuance such shares shall be listed or quoted on each securities exchange, if
any, on which the other shares of outstanding Common Stock of the Company are
then listed or quoted.
(b) The Company covenants that if any securities reserved for
the purpose of exercise of Class A Warrants hereunder require registration with,
or approval of any governmental authority under any federal securities law
before such securities may be validly issued or delivered upon such exercise,
then the Company will file a registration statement under the federal securities
laws or a post-effective amendment to a registration statement, use its best
efforts to cause the same to become effective, keep such registration statement
current while any of the Class A Warrants are outstanding and deliver a
prospectus which complies with Section 10(a)(3) of the Securities Act of 1933,
as amended (the "1933 Act"), to the Registered Holder exercising the Class A
Warrant (except, if in the opinion of counsel to the Company, such registration
is not required under the federal securities law or if the Company receive a
letter from the staff of the Securities and Exchange Commission (the
"Commission") stating that it would not take any enforcement action if such
registration is not effected). The Company will use its best efforts to obtain
appropriate approvals or registrations under the state "blue sky" securities
laws of all states in which Registered Holders reside. The Warrants may not be
exercised by, nor may shares of Common Stock be issued to, any Registered Holder
in any state in which such exercise would be unlawful.
-7-
<PAGE>
(c) The Company shall pay all documentary, stamp or similar
taxes and other governmental charges that may be imposed with respect to the
issuance of the Class A Warrants, or the issuance or delivery of any shares of
Common Stock upon exercise of the Class A Warrants; provided, however, that if
shares of Common Stock are to be delivered in a name other than the name of the
Registered Holder of the Class A Warrant being exercised, then no such delivery
shall be made unless the person requesting the same has paid to the Warrant
Agent the amount of transfer taxes or charges incident thereto, if any.
(d) The Warrant Agent is hereby irrevocably authorized as the
Transfer Agent to requisition from time to time, certificates representing
shares Common Stock or other securities required upon exercise of the Warrants,
and the Company will comply with all such requisitions.
SECTION 6. Exchange and Registration of Transfer.
(a) Class A Warrant Certificates may be exchanged for other
Class A Warrant Certificates representing an equal aggregate number of Class A
Warrants or may be transferred in whole or part. Class A Warrant Certificates to
be so exchanged shall be surrendered to the Warrant Agent at its Corporate
Office, and the Company shall execute and the Warrant Agent shall countersign,
issue and deliver in exchange therefor the Class A Warrant Certificates or
Certificates which the Registered Holder making the exchange shall be entitled
to receive.
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(b) The Warrant Agent shall keep, at such office, books in
which subject to such reasonable regulations as it may prescribe, it shall
register Class A Warrant Certificates and the transfer thereof. Upon due
presentment for registration of transfer of any Class A Warrant Certificate at
such office, the Company shall execute and the Warrant Agent shall issue and
deliver it to the transferee or transferees a new Class A Warrant Certificate or
Certificates representing an equal aggregate number of Class A Warrants.
(c) With respect to any Class A Warrant Certificates presented
for registration or transfer, or for exchange or exercise, the subscription or
assignment, as the case may be, on the reverse thereof shall be duly endorsed or
be accompanied by a written instrument or instruments of subscription or
assignment, in form satisfactory to the Company and the Warrant Agent, duly
executed by the Registered Holder thereof or his attorney, duly authorized in
writing.
(d) No service charge shall be made for any exchange or
registration of transfer of the Class A Warrant Certificates. However, the
Company may require payment of a sum sufficient to cover an tax or other
governmental charge that may imposed in connection therewith.
(e) All Class A Warrant Certificates surrendered for exercise
or for exchange shall be promptly cancelled by the Warrant Agent.
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(f) Prior to due presentment for registration or transfer
thereof, the Company and the Warrant Agent may deem and treat the Registered
Holder of any Class A Warrant Certificate as the absolute owner thereof of each
Class A Warrant represented thereby (notwithstanding any notations of ownership
or writing thereon made by anyone other than the Company or the Warrant Agent)
for all purposes and shall not be affected by any notice to the contrary.
(g) Anything herein to the contrary not withstanding, since as
of the date hereof the Class A Warrant Certificates have not been registered
under the Act of 1933, the Warrant Agent may not register a transfer of such
Class A Warrant Certificate unless (i) the Class A Warrants have been registered
pursuant to a registration statement under the 1933 Act which has become
effective and is current with respect to such Warrants, or (ii) the transfer is
pursuant to a specific exemption from registration under the 1933 Act and the
Warrant Agent has been furnished the written opinion of counsel to the Company
or their counsel reasonably acceptable to the Company, that the proposed
disposition is consistent with all applicable provisions of the 1933 Act as well
as any applicable "Blue Sky" or other state securities law.
SECTION 7. Loss or Mutilation.
Upon receipt by the Company and the Warrant Agent of evidence
satisfactory to them of the ownership of and the loss, theft, destruction or
mutilation of any Class A Warrant Certificate and (in the case of loss, theft or
destruction) of indemnity satisfactory to them, and (in case of mutilation) upon
surrender and cancellation thereof, the Company shall execute and the Warrant
Agent shall countersign and deliver in lieu thereof a new Class A Warrant
Certificate representing an equal aggregate number of Class A Warrants.
Applicants for a substitute Series A Unit Certificate shall also comply with
such other reasonable regulations and pay such other reasonable charges as the
Warrant Agent may prescribe.
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SECTION 8. ADJUSTMENTS
(a) In case of any reclassification, capital reorganization or
other change of outstanding shares of the Common Stock, or in case of any
consolidation or merger of the Company with or into another corporation (other
than a consolidation or merger in which the Company is the continuing
corporation and which does not result in any reclassification, capital
reorganization or other change of outstanding shares of Common Stock), the
Company shall cause effective provision to be made so that the Holder shall have
the right thereafter, by exercising this Warrant, to purchase the kind and
number of shares of stock or other securities or property (including cash)
receivable upon such reclassification, capital reorganization or other change,
consolidation or merger by a holder of the number of shares of Common Stock that
could have been purchased upon exercise of the Class A Warrant immediately prior
to such reclassification, capital reorganization or other change, consolidation
or merger. Any such provision shall include provision for adjustments that shall
be as nearly equivalent as may be practicable to the adjustments provided for in
this Section 8. The foregoing provisions shall similarly apply to successive
reclassifications, capital reorganizations and other changes of outstanding
shares of Common Stock and to successive consolidations or mergers. If the
consideration received by the holders of Common Stock is other than cash, the
value shall be as determined by the Board of Directors of the Company acting in
good faith.
(b) If and whenever the Company shall effect a stock dividend,
a stock split, a stock combination, or a reverse stock split of the Common
Stock, the number of Warrant Shares purchasable hereunder and the Purchase Price
shall be proportionately adjusted in the manner determined by the Company's
Board of Directors acting in good faith. The number of shares, as so adjusted,
shall be rounded down to the nearest whole number and the Purchase Price shall
be rounded to the nearest cent.
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<PAGE>
SECTION 9. Redemption.
(a) Commencing on the Initial Class A Warrant Redemption Date,
the Company may on thirty (30) days prior written notice, redeem all of the
Class A Warrants at a redemption price of ten cents ($.10) per Warrant;
provided, however, that before any such call for redemption of the Class A
Warrants can take place, the (i) average closing bid price for the Common Stock,
as reported by the OTC Bulletin Board, or (ii) if not so quoted as reported by
any other recognized quotation system on which the Common Stock is quoted, shall
for any five (5) trading days within a period of thirty (30) consecutive biding
days ending or on the fifth (5th) trading day prior to the date on which the
notice contemplated by Sections 9(b) and 9(c) hereof is given, equaled or
exceeded $6.00 per share of Common Stock (subject to adjustment in the event of
any stock splits or other similar events as provided in Section 8 hereof).
(b) In case the Company shall exercise its right to redeem all
of the Class A Warrants, it shall give or cause to be given notice to the
Registered Holders of the Class A Warrants, by mailing to such Registered
Holders a notice of redemption, first class, postage prepaid, at their last
address as shall appear on the records of the Warrant Agent. Any notice mailed
in the manner provided herein shall be conclusively presumed to have been duly
given whether or not the Registered Holder receives such notice.
(c) The notice of redemption shall specify (i) the redemption
price, (ii) the date fixed for redemption, which shall in no event be less than
thirty (30) days after the date of mailing of such notice, (iii) the place where
the Class A Warrant Certificates shall be delivered and the redemption price
shall be paid, and (iv) that the right to exercise the Class A Warrant shall
terminate at 5:00 p. m.(New York time) on the business day immediately
preceding the date fixed for redemption,, The date fixed for the redemption of
the Class A Warrants shall be the "'Redemption Date" for purposes of this
Agreement. No failure to mail such notice nor any defect therein or in the
mailing thereof shall affect the validity of the proceedings for such redemption
except as to a holder (A) to whom notice was not mailed or (B) whose notice was
defective. An affidavit of the Warrant Agent or the Secretary or Assistant
Secretary of the Company that notice of redemption has been mailed shall, in the
absence of fraud, be prima facie evidence of the facts stated therein.
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(d) Any right to exercise a Class A Warrant shall terminate at
5: 00 p.m. (New York time) on the business day immediately preceding the
Redemption Date. The redemption price payable to the Registered Holders shall be
mailed to such persons at their addresses of record.
(e) The Company shall as soon as practicable after the
Redemption Date, and in any event within fifteen (15) months thereafter, make
"generally available to its security holders" (within the meaning of Rule 158
under the Act) an earnings statement (which need not be audited) complying with
Section 11 (a) of the Act and covering a period of at least twelve (12)
consecutive months beginning after the Redemption Date.
SECTION 10. Concerning the Warrant Agent.
(a) The Warrant Agent acts hereunder as agent and in a
ministerial capacity for the Company, and its duties shall be determined by
solely by the provisions hereof. The Warrant Agent shall not, by issuing and
delivering Class A Warrant Certificates, or by any other act hereunder, be
deemed to make any representation as to the validity, or value, or authorization
of the Class A Warrant Certificates, or the Class A Warrants represented
thereby, or of any securities, or other property delivered upon exercise of any
Class A Warrant is fully paid and non-assessable.
(b) The Warrant Agent shall not at any time be under any duty
or responsibility to any holder of Class A Warrant Certificates to make or cause
to be made any adjustment of the Purchase Price provided in this Agreement, or
to determine whether any fact exists which may require any such adjustment, or
with respect to the nature or extent of any such adjustment when made, or with
respect to the method employed in making the same. It shall not (i) be liable
for any recital, or statement of fact contained herein, or for any action taken,
suffered or omitted by it in reliance on any Class A Warrant Certificate, or
other document or instrument believed by it in good faith to be genuine and to
have been signed or presented by the proper party or parties, (ii) be
responsible for any failure on the part of the Company to comply with any of its
covenants and obligations contained in this Agreement or in any Class A Warrant
Certificate, or (iii) be liable for any act or omission in connection with this
Agreement except for its own its own gross negligence or willful misconduct.
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<PAGE>
(c) The Warrant Agent may at any time consult with counsel
satisfactory to it (who may be counsel for the Company) and shall incur no
liability or responsibility for any action taken, suffered or omitted by it good
faith in accordance with the opinion or advice of such counsel.
(d) Any notice, statement, instruction, request, direction,
order or demand of the Company shall be sufficiently evidenced by an instrument
signed by the Chairman of the Board of Directors, President or any Vice
President (unless other evidence in respect thereof is herein specifically
prescribed). The Warrant Agent shall not be liable for any action taken,
suffered or omitted by it in accordance with such notice, statement,
instruction, request, direction, order or demand.
(e) The Company agrees to pay the Warrant Agent reasonable
compensation for its services hereunder and to reimburse it for its reasonable
expenses hereunder; the Company further agrees to indemnify the Warrant Agent
and hold harmless against any and all losses, expenses and liabilities,
including judgments, costs and Counsel fees, for anything done or omitted by the
Warrant Agent in the execution of its duties and powers hereunder except losses,
expenses and liabilities arising as a result of the Warrant Agent's gross
negligence or willful misconduct.
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(f) The Warrant Agent may resign its duties and be discharged
from all further duties and liabilities hereunder (except liabilities arising as
a result of the Warrant Agent's own gross negligence or willful misconduct),
after giving thirty (30) days prior written notice to the Company. At least
fifteen (15) days prior to the date such resignation is to become effective, the
Warrant Agent shall cause a copy of such notice of resignation to, be mailed to
the Registered Holder of each notify the Company in writing of such fact and of
the number Class A Warrant Certificate at the Company's expense. Upon such
resignation the Company shall appoint in writing a new warrant agent. If the
Company shall fail to make such appointment within a period of thirty (30) days
after it has been notified in writing of such resignation by the resigning
Warrant Agent, then the Registered Holder of any Class A Warrant Certificate may
apply to any court of competent jurisdiction for the appointment of a new
warrant agent. Any new warrant agent, whether appointed by the Company or by
such a court, shall be a bank or trust company having a capital and surplus, as
shown by its last published report to its stockholders, of not less than ten
million dollars ($10,000,000) or a stock transfer company doing business in New
York, New York. After acceptance in writing of such appointment by the new
warrant agent is received by the Company, such new warrant agent shall be vested
with the same powers, rights, duties and responsibilities as if it had been
originally named herein as the warrant agent without any further assurance,
conveyance, act or deed; but if for any reason it shall be necessary or
expedient to execute and deliver any further assurance, conveyance, act or deed,
the same shall be done at the expense of the Company and shall be legally and
validly executed and delivered by the resigning Warrant Agent. Not later than
the effective date of any such appointment, the Company shall file, notice
thereof with the resigning Warrant Agent and shall forthwith cause a copy of
such notice to be mailed to the Registered Holder of each Class A Warrant
Certificate.
(g) Any corporation into which the Warrant Agent or any new
warrant agent may be converted or merged, any corporation resulting from any
consolidation to which the Warrant Agent or any new warrant agent shall be a
party, or any corporation succeeding to the corporate trust business of the
Warrant Agent or any new warrant agent shall be a successor warrant agent under
this Agreement without any further act, provided that such corporation is
eligible for appointment as successor to the Warrant Agent under the provisions
of the preceding paragraph. Any such successor warrant agent shall promptly
cause notice of its succession as warrant agent to be mailed to the Company and
to the Registered Holders of each Class A Warrant Certificate.
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(h) The Warrant Agent, its subsidiaries and affiliates, and
any of its or their officers or directors, may buy and hold or sell Class A
Warrants or other securities of the Company and otherwise deal with the Company
in the same manner and to the same extent and with like effect as though it were
not Warrant Agent. Nothing herein shall preclude the Warrant Agent from acting
in any other capacity for the Company or for any other legal entity.
SECTION 11. Modification of Agreement.
The Warrant Agent and the Company may by supplemental
agreement make any changes or corrections in this Agreement (a) that they shall
deem appropriate to cure any ambiguity or to correct any defective or
inconsistent provision or to manifest mistake or error herein contained, or (b)
that they may deem necessary or desirable an which shall not adversely affect
the interests of the holders of Class A Warrant Certificates; provided, however,
that this Agreement shall not otherwise be modified, supplemented or altered in
any respect except with the consent in writing of the Registered Holders holding
not less than sixty-six and two-thirds percent (66-2/3%) of the Warrants then
outstanding; provided, further, that no change in the number or nature of the
securities purchasable upon the exercise of any Class A Warrant, and no change
that increases the Purchase Price of any Class A Warrant, other than such
changes as are specifically set forth in this Agreement as originally executed,
shall be made without the consent in of each Registered Holders affected by such
change.
SECTION 12. Notices.
All notices, request, consents and other communications
hereunder shall be in writing and shall be deemed to leave been made when
delivered or mailed first-class postage prepaid or delivered to a telegraph
office for transmission, if to the Registered Holder of a Class A Warrant
Certificate, at the address of such holder as shown on the registry books
maintained by the Warrant Agent; if to the Company at 12030 Sunrise Valley
Drive, Reston, New York 20191, Attention: Michael J. Black, Chairman and Chief
Executive Officer, or at such other address as may have been furnished to the
Warrant Agent in writing by the Company; and if to, the Warrant Agent, at its
Corporate Office.
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SECTION 13. Governing Law.
This Agreement shall be governed by and construed in
accordance with the laws of the State of New York without giving effect to
conflicts of laws.
SECTION 14. Binding Effect.
This Agreement shall be binding upon and inure to the benefit
of the Company, the Warrant Agent and their respective successors and assigns
and the holders from time to time of the, Class A Warrants or any of them.
Except as hereinafter stated, nothing in this Agreement is intended or shall be
construed to confer upon any other person any right, remedy or claim or to
impose upon any other person any duty, liability or obligation.
SECTION 15. Counterparts.
This Agreement may be executed in several counterparts which
taken together shall constitute a single document.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed as of the date first above written.
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<PAGE>
H-QUOTIENT, INC. CONTINENTAL STOCK TRANSFER
& TRUST COMPANY
As Warrant Agent
By:______________________________ By:_______________________________
Name: Michael J. Black Name: Michael Nelson
Title: Chairman & Chief Executive Officer Title:
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<PAGE>
EXHIBIT 10.1
[LOGO]
IHS OF VIRGINIA, INC.
12030 Sunrise Valley Drive, Suite 205
Reston, VA 20191
Software License and Support Agreement
Between __________________ (Customer) And IHS of Virginia, Inc. (IHS)
1. DEFINITIONS. As used in this Agreement, the following terms shall have the
following meanings:
1.1 CONCURRENT USER. "Concurrent User" for purposes of licensing Software shall
mean the number of logons to the System at one time on any one processor, group
of processors acting as one or multiple processors controlled by a single
client.
1.2 DOCUMENTATION. "Documentation" shall mean the manuals regarding the
functional and technical capabilities, operation, installation and use of the
Software.
1.4 HARDWARE. "Hardware" shall mean the computer hardware products including,
but not limited to processors, operating Software, system disks, terminals,
memory, printers and modems that IHS recommends or supplies for use with the
Software.
1.5 SOFTWARE. "Software" shall mean computer readable media provided by IHS and
the computer software licensed by IHS and its suppliers contained therein as
well as documentation supplied by IHS. The expression "Software" covers the
initial configuration as well as the new releases supplied under this Agreement.
1.6 RELEASE. "Release" shall mean a set of computer programs and associated
documentation which modifies, refines, or enhances the Software and that which
IHS does not separately price or market.
2. LICENSE GRANT
IHS hereby grants to Customer, and Customer accepts, a non-exclusive license to
use the "DataQual" Software Media and the computer software contained therein,
as set forth in schedules attached hereto, in object-code-only form ("the
Software") and the accompanying Manuals, only as authorized in this Agreement.
The Software may be used for the term of this Agreement only at the Premises and
only on the Designated Computer (which computer must be owned, leased, or
otherwise controlled by Customer) or, in the event of the inoperability of that
computer, on a backup computer selected by Customer. Use in a Local Area Network
is authorized, however, additional user fees may be due per Terms and Conditions
contained in schedules attached. Customer agrees to not assign, sublicense,
transfer, pledge, lease, rent, or share Customer's rights under this Agreement.
Customer agrees not to exceed licensed user limits. Upon discovery of
unauthorized usage in excess of licensed user limits, Customer agrees to
immediately notify IHS of such usage and immediately provide remedies acceptable
to IHS which may include ceasing such usage, purchasing additional user
licenses, and indemnifying IHS for charges associated with use of the Software
in excess of licensed limits.
<PAGE>
Upon loading the Software into the Designated Computer, Customer may retain the
Software Media for backup purposes. In addition, Customer may make one copy of
the Software on a second set of media for the purpose of backup in the event
that the Software Media are damaged or destroyed. Customer may make one copy of
the Manuals for backup purposes. Any such copies of the Software or the Manuals
shall include IHS' and/or its supplier's copyright and other proprietary
notices. Except as authorized under this paragraph, no copies of the Software or
any portions thereof may be made by Customer or any person under Customer's
authority or control. Upon termination of this Agreement, Customer agrees to
cease using the Software, destroy all copies, and certify destruction or return
the original Software to IHS.
3. SUPPORT SERVICES
IHS will for the term of this Agreement:
o make reasonable efforts to supply corrections to problems reported by
Customer which IHS diagnoses as defects in a currently supported release of
the Software;
o provide Customer with New Releases, which IHS elects to make available to
its Customer base generally. The basic hours for the provision of these
services will be in accordance with the operations schedule of the support
center, but not less than 9:00 am to 5:00 p.m. Eastern Time Monday to Friday,
excluding IHS published holidays.
Customer understands and agrees that Customer must install all solutions,
corrections and New Releases supplied by IHS within 90 days in accordance with
IHS' installation instructions. Customer recognizes that Customer's failure to
install such solutions, corrections and New Releases may render the Software
unusable or nonconforming with its associated documentation and Customer agrees
to assume all risks arising therefrom and to release IHS from all liability in
respect thereof.
Any attempt by Customer to alter the Software without IHS' written direction
will be at Customer's sole risk and expense and in no event will IHS have any
obligation to support or maintain any alteration which is not distributed by IHS
to its general Customer base and made part of IHS' standard Software.
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disclosed without the written permission of Integrated Healthcare Systems
<PAGE>
IHS' Support services do not include:
o services which in IHS' opinion are required due to accident, neglect,
misuse, failure of electrical power, air conditioning or humidity control on
the customer premises, or failure of storage media not furnished by IHS;
o services required due to installation or failure of a Software or Hardware
component not actively supported under an IHS Support or License agreement.
o services required due to attempts by other than IHS personnel to repair,
maintain, modify or move the Software;
o the provision of consumable operating supplies or accessories;
o the training of new personnel due to staff turnover;
o the training of personnel that for any reason were not included in the
original implementation training or subsequent training provided by IHS.
Customer's obligations:
o Customer must promptly report any identified problem or error to IHS by
telephone to its designated Support contact point, describing it in
sufficient detail for IHS to be able to recreate the problem or error, and
indicating whether or not it is an Emergency Problem.
o Customer agrees to allow IHS reasonable access to the Premises, Software,
and Hardware and the reasonable use of any equipment or media necessary for
IHS to perform its Support obligations hereunder.
4. PROPRIETARY PROTECTION OF CUSTOMER DATA
Customer agrees to allow data that it makes available to IHS to be retained and
used in data analyses that IHS may perform from time to time. IHS agrees to use
such Customer data as may be in its possession only in accordance with all
applicable Federal and State laws and industry specific guidelines, and to
protect it with the same effort it uses to protect its own proprietary data.
Further, IHS agrees not to publish to any third party any data or results of the
analysis of Customer data that is attributable to Customer without the expressed
consent of Customer.
5. PROPRIETARY PROTECTION OF THE SOFTWARE
Customer acknowledges and agrees that the Software consists of proprietary,
unpublished products of IHS and/or its suppliers, protected under U.S. copyright
law and trade secret laws of general applicability. Customer further
acknowledges and agrees that all right, title, and interest in and to the
Software are and shall remain with IHS and/or its suppliers. This Agreement does
not convey to Customer an interest in or to the Software, but only a limited
right of use revocable in accordance with the terms of this Agreement.
<PAGE>
Customer may not at any time disclose or disseminate the Software to any person
who does not need to obtain access thereto consistent with Customer's rights
under this Agreement. Under no circumstances may Customer attempt to decompile
or reverse engineer the Software or modify the Software. Under no circumstances
may Customer disclose or disseminate the Software to any competitor of IHS.
Customer will use Customer's best efforts to ensure that all Customer's
personnel and all other persons with authorized access to the Software shall
protect it against improper use, dissemination or disclosure. Customer
acknowledges that, in the event of Customer's breach of any of the foregoing
provisions, IHS will not have an adequate remedy in money or damages. IHS shall
therefore be entitled to obtain an injunction against such breach from any court
of competent jurisdiction immediately upon request. IHS' right to obtain
injunctive relief shall not limit its right to seek further remedies. Customer's
obligations hereunder shall remain in effect for as long as Customer continues
to possess or use the Software or any trade secrets derived therefrom.
6. TERM
This Agreement shall become effective upon execution by Customer and acceptance
and approval by IHS, and shall continue until terminated. Either party may
terminate this Agreement upon written notice to the other party not less than 90
days in advance of the desired termination date. IHS may also terminate this
Agreement if Customer petitions for relief under the Bankruptcy Code or if any
involuntary petition thereunder is filed against Customer and is not dismissed
within sixty (60) days, or if a receiver is appointed for Customer's business,
or if Customer makes an assignment for the benefit of creditors. Upon
termination for whatever reason, Customer agrees to return to IHS the Software
and all copies and portions thereof in Customer's possession, or certify in a
manner satisfactory to IHS the destruction and cessation of use of the Software.
If Customer defaults in payment of any sum due under this Agreement, IHS may
notify Customer in writing of the default. Customer will have thirty (30) days
from delivery of the written notice to remedy the default, failing which, IHS
shall have the immediate right to terminate this Agreement.
If either party commits a material breach of its obligations under this
Agreement, other than default in payment, the other party may notify the
defaulting party in writing of the breach. The defaulting party shall have sixty
(60) days to remedy the breach, failing which the other party shall have the
immediate right to terminate this Agreement.
Annual License and Maintenance services will begin upon the shipment date of the
Software and will continue for an initial term of twelve (12) months. They shall
automatically continue thereafter for further periods of twelve (12) months
unless or until this Service is terminated by Customer or IHS on not less than
Thirty (30) days' written notice before the expiration of the initial term or
any subsequent twelve (12) month period.
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disclosed without the written permission of Integrated Healthcare Systems
<PAGE>
7. FEES, PAYMENT AND TAXES
The total contract price is in consideration of the license granted and the
services provided under this Agreement. Customer agrees to pay charges pursuant
to this Agreement issued in accordance with the pricing Schedules as may be
accepted by both parties and appended to this Agreement. Unless otherwise
indicated in a Schedule, payment shall be due thirty (30) days from the invoice
date.
The travel, living and accommodation costs incurred by IHS in connection with
Consulting and Training services shall be paid by Customer within thirty (30)
days of the date of invoice. Charges of one and one half per cent (1.5%) per
month or the highest amount allowed by law, whichever is less, prorated on a
daily basis will be applied to late payments.
Customer is solely responsible for payment of any taxes (including sales or use
taxes and intangible taxes) resulting from Customer's acceptance and use of
products and services. Customer agrees to hold IHS harmless from all claims and
liability arising from Customer's failure to report or pay such taxes.
Customer shall pay to IHS the Annual Maintenance Fee for the services specified
herein. On January 1 of each year, IHS may adjust the Annual Maintenance Fee by
an amount not to exceed ten percent (10%) of the previous year's fee. Payment of
the first Annual Maintenance Fee must be made within ninety (90) days of
Activation of the Software, unless it has been included in the original license
agreement. Subsequent Annual Maintenance Fees are due and payable on this Annual
Renewal Date. In the event of termination of this agreement under Paragraph 6,
no prorated adjustment shall be made in annual license fees.
Customer must make payment of all invoices to IHS within thirty (30) days of the
date of the invoice. Charges of one and one half percent (1.5%) per month or the
highest amount allowed by law, whichever is less, prorated on a daily basis will
be applied to late payments.
8. LIMITED WARRANTY
IHS warrants, for Customer's benefit alone, that the Software Media in which the
Software is embedded shall for a period of ninety (90) (referred to as "the
Warranty Period") be free from defects in material and workmanship.
IHS MAKES AND CUSTOMER RECEIVES NO WARRANTY EXPRESS OR IMPLIED AND THERE ARE
EXPRESSLY EXCLUDED ALL IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE. IHS SHALL HAVE NO LIABILITY WITH RESPECT TO ITS OBLIGATIONS
UNDER THIS AGREEMENT FOR CONSEQUENTIAL, EXEMPLARY, OR INCIDENTAL DAMAGES, EVEN
IF IT HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. IN NO EVENT SHALL IHS
BE LIABLE FOR DIRECT DAMAGES IN EXCESS OF AN AGGREGATE OF ALL SUMS PAID BY
CUSTOMER TO IHS UNDER THIS AGREEMENT DURING THE PRECEDING TWELVE (12) MONTHS. IN
PARTICULAR IHS SHALL HAVE NO LIABILITY FOR ANY PROGRAMS OR DATA STORED IN OR
USED WITH THE SOFTWARE, INCLUDING THE COSTS OF RECOVERING SUCH PROGRAMS OR DATA.
<PAGE>
IHS will indemnify and hold Customer harmless from liability against any claim,
demand or action alleging that the Software infringes any third-party rights in
the United States in respect of copyright, trade secret or patent. This
indemnification is conditional upon Customer's fully cooperating with IHS in the
defense or settlement of such actions, giving IHS prompt written notice of any
claim, demand or action for which indemnification is sought, and surrendering to
IHS the right to defend such claim.
9. FORCE MAJEURE
Neither party shall be liable for any failure to perform or delay in the
performance of its obligations hereunder caused by circumstances beyond its
reasonable control including, but not limited to, acts of God, government
requirement, fires, strikes, floods, epidemics, riots, power shortages, delays
in transportation, inability to obtain necessary labor, materials, or
components, or any act, neglect or default of the other party.
10. GOVERNING LAW
This Agreement shall be construed and governed in accordance with the laws of
the State of Virginia. Any and all proceedings relating to the subject matter
hereof shall be maintained in the courts of the State of Virginia which courts
shall have exclusive jurisdiction for such purpose.
11. COST OF LITIGATION
If any action is brought by either party to this Agreement against the other
party regarding the subject matter hereof, the prevailing party shall be
entitled to recover, in addition to any other relief granted, reasonable
attorney fees and expenses of litigation.
12. SEVERABILITY
Should any court of competent jurisdiction declare any term of this Agreement
void or unenforceable, such declaration shall have no effect on the remaining
terms hereof.
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<PAGE>
13. NO WAIVER
The failure of either party to enforce any rights granted hereunder or to take
action against the other party in the event of any breach hereunder shall not be
deemed a waiver by that party as to subsequent enforcement of rights or
subsequent actions in the event of future breaches.
14. GENERAL
Accepted and approved by:
By:...................................................
Name
Printed:..............................................
Title:................................................
Date:.................................................
Mailing Address:
......................................................
......................................................
......................................................
This Agreement represents the entire agreement concerning the Software between
Customer and IHS and it supersedes any prior proposals, representations or
understandings between Customer and IHS. In the event of conflict between the
terms of this Agreement and terms of preprinted customer purchase orders, the
terms of this Agreement shall apply. No modification of this Agreement shall be
binding unless it is in writing and is signed by an authorized representative of
both parties.
Accepted and Approved by IHS OF VIRGINIA, INC.
By:...................................................
Name
Printed:..............................................
Title:................................................
Date:.................................................
Mailing Address:
IHS OF VIRGINIA, INC.
12007 Sunrise Valley Drive, Suite 140
Reston, Virginia 20191
Page 4
This page contains proprietary information and is not to be duplicated or
disclosed without the written permission of Integrated Healthcare Systems
<PAGE>
Schedule S
The parties, except as explicitly stated herein, intend no change to the
Agreement.
For Customer:
......................................................
......................................................
Customer:
......................................................
......................................................
......................................................
For IHS:
......................................................
................................... (date).................
IHS OF VIRGINIA, INC.
12030 Sunrise Valley Drive, Suite 205
Reston, VA 20191
Page 5
This page contains proprietary information and is not to be duplicated or
disclosed without the written permission of Integrated Healthcare Systems
<PAGE>
EXHIBIT 10.2
IHS OF VIRGINIA, INC.
12030 Sunrise Valley Drive, Suite 205
Reston, VA 20191
DataQual+
Licensed Software
Agreement
(Customer Name)
<PAGE>
1. LICENSE GRANT
IHS of Viriginia, Inc. ("IHS") hereby grants to you, and you accept, a
non-exclusive license to use the "DataQual+" Program Diskettes and the computer
software contained therein, as set forth in Appendix A hereto, in
object-code-only form ("The Software") and the accompanying Users Manual, only
as authorized in this Agreement. The Software may be used only at the Premises
and only on the Designated Computer (which computer must be owned, leased, or
otherwise controlled by you) or, in the event of the inoperability of that
computer, on a backup computer selected by you. Neither concurrent use on two or
more computers nor use in a local area network or other network is authorized
without the prior written consent of IHS and the payment of additional license
fees. You agree that you will not assign, sublicense, transfer, pledge, lease,
rent, or share your rights under this Agreement.
Upon loading the Software into the Designated Computer, you may retain the
Program Diskettes for backup purposes. In addition, you may make one copy of the
Software on a second set of diskettes for the purpose of backup in the event
that the Program Diskettes are damaged or destroyed. You may make one copy of
the User's Manual for backup purposes. Any such copies of the Software or the
Users Manual shall include IHS's and/or its supplier's copyright and other
proprietary notices. Except as authorized under this paragraph, no copies of the
Software or Users Manual (collectively "The Program") or any portions thereof
may be made by you or any person under your authority or control.
IHS shall provide you at the Premises with the number of days of Implementation
and/or Training specified in Appendix A of this Agreement. These services shall
be free of charge but you shall be responsible for payment of the travel, living
and accommodation costs of IHS's personnel involved.
2. PROPRIETARY PROTECTION OF THE PROGRAM
You acknowledge and agree that the Program consists of proprietary, unpublished
products of IHS and/or its suppliers, protected under U.S. copyright law and
trade secret laws of general applicability. You further acknowledge and agree
that all right, title, and interest in and to the Program are and shall remain
with IHS and/or its suppliers. This Agreement does not convey to you an interest
in or to the Program, but only a limited right of use revocable in accordance
with the terms of this Agreement.
You may not at any time disclose or disseminate the Program to any person who
does not need to obtain access thereto consistent with your rights under this
Agreement. Under no circumstances may you attempt to decompile or reverse
compile the Software or modify the Program. Under no circumstances may you
disclose or disseminate the Program to any competitor of IHS. You will use your
best efforts to ensure that all your personnel and all other persons with
authorized access to the Program shall protect it against improper use,
dissemination or disclosure.
You acknowledge that, in the event of your breach of any of the foregoing
provisions, IHS will not have an adequate remedy in money or damages. IHS shall
therefore be entitled to obtain an injunction against such breach from any court
of competent jurisdiction immediately upon request. IHS's right to obtain
injunctive relief shall not limit its right to seek further remedies. Your
obligations hereunder shall remain in effect for as long as you continue to
possess or use the Program or any trade secrets derived therefrom.
Page 1
<PAGE>
3. FEES, PAYMENT AND TAXES
The License Fee is in consideration of the license granted under this Agreement.
Invoices issued pursuant to this Agreement shall be in accordance with the
pricing schedules set forth in appendix A. The Licensed Software fees are due
and payable to IHS within thirty (30) days after execution of this agreement.
The travel, living and accommodation costs incurred by IHS in connection with
Implementation and/or Training shall be invoiced to you on a monthly basis and
shall be payable by you within thirty (30) days of the date of invoice. Charges
of one and one hag per cent (1.5%) per month or the highest amount allowed by
law, whichever is less, prorated on a daily basis will be applied to late
payments.
You are solely responsible for payment of any taxes (including sales or use
taxes and intangible taxes) resulting from your acceptance of the license
granted, the services provided, and your possession and use of the Program. You
agree to hold IHS harmless from all claims and liability arising from your
failure to report or pay such taxes.
4. TERM
This Agreement shall become effective upon the delivery of the Program to you,
together with a copy of this Agreement signed by you and accepted and approved
by IHS, and shall continue until terminated. Either party may terminate this
Agreement upon the breach by the other party of any term hereof. IHS may also
terminate this Agreement if you petition for relief under the Bankruptcy Code or
if any involuntary petition thereunder is filed against you and is not dismissed
within sixty (60) days, or if a receiver is appointed for your business, or if
you make an assignment for the benefit of creditors. Upon termination by IHS for
whatever reason, you agree to return to IHS the Program and all copies and
portions thereof in your possession.
5. LIMITED WARRANTY
IHS warrants, for your benefit alone, that the Program Diskettes in which the
Software is embedded and the User's Manual shall, for a period of ninety (90)
days from the date of shipment thereof to you (referred to as "the Warranty
Period") be free from defects in material and workmanship. IHS further warrants,
for your benefit alone, that during the Warranty Period the Software shall
operate substantially in accordance with the functional specifications in the
User's Manual. This warranty is expressly conditional on your observance of the
operating, security and data-control procedures set forth in the Users Manual.
As your exclusive remedy for any material non-conformity or defect in the
Program for which IHS is responsible, IHS shall make all reasonable efforts to
correct or cure such non-conformity or defect.
However, IHS shall not be obliged to correct, cure or otherwise remedy any
non-conformity or defect the Program if you have made any changes whatsoever to
the Program, d the Program has been misused or damaged in any respect, or if you
have not reported to IHS the existence and nature of such non-conformity or
defect promptly upon discovery thereof.
Page 2
<PAGE>
EXCEPT AS EXPRESSLY SET FORTH ABOVE, IHS DISCLAIMS ANY AND ALL OTHER WARRANTIES,
WHETHER EXPRESS OR IMPLIED, INCLUDING (WITHOUT LIMITATION) ANY IMPLIED
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
6. INDEMNIFICATION AND LIMITATION OF LIABILITY
IHS will indemnify and hold you harmless from liability against any claim,
demand or action alleging that the Program infringes any third-party rights in
the United States in respect of copyright, trade secret or patent. This
indemnification is conditional upon your fully cooperating with IHS in the
defense or settlement of such actions and giving IHS prompt written notice of
any claim, demand or action for which indemnification is sought.
Except in respect of the above indemnification, IHS's cumulative liability to
you or any other party for any loss or damages resulting from any claims,
demands or actions arising out of or relating to this Agreement shall not exceed
the license fee paid to IHS for the use of the Program. In no event shall IHS be
liable for any indirect, incidental, consequential, special, or exemplary
damages or lost profits, even if IHS has been advised of the possibility of such
damages. In particular IHS shall have no liability for any programs or data
stored in or used with the Software, including the costs of recovering such
programs or data.
7. GOVERNING LAW
This Agreement shall be construed and governed in accordance with the laws of
the State of Virginia. Any and all proceedings relating to the subject matter
hereof shall be maintained in the courts of theState of Virginia, which courts
shall have exclusive jurisdiction for such purpose.
8. LITIGATION
If any action is brought by either party to this Agreement against the other
party regarding the subject matter hereof, the prevailing party shall be
entitled to recover, in addition to any other relief granted, reasonable
attorney fees and expenses of litigation.
9. SEVERABILITY
Should any term of this Agreement be declared void or unenforceable by any court
of competent jurisdiction, such declaration shall have no effect on the
remaining terms hereof.
10. NO WAIVER
The failure of either party to enforce any rights granted hereunder or to take
action against the other party in the event of any breach hereunder shall not be
deemed a waiver by that party as to subsequent enforcement of rights or
subsequent actions in the event of future breaches.
Page 3
<PAGE>
11. OMNIBUS RECONCILIATION ACT COMPLIANCE
As applicable under the Omnibus Reconciliation Act 1980, until the expiration of
four (4) years after furnishing of services pursuant to this Agreement, IHS
shall, upon receipt of written request, and if still required to make such
information available under the then existing law, make available to the
Secretary of the Department of Health and Human Services, the Comptroller
General, or any of their duly authorized representatives, this Agreement, books,
documents and records of IHS that are necessary to certify the nature and extent
of such costs, and if IHS carries out any-of the duties of this Agreement
through a subcontract with a value or cost of Ten Thousand Dollars ($ 10,000) or
more over a twelve (12)-month period, such subcontract shall contain a clause to
the effect that, until the expiration of four (4) years after the furnishing of
such services pursuant to such subcontract, the subcontractor shall, upon
receipt of written request and if still required to make such information
available under the then existing law, make available to the Secretary,
Comptroller General, or any of their duly authorized representatives, the
subcontract, books, documents and records of such organization that are
necessary to verify the nature and extent of such costs.
12. GENERAL
This Agreement represents the entire agreement concerning the Program between
you and IHS and it supersedes any prior proposals, representations or
understandings between you and IHS.
No modification of this Agreement shall be binding unless it is in writing and
is signed by an authorized representative of both parties.
Any notices required or permitted under this Agreement shall be in writing and
delivered in person or sent by registered or certified mail, return receipt
requested.
Page 4
<PAGE>
By Your Signature Hereto You Acknowledge Having Read This Agreement and Agree to
Accept and to Abide by Its Terms and Conditions.
For: (Customer) Accepted and Approved by
IHS of Viriginia, Inc.
By:_________________________________ By:__________________________________
Name Name
Printed:____________________________ Printed:_____________________________
Title:______________________________ Title:_______________________________
Date:_______________________________ Date:________________________________
Mailing Address: Mailing Address:
(Customer) IHS of Viriginia, Inc.
12030 Sunrise Valley Drive, Suite 205
Reston, Virginia 20191
Page 5
<PAGE>
Appendix A
Licensed Software Description
Licensed Software modules and features included in the DataQual+ software
license fee are as follows:
<TABLE>
<CAPTION>
Discounted Training
Software Products List Price Price Days
----------------- ---------- ---------- --------
<S> <C> <C> <C>
DataQual+ Base System
Quality Assurance
Ad Hoc Reporting
Graphics
Staff Credentialing Module
Risk Management Module
Utilization Management Module
Medical Records Module
Infection Control Module
DRG Grouper/Maximizer Module
FastNote Module
lnterQual Criteria Sets
Additional User Terminal (Total 5)*
I-Link Interface
Total
</TABLE>
Annual Maintenance/License Fees
15% of Full List Price (i.e., non-discounted price)
Full List Price: $XX,XXX x 15% $x,xxx/year.
-----------
* Reference E & F on the following page.
Page 6
<PAGE>
Pricing Terms & Conditions
A. Base system price includes 3 days of training and installation.
B. Each additional module receives an additional 1/2 day of training.
C. Additional training/consulting ordered:
Program Manager $ 95/hr
Programmer/Analyst $ 85/hr
Installation/Training Specialist $ 85/hr
D. All expenses incurred for travel and per them at customer site will be
invoiced separately at actual rates. E. Base system license of DataQual+ is
for up to __ user terminals.
F. Each additional workstation will be charged a $____ license fee.
G. Annual maintenance/new release support/Hot Line - 15 percent of system list
price. Maintenance charges start 90 days after delivery of software.
H. Leasing options available.
I. FastNote module can accommodate up to __ hand held devices only.
J. All prices exclude hardware costs.
Page 7
<PAGE>
EXHIBIT 10.3
IHS OF VIRGINIA, INC.
12030 Sunrise Valley Drive, Suite 205
Reston, VA 20191
DataQual+
Software Maintenance
Agreement
<PAGE>
1. PROGRAM COVERED
The Program covered by this Agreement is the Program described in the License
Agreement. The expression "Program" also covers the New Releases (as defined
below) supplied to you under this Agreement.
2. MAINTENANCE SERVICES
2.1 IHS of Viriginia, Inc. ("IHS") will for the term of this Agreement:
i) provide you with any known problem solutions relating to the Program as
such solutions become known to IHS;
ii) make all reasonable efforts to supply corrections to problems reported
by you which IHS diagnoses as defects in a currently supported release
of the Program;
iii) provide you with New Releases which IHS elects to make available to its
customer base generally (a New Release is defined as modifications,
refinements and enhancements which IHS elects to incorporate into and
make part of the Program and does not separately price or market). The
basic hours for the provision of these services will be 8.00 am to 5.00
PM Eastern Standard Time, Monday to Friday inclusive, excluding public
holidays.
2.2 Maintenance services will be chargeable as specffied in Section 5 below.
It is understood however, that in respect of on-site support visits at any
time IHS will invoice you for economy class air travel, car hire and other
ground transportation expenses and reasonable living and accommodation
costs.
2.3 You understand and agree that all solutions, corrections and New Releases
supplied by IHS must be installed by you in accordance with IHS's
installation instructions. You recognize that your failure to install such
solutions, corrections and New Releases may render the Program unusable or
non-conforming with its associated documentation and you agree to assume
all risks arising therefrom and to release IHS from all liability in
respect thereof.
2.4 Any attempt by you to alter the Program on your own and without IHS's
written direction will be at your sole risk and expense and in no event
will IHS have any obligation to support or maintain any alteration which
is not distributed by IHS to its general customer base and made part of
IHS's standard Program.
2.5 You will reimburse IHS for time and expenses incurred by lST in connection
with support provided which is not necessitated by defects in the current
release of the Program or which are incurred in the provision of services
other than those described in Section 2.1 above. Such charges will be
invoiced to you at IHS's then current rates, together with economy class
air fare, car hire and other ground transportation expenses, and reasonable
living and accommodation costs.
Page 1
<PAGE>
2.6 IHS's maintenance services do not include:
a) services which in IHS's opinion are required due to accident, neglect,
misuse, failure of electrical power, air conditioning or humidity
control, or failure of storage media not furnished by IHS;
b) services required due to attempts by other than IHS's personnel to
repair, maintain, modify or move the Program;
c) the provision of consumable operating supplies or accessories.
3. YOUR OBLIGATIONS
3.1 You must promptly report any identified problem or error to IHS by
telephone (with confirmation by telex or facsimile), documenting it in
sufficient detail for IHS to be able to recreate the problem or error, and
indicating the priority to be assigned to ft.
3.2 As IHS will support only the current release level of the Program and the
prior release level for ninety(90)days after introduction of a New Release,
you must install each New Release of the Program within such ninety
(90)-day period.
3.3 You agree to allow IHS reasonable accesses to the Premises and to the
Program and reasonable use of any equipment or media necessary for IHS to
perform its maintenance obligations hereunder.
4. TERM
Maintenance services will begin on the Commencement Date and will continue for
an initial term of twelve (12) months. They shall automatically continue
thereafter for further periods of twelve (1 2) months unless or until this
Agreement is terminated by you or IHS on not less than ninety (90) days' written
notice before the expiration of the initial term or any subsequent twelve
(12)-month period.
5. FEES, TAXES AND PAYMENT
5.1 Fees and Taxes
You shall pay to IHS the Annual Maintenance Fee for the services
specified in Section 2.1 hereof. You are solely responsible for payment
of any taxes (including sales or use taxes and intangible taxes) in
connection with the maintenance services provided to you. You agree to
hold IHS harmless from all claims and liability arising from your
failure to report or pay such taxes.
5.2 Increases
On January 1 of each year, the Annual Maintenance Fee may be adjusted
by IHS by an amount not to exceed ten per cent (10%) of the previous
years fee.
Page 2
<PAGE>
5.3 Payment
Payment of the first Annual Maintenance Fee must be made within thirty
(30) days of delivery and installation of the Program. Subsequent
Annual Maintenance Fees are due and payable within thirty (30) days of
the Annual Renewal Date. Payment of all invoices hereunder must be made
by you to IHS within thirty (30) days of the date of the invoice.
Charges of one and one half percent (1.5%) per month or the highest
amount allowed by law, whichever is less, prorated on a daily basis
will be applied to late payments.
6. LIMITATION OF LIABILITY
IHS MAKES AND YOU RECEIVE NO WARRANTY EXPRESS OR IMPLIED AND THERE ARE EXPRESSLY
EXCLUDED ALL IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR
PURPOSE. IHS SHALL HAVE NO LIABILITY WITH RESPECT TO ITS OBLIGATIONS UNDER THIS
AGREEMENT FOR CONSEQUENTIAL, EXEMPLARY, OR INCIDENTAL DAMAGES, EVEN IF IT HAS
BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. IN NO EVENT SHALL IHS BE LIABLE
FOR DIRECT DAMAGES IN EXCESS OF AN AGGREGATE OF ALL SUMS PAID BY YOU TO IHS
UNDER THIS AGREEMENT DURING THE PRECEDING TWELVE (12) MONTHS.
7. FORCE MAJEURE
Neither party shall be liable for any failure to perform or delay in the
performance of its obligations hereunder caused by circumstances beyond its
reasonable control including, but not limited to, acts of God, government
priorities, fires, strikes, floods, epidemics, riots, power shortages, delays in
transportation, inability to obtain necessary labor, materials, or components,
or any act, neglect or default of the other party.
8. TERMINATION
8.1 If either party petitions for relief under the Bankruptcy Code or if any
involuntary petition thereunder is filed against either party, and the
same be not dismissed within thirty (30) days, or K a receiver is
appointed for the business of either, or if either makes an assignment for
the benefit of creditors, the other may give written notice of its intent
to terminate. The party receiving the notice shall have thirty (30) days
from delivery of such notice in which to remedy the position, failing
which the other party shall have the immediate right to terminate this
Agreement.
8.2 If you default in payment of any sum due under this Agreement, IHS may
notify you in writing of the default. You will have thirty (30) days from
delivery of the written notice to remedy the default, failing which IHS
shall have the immediate right to terminate this Agreement.
8.3 If either party commits a material breach of its obligations under this
Agreement, other than default in payment, the other party may notify the
defaulting party in writing of the breach. The defaulting party shall have
sixty (60) days to remedy the breach, failing which the other party shall
have the immediate right to terminate this Agreement.
Page 3
<PAGE>
8.4 If IHS terminates the License Agreement for your default, all maintenance
fees or charges payable for the remaining term of this Agreement shall
become due and payable and IHS's obligations under this Agreement shall
immediately end.
8.5 Termination of this Agreement shall be without prejudice to all accrued
rights and remedies and shall not affect the continuing rights and
obligations of the parties under this Agreement.
9. TITLE TO SOFTWARE AND CONFIDENTIALITY
9.1 Any solutions, corrections, New Releases or documentation ('The
Confidential Information") as may be provided under this Agreement shall
remain proprietary to IHS and/or its suppliers. The License Agreement shall
include the Confidential Information under its grant of license and
proprietary restrictions.
9.2 All applicable rights to patents, copyrights, trade marks, and trade
secrets in the Confidential Information and all improvements, modifications
and changes thereto are and shall remain in IHS and/or its suppliers. You
shall not sell, transfer, publish, disclose or otherwise make available the
Confidential Information to any third party. You agree to secure and
protect the Confidential Information and all copies thereof in a manner
consistent with the maintenance of IHS's or its suppliers' rights therein
and to take appropriate action by instruction or agreement with your
employees and others who are permitted access to the Confidential
Information to satisfy your obligations hereunder. Violation of any
provisions herein shall be the basis for immediate termination of this
Agreement.
10. OMNIBUS RECONCILIATION ACT COMPLIANCE
As applicable under the Omnibus Reconciliation Act 1980, until the expiration of
four (4) years after furnishing of services pursuant to this Agreement, IHS
shall, upon receipt of written request, and if still required to make such
information available under the then existing law, make available to the
Secretary of the Department of Health and Human Services, the Comptroller
General, or any of their duly authorized representatives, this Agreement, books,
documents and records of IHS that are necessary to certify the nature and extent
of such costs, and if IHS carries out any of the duties of this Agreement
through a subcontract with a value or cost of Ten Thousand Dollars ($ 10,000) or
more over a twelve (12)-month period, such subcontract shall contain a clause to
the effect that, until the expiration of four (4) years after the furnishing of
such services pursuant to such subcontract, the subcontractor shall, upon
receipt of written request and if still required to make such information
available under the then existing law, make available to the Secretary,
Comptroller General, or any of their duly authorized representatives, the
subcontract, books, documents and records of such organization that are
necessary to verify the nature and extent of such costs.
11. GENERAL PROVISIONS
11.1 You may not, without the prior written consent of IHS, assign your rights
or obligations under this Agreement to any person or entity, in whole or in
part.
Page 4
<PAGE>
11.2 Any notices required or permitted under this Agreement shall be in writing
and delivered in person or sent by registered or certified mail, return
receipt requested.
11.3 This Agreement and performance hereunder shall be governed by and
construed in accordance with the laws of the State of Delaware. Any and
all proceedings relating to the subject matter hereof shall be maintained
in the courts of the State of Delaware, which courts shall have exclusive
jurisdiction for such purpose.
11.4 The failure of either party to enforce any rights granted hereunder or to
take action against the other party in the event of any breach hereunder
shall not be deemed a waiver by that party as to subsequent enforcement
of rights or subsequent actions in the event of future breaches.
11.5 This Agreement represents the entire agreement between you and IHS for
the provision of maintenance services in respect of the Program and it
supersedes any prior proposals, representations or understandings between
you and IHS. No modification of this Agreement shall be binding unless ft
is in writing and is signed by an authorized representative of both
parties. Should any term of this Agreement be declared void or
unenforceable by any court of competent jurisdiction, such declaration
shall have no effect on the remaining terms hereof.
By Your Signature Hereto You Acknowledge Having Read This Agreement and Agree to
Accept and to Abide by Its Terms and Conditions.
For: (Customer) Accepted and Approved by
IHS of Viriginia, Inc.
By:___________________________ By: ________________________________
Name Name
Printed:______________________ Printed:____________________________
Title:________________________ Title:______________________________
Date:_________________________ Date:_______________________________
Mailing Address: Mailing Address:
(Customer) IHS of Viriginia, Inc.
12030 Sunrise Valley Drive, Suite 205
Reston, Virginia 20191
Page 5
<PAGE>
Appendix A
Maintained Software Description
Maintained Software modules and features included in the DataQual+ software
maintenance fee are as follows:
DataQual+
Software Products
DataQual+ Base System Utilization Management Module
o Quality Assurance
o Ad Hoc Reporting Medical Records Module
o Graphics
Infection Control Module
Staff Credentialing Module
DRG Grouper/Maximizer Module
Risk Management Module
FastNote
Summary of Total Charges
Annual Software Maintenance/New Release Support
(15% of $xx,xxx) $x,xxx
------
Total Annual Charges (Recurring) $x,xxx
------
Page 6
<PAGE>
EXHIBIT 10.4
DataQual for Windows(TM) and I-Link 32 Upgrade Addendum
This agreement between ___________________________ (Customer) and IHS of
Virginia, Inc. (IHS) amends the Software License Agreement currently in place
between Customer and IHS (Agreement), and is made a part thereof. IHS hereby
grants to Customer a non-exclusive license to use computer software and/or
hardware products (Products) as identified in the Quotation schedules attached
hereto at prices stated therein. This Addendum, the Agreement, and the End User
Software License Agreement represent the entire agreement between Customer and
IHS concerning the Products, and supersedes any prior proposals, representations
or understandings between Customer and IHS. No modification of this agreement
shall be binding unless in writing and signed by an authorized representative of
both parties.
1. The Products are provided under license by IHS to Customer for Customer's
use under the terms and conditions of this agreement. The computer hardware
provided with I-Link 32 (Hardware) shall remain the property of IHS, and
must be returned to IHS in the event of any Termination of the Agreement.
Customer agrees to use the Hardware only for purposes authorized by IHS.
2. It shall be the responsibility of IHS to provide maintenance for the
Hardware either on-site or by express courier replacement service. It shall
be the responsibility of Customer to maintain a reasonable operating
environment as well as physical and electronic security for the Products.
3. Customer agrees to allow IHS to use the data handled by I-Link 32 for
analysis and statistical reporting for comparative purposes with other
hospitals. IHS agrees to safeguard all patient related data and not to
publish any data or results of the analysis of any data that is
attributable to Customer without the expressed consent of Customer.
4. Customer agrees to provide an analog telephone connection for the purposes
of system support, data transfers, problem diagnosis, and Software updates.
5. The price of I-Link 32, defined on quotation attached, includes
configuration for capture of as many of the data elements on the attached
list as may be desired by customer, from a single data source on a TCP/IP
network. Configuration of I-Link 32 for capture of additional data
elements, sources, transmission mechanisms, or bi-directional data
transfers may result in additional charges by IHS under standard consulting
rates.
6. Customer is responsible for following reasonable information systems
practices to ensure that all Customer data is backed up and properly
secured using external means across Customer's network. IMPLIED WARRANTIES
OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE ARE EXPRESSLY
EXCLUDED. IHS SHALL HAVE NO LIABILITY FOR CONSEQUENTIAL OR INCIDENTAL
DAMAGES. IN NO EVENT SHALL IHS BE LIABLE FOR DIRECT DAMAGES IN EXCESS OF AN
AGGREGATE OF ALL SUMS PAID BY CUSTOMER TO IHS UNDER THIS AGREEMENT DURING
THE PRECEDING TWELVE (12) MONTHS, AND IHS SHALL HAVE NO LIABILITY FOR ANY
DATA STORED IN OR USED WITH THE PRODUCTS, INCLUDING THE COSTS OF RECOVERING
SUCH DATA.
<PAGE>
For: Customer
By:...................................................................
Name
Printed:............................................................
Title:.................................................................
Date:..............................................................
Accepted and Approved by IHS of Virginia, Inc.
By:....................................................................
Name
Printed:...............................................................
Title:.................................................................
Date:..............................................................
This page contains IHS proprietary information, and is not to be duplicated or
disclosed without the written permission of Integrated Healthcare Systems, Inc.
<PAGE>
EXHIBIT 10.5(a)
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (hereinafter the "Agreement") is made as if entered
into as of the ___ day of ________, 199__ by and between Integrated Healthcare
Systems, Inc., a Delaware corporation and any and all subsidiaries (hereinafter
the "Company"); and _________, a _________ resident (hereinafter "Executive").
WITNESSETH
The Company and Executive hereby agree as follows:
1 . Retention. The Company hereby engages the Executive to render his services
to perform fully the duties to the Company called for hereunder during the terms
of this Agreement, and the Executive hereby accepts such employment and agrees
to render all services and perform such duties called for hereunder to the best
of his ability and to devote such time, energies and skills to such services and
duties as are required to perform such service and duties.
2. Duties and Services. (a) Executive shall serve as __________________________
of the Company. Executive shall perform such duties and services as are
customarily performed by an official in these capacities and such other
functions as may from time to time be designated by the Board of Directors of
the Company consistent with the above office. Executive shall report directly to
the Chief Executive Officer.
(b) At the direction of the Board of Directors of the Company, Executive
may be assigned different and/or additional duties for either the Company or any
subsidiary of the Company; provided, however, that the nature of any and all
duties shall be similar in terms of responsibility and prestige to the nature of
the duties previously performed by Executive under the terms of this Agreement.
In the event that such different and/or additional duties are assigned to the
Executive, Executive shall be entitled to additional compensation only in the
event that such duties require him to undertake greater responsibility than he
had prior to the assignment of such duties.
3. Term. Subject only to Sections 5 and 6 hereof, the term of the Agreement
shall commence on the date hereof and shall terminate on __________ ___, ______;
provided, however, that at the option of the Company by written notice to the
Executive not less than thirty (30) days prior to the expiration date of this
Agreement, the term of this Agreement may be extended for a period of one year
to ___________ ___, 200__ and at the additional option of the Company by written
notice to the Executive not less than thirty (30) days prior to the extended
expiration date of this Agreement the term of this Agreement may be further
extended for a period of one year to__________ __, 200_.
4. Consideration. As full compensation for his services hereunder, the Company
agrees to pay the Executive, and the Executive agrees to accept the following:
<PAGE>
(a) A salary computed at the initial rate of _______________________ Dollars
($___________ ) per annum, payable in such installments as salaries are
paid to other executive personnel of the Company. Upon approval of the
Board of Directors of the Company, the initial salary as provided for in
this Section 4(a) may be increased in such amount as shall be determined
by the Board of Directors of the Company, in its sole discretion.
(b) The Executive shall be entitled to reimbursement of authorized business
expenses incurred in connection with the conduct of the Company's
business. The authorized costs, record keeping and reimbursement shall
conform to the Company's standard policy with regard thereto established
by the Board of Directors of the Company from time to time.
(c) In the event the Company implements a 401(k) plan, the Executive shall be
entitled to be a participant in such plan. The Executive shall be
entitled to life insurance, medical insurance, disability insurance and
other fringe benefits in accordance with standard policy affecting senior
Company executives, if any, as established by the Board of Directors of
the Company from time to time, including, without limitation, any fringe
benefits more specifically described herein.
(d) Executive shall be entitled to 20 days of paid vacation each fiscal year,
in addition to those holidays normally established for all employees of
the Company, which vacation shall not be carried over from year to year,
but Executive shall be entitled to compensation for any accrued but
unpaid vacation at the earlier of the end of each fiscal year of the
Company, or the termination of this Agreement, as provided herein.
(e) In the event the Company adopts a stock option plan for the benefit of
its employees and the employees of its subsidiary corporations, upon the
adoption of such stock option plan, Executive will be a participant in
the plan. Until such time as the Company does adopt a qualified stock
option plan, the Executive is entitled to receive a minimum of __________
and up to __________ warrants per year of his employment at an exercise
price not less than the most recent issued warrant by the Company. Should
there be a change in control of the Company (change of control is herein
defined as the issuance of new shares of the Company's common stock in an
amount greater than the 50% of the number of outstanding shares of the
Company's common stock as of the date of this agreement), and prior to
such change of control, the Company agrees to accept as payment for the
exercise of any outstanding warrants in the Executive's possession a
promissory note issued by the Executive to the Company, payable in twenty
four months from the date of issuance of the promissory note with an
interest rate of ___ percent (_%) per annum.
5. Termination for Cause. The Company may terminate Executive's employment
hereunder, immediately upon written notice to executive, for "cause," as
hereinafter defined, in which event the Company shall pay Executive's
compensation pursuant to Section 4 hereof through the date of such written
notice of termination, and the Company shall continue any medical, disability
and life insurance provided pursuant to Section 4(c) for ninety days after
the effective date of such termination. For purposes of this Agreement,
"cause" for termination of the Executive's employment shall exist only if:
<PAGE>
(a) Executive repeatedly breaches any of the material terms or conditions of
the duties contained in this Agreement, which breaches shall remain
uncured by the Executive for a period of sixty (60) days after
Executive's receipt of written notice thereof from the Board of Directors
alleging with specificity such breaches and the specific actions
necessary to remedy same:
(b) Executive's willful refusal to follow written directions of the Company's
Board of Directors to perform duties consistent with those described in
Section 2 of this Agreement, which refusal is not cured within sixty (60)
days of Executive's receipt of written notice hereof form the Board of
Directors alleging with specificity such refusals and the specific
actions necessary to remedy same: or
(c) The voluntary resignation by Executive as an employee of the Company.
In the event that the Executive contests, in any court of competent
jurisdiction, the actions of the Company in terminating his employment under
this Agreement for "cause", then the Company agrees to pay into the registry of
such court the amount of the Executive's salary due pursuant to Section 4(a)
from the date of Executive's termination to the date of filing of the court
action, and continue to make such payments, and to continue medical, life and
disability insurance provided pursuant to Section 4(c) during the pendency of
such action, for the remainder of the term of this Agreement. In the event that
a court of competent jurisdiction, with all periods of appeal having expired
thereon, determines that the Company shall have wrongfully terminated the
employment of the Executive hereunder, then the termination shall be treated as
a termination without cause pursuant to Section 6 of this Agreement and the
Executive shall be paid out of the registry of the court the full amount of back
salary from the date of such wrongful termination and in addition, the Company
shall pay to the Executive all remaining payments due to Executive for the
remainder of the term hereof, together with the Executive" reasonable attorney"
fees incurred in such action, and shall continue medical, life and disability
insurance provided pursuant to Section 4(c) for the remainder of the term of
this Agreement (if any) which sum the Executive shall accept as full liquidated
damages (and note as a penalty) arising out of the Company's breach hereof and
in lieu of all other rights and remedies then available to the Executive arising
therefrom, all of which are hereby knowingly waived by the Executive. In the
event that a court of competent jurisdiction, with all periods of appeal having
expired thereon, determines that the Company shall not have wrongfully
terminated the employment of the Executive hereunder, then at that time the
Company shall be entitled to the immediate return of all funds paid into the
registry of the court pursuant to this paragraph and shall be entitled to
discontinue thereafter medical, life and disability insurance benefits under
Section 4(c).
6. Termination Without Cause.
(a) This agreement may be terminated by the Company without cause upon ninety
(90) days written notice to Executive, provided, however, that the
Company shall continue the compensation payments as set forth in Section
4 hereof, including all benefits, and full payment for all vacation days,
for the remainder of the term of the Agreement.
<PAGE>
(b) This Agreement shall terminate upon the death of the Executive. Upon the
death of the Executive, the Company shall pay the compensation pursuant
to Section 4(a) hereof for one hundred eighty (180) days after the death
of the Executive to the estate of the Executive.
7. Inventions. Executive agrees, in consideration of his employment, that all
inventions, trade secrets and other ideas and processes that may be patented or
treated as trade secrets, whether heretofore conceived by him or conceived by
him during his employment by the Company, insofar as they relate to the business
of the Company or to any technology applied or applicable in such business,
shall be and remain the exclusive property of the Company.
8. Conflicting Obligation; Competition
(a) During the term of this Agreement, Executive shall not, directly or
indirectly, alone or as a partner, officer, director or controlling
stockholder of any other institution, be engaged in any other commercial
activity or continue to assume other commercial affiliations without the
written consent of the Board of Directors of the Company.
(b) During the term of the Agreement and for a period of one year following
the termination or expiration of his employment, Executive shall not,
directly of indirectly, own, manage, operate, control, be employed by, or
participate in the ownership, management, operation, or control of any
business similar to the business conducted by the Company at the time of
such termination or expiration.
(c) During the term of this Agreement and for a period of two years following
the termination or expiration of his employment, Executive shall not,
directly or indirectly, solicit business of a type then provided by the
Company from any person who is then or has been within a period of two
years from the date of such termination or expiration a customer of the
Company.
(d) Executive further agrees that he will not, for a period of one year after
termination of his employment, hire or employ, in any capacity in any
business in which he shall be interested as a proprietor, partner or
stockholder of a corporation engaged in any business competitive with
that of the Company, any person who shall have been an employee of the
Company within the one year proceeding such employment.
(e) The covenants set forth in the Section 8 shall be construed as an
agreement independent of any provisions of this Agreement or any other
agreement between the Company and Executive and the existence of any
claim, defense or cause of action by Executive against the Company,
whether predicated on this Agreement or otherwise, shall not constitute a
defense to enforcement by the Company of the provisions of this Section
8.
<PAGE>
9. Propriety Information. Executive recognizes that, on account of and in
connection with his employment, he will gain access to and have possession of
(i) the names and addresses of the Company's clients and customers and written
compilations thereof, (ii) financial information relating to the Company, (iii)
information for and about potential acquisitions of other businesses (iv) other
information about the conduct of the Company's business. Executive hereby
recognizes such information about the conduct of the Company, and agrees not to
reveal such information to third parties except with the Company's written
consent, or as may be necessary in the ordinary course of performing Executive's
duties for the Company or as otherwise directed by the Company, and agrees to
turn over to the Company all such records, compilations, files, and memoranda,
to the Company upon termination of his employment, and all copies thereof,
keeping no such copies for him.
10. Indemnification. The Company agrees to indemnify and hold the Executive
harmless from and against all claims, damages, losses, liabilities and expenses
as the same are incurred (including any legal or other expenses incurred in the
defense or litigation, defending against any such claim, damage, loss, or
liability or any action in respect thereof), relating to or arising out of the
Executive's employment with the Company, including but not limited to the
Company's former subsidiary, Integrated Systems Technology, Inc.
11. Entire Agreement. This Agreement contains the entire agreement between the
parties with respect to the employment of the Executive by the Company and
supersedes any and all previous agreements regarding Executive's employment with
the Company- provided, however, that the Executive shall be entitled to receive
and Company hereby agrees to pay the Executive, any deferred or accrued salary
and expenses reflected on the books of the Company as of the date hereof and due
to Executive, notwithstanding the termination of the previous agreements
regarding Executive's employment with the Company.
12. Successors and Assigns. The obligations and rights of the Executive shall
inure to the benefit of and shall be binding upon him and his personal
representatives, and the obligations and rights of the Company shall inure to
the benefit of and shall be binding upon it and its successors and assigns.
13. Interpretation. When the context in which words are used in this Agreement
indicates that such is the intent, the singular shall include the plural, the
plural shall include the singular, and the masculine shall include the feminine
and the neuter.
14. Validity of Agreement. In the event any sentence or paragraph of this
Agreement is declared by a court of competent jurisdiction to be invalid, void,
or unenforceable, such sentence or paragraph shall be deemed amended to conform
to applicable laws as to be valid and enforceable to the fullest extent possible
or, if it cannot be so amended without materially altering the intention of the
parities as expressed herein, it shall be deemed severed from the remainder of
this Agreement and the balance of the Agreement shall remain in full force and
effect.
<PAGE>
15. Governing Law. This Agreement shall be governed by, and construed and
enforced in accordance with the laws of the State of Delaware.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, under seal,
as of the date and year first set forth above.
"EXECUTIVE"
-------------------------------------------
Name:
"COMPANY"
H-QUOTIENT, INC.
a Virginia Corporation
By:
----------------------------------------
Its:---------------------------------------
<PAGE>
EXHIBIT 10.5(b)
TERMS OF EMPLOYMENT FOR KEY EMPLOYEES
THIS AGREEMENT is a legally binding contract between H-Quotient, Inc., its
affiliates and its subsidiaries (collectively "IHS"), as employer, and as a key
employee of IHS. This Agreement is intended to protect important interests of
IHS, particularly valuable technology and business interests that IHS has
acquired over the years. In addition, this Agreement is intended to provide a
way for IHS to prevent unfair competition in its industry. It is hoped that in
the long run the terms of this Agreement will be a benefit, rather than a
burden, to all personnel by protecting the welfare and success of IHS as a
leader in its industry and in its community.
IHS believes that the terms of this Agreement are fair and reasonable. The
continuance of your employment and the willingness of IHS to grant you access to
its trade secrets and business information are contingent upon your entering
into this Agreement.
Nothing in this Agreement should be construed as a guarantee that your
employment will continue for any specific period of time. Unless otherwise
agreed in writing, either party may terminate employment at any time without
cause, and IHS reserves the right to change the terms of compensation or to
reassign employees to any area at any time.
1. SCOPE OF DUTIES
While I am employed by IHS, I will devote my full business time,
attention, skill and effort exclusively to the performance of the
duties that IHS may assign to you from time to time. During my
employment, I will not engage in any activities or render any services
of a business or commercial nature for anyone other than IHS that could
be construed as competitive activities with IHS, unless I have obtained
advance approval in writing from my direct supervisor.
2. OWNERSHIP OF INVENTIONS AND OTHER DEVELOPMENTS
IHS shall be entitled to own and control all proprietary technology and
all financial, operating and training ideas, processes and materials,
including works of expression and all copyrights in such works, that
are developed, written or conceived by me during employment to the
extent that they relate to IHS's current or potential business.
Accordingly, I will disclose, deliver and assign to IHS all such
patentable inventions, discoveries and improvements; trade secrets; and
all works subject to copyright, and I agree to execute all documents,
patent applications and arrangements to further document such ownership
and/or assignment and to take whatever other steps may be needed to
give IHS the full benefit of them.
I specifically agree that all copyrightable materials generated or
developed under this Agreement, including but not limited to computer
programs and documentation, shall be considered works made for hire
under the copyright law of the United States and that they shall, upon
creation, be owned exclusively by IHS. To the extent that any such
materials, under applicable law, may not be considered works made for
hire, I hereby assign to IHS the ownership of all copyrights in such
materials, without the necessity of any further consideration, and IHS
shall be entitled to register and hold in its own name all copyrights
in respect of such materials.
<PAGE>
3. CONFIDENTIALITY OF TRADE SECRETS AND BUSINESS INFORMATION
3.1 I acknowledge that during the course of my employment I may obtain
access to trade secrets and confidential business information of IHS.
Under the law, a trade secret is a type of intangible property, and its
theft is a crime in most states. A trade secret generally consists of
valuable, secret information or ideas that IHS collects or uses in
order to keep a competitive edge. Examples of trade secrets are system
design, program Materials (including source and object code and system
and user documentation), operating processes, equipment design, product
specifications and any other proprietary technology. Confidential
business information, which IHS also treats as proprietary, consists of
all other competitively sensitive information kept in confidence by
IHS. Examples of confidential business information are selling and
pricing information and procedures, customer lists, business and
marketing plans, and internal financial statements.
3.2 I agree not to use or disclose any trade secrets of IHS at any time
except as necessary to perform my duties for IHS. I also agree not to
use or disclose any confidential business information until 3 years
after the termination of my employment, except as necessary to perform
my duties for IHS. These restrictions do not apply to any information
generally available to the public or any information properly obtained
from a completely independent source.
4. TERMINATION OF EMPLOYMENT
4.1 At the time my employment is terminated, I will participate in an exit
interview conducted by a Personnel Officer for the purpose of
finalizing any remaining issues and assuring a proper transition.
4.2 On or before the termination of my employment, I will return all
records, materials and other physical objects relating to my
employment, including tools, documents, papers, computer .software and
passwords and other identification materials. This obligation applies
to all materials relating to the affairs of IHS or any of its
customers, clients, or agents that may be in my possession or control.
5. PROHIBITION AGAINST COMPETITIVE ACTIVITIES AFTER EMPLOYMENT
5.1 I agree that for a period of one (1) year subsequent to termination of
my employment with IHS, I will not without prior written consent of
IHS, within the territorial United States, engage in the business of
the installation, maintenance, enhancement, modification, or support of
IHS proprietary software or any computer programs ancillary thereto or
used in conjunction therewith.
<PAGE>
5.2 I further agree that for a period of two (2) years after the
termination of my employment, howsoever brought about, I will not (1)
directly or indirectly induce any customers of IHS to patronize any
business entity which directly competes with the business conducted by
IHS,- (2) canvass or solicit any such business any customers of IHS,
(3) directly or indirectly request or advise any customers of IHS to
withdraw, curtail or cancel such customer's business with IHS,- or
provide the names or addresses of any IHS customers.
6. PROHIBITION AGAINST UNFAIR RECRUITING PRACTICES
6.1 I agree to notify my direct supervisor if I am contacted by a
competitor of IHS for the purpose of having me accept a job involving
Prohibited Activities as specified above at any time during my
employment
6.2 During my employment and for two years afterwards, I will not solicit
or recruit any other people who are then employees of IHS, for the
purpose of encouraging them to join in any other business activity or
enterprise whatsoever, if I became acquainted with those people or
worked with them in connection with my employment with IHS.
7. OTHER TERMS
7.1 The terms of this Agreement shall survive termination of employment.
7.2 If any term of this Agreement is found to be unlawful or unenforceable
in any respect, the courts shall enforce such term, in whole or in
part, and all other terms of this Agreement, to the fullest extent
possible.
7.3 Irreparable harm should be presumed if this Agreement is breached in
any way. Damages would be difficult if not impossible to ascertain, and
the faithful observance of all terms of this Agreement is an essential
condition to employment with IHS. Furthermore, this Agreement is
intended to protect the proprietary rights of IHS in important ways,
and even the threat of any misuse of the technology of IHS would be
extremely harmful because of the importance of that technology. In the
light of these considerations, I agree that a court of competent
jurisdiction should immediately enjoin any breach of this Agreement,
upon IHS's request, and IHS is released from the requirement of posting
any bond in connection with temporary or interlocutory injunctive
relief, to the extent permitted by law.
<PAGE>
This Agreement shall be governed by and enforced under the laws of the State of
Delaware.
I ACKNOWLEDGE THAT, BEFORE SIGNING THIS AGREEMENT I WAS GIVEN AN OPPORTUNITY TO
READ IT, EVALUATE IT AND DISCUSS IT WITH MY PERSONAL ADVISORS AND WITH
REPRESENTATIVES OF IHS.
IN WITNESS WHEREOF, IHS has caused this Employee Nondisclosure Agreement to be
signed by one of its authorized officers, and Employee has signed this Agreement
as of the date first above written.
EMPLOYEE H-QUOTIENT, INC.
- ----------------------------- By:
Signature ---------------------------------
Title:
------------------------------
Date: Date:
-------------------------- -------------------------------
<PAGE>
EXHIBIT 10.6
SUBLEASE AGREEMENT
This Sublease Agreement (the "Sublease") is executed this 21st day of May 1999,
and between, Axent Technologies, Inc., a Delaware corporation ("Sublessor") and
Integrated Healthcare Systems, Inc., a Delaware ("Sublessee").
WITNESSETH:
WHEREAS, Reston Plaza Office, L.L.C. as Landlord ("Landlord") and Sublessor as
Tenant executed a Lease Agreement dated ___________, 1998 (the "Lease"), a copy
which is attached hereto at Exhibit "A", with respect to certain Premises
described therein (the "Premises") a copy which is attached hereto as Exhibit
"B"; and
WHEREAS, Reston Plaza I & II, L.L.C. ("Landlord") is the successor in interest
to Reston Plaza Office, L.L.C. and
WHEREAS, Sublessor desires to sublease the Premises described as 3,682 rental
square feet located on the second floor at 12030 Sunrise Valley Drive, Reston,
Virginia (the "Subleased Premises") under and subject to the terms of the Lease
and Sublessee desires to lease the Subleased Premises from Sublessor.
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency
of which is hereby acknowledged, the parties hereto covenant and agree as
follows:
1. Lease. Sublessee hereby expressly assumes and agrees to perform all
obligations and covenants of Sublessor under the Lease with respect to the
Subleased Premises. This Sublease and Sublessee's rights under this Sublease
shall at all times be subject and subordinate to the Lease. If any conflict
between the Lease and the Sublease occurs, the provisions of the Lease shall
control, except as other specifically provided herein.
2. Term. The term of this Sublease shall commence (the "Commencement Date") on
the earlier of (i) the date of occupancy by Sublessee or (ii) June 1, 1999, and,
unless sooner terminated pursuant to the provisions hereof, shall terminate on
the earlier of May 31, 2001, or two (2) years from the Commencement Date or the
prior termination of the term of the Lease; provided, that if Sublessor shall
not deliver the Premises to Sublessee in the condition required hereunder on or
prior to June 1, 1999, the Commencement Date shall not occur until the date of
such delivery. As used herein, the phrase "Lease Year" shall mean the twelve
calendar month period commencing on the Commencement Date (or, if the
Commencement Date is not the first day of a calendar month, then commencing on
the first day of the calendar month during which the Commencement Date occurs)
and each anniversary hereof, except that the last Lease Year may not be twelve
calendar months and shall terminate on the last day of the term of this
Sublease. Notwithstanding anything to the contrary contained herein, if
Sublessor has not obtained the required
1
<PAGE>
consent of Landlord or has not delivered the Premises in the condition required
hereunder on or before June 1, 1999, Sublessee shall have the right thereafter
to cancel this Sublease, and, upon such cancellation, Sublessor shall return all
sums theretofore deposited by Sublessee with Sublessor, and neither party shall
have any further liability to the other.
3. Rent.
(a) Sublessee shall pay to Sublessor gross annual rental
("Gross Rent") on a Full Service Basis for the Premises calculated as follows:
$29.00 per rentable square foot on a gross basis, for an annual total of
$106,778 ("Annual Gross Rent"), , together with additional rent as set forth
below with a three percent (3%) per annum increase on the anniversary date
commencing June 1, 2000.
Annual Gross Rent shall be due and payable in twelve equal
installments of $8,898.17 each. Each such installment shall be due and payable
in advance on the fifth day prior to the first day of each calendar month of the
term hereof. If the term of this Sublease commences on a day other than the
first day of a month or ends on a day other than the last day of a month, Gross
Rent for such month shall be prorated; prorated Gross Rent for any such partial
first month of the term hereof shall be paid on the date on which the term
commences.
(b) Sublessee shall also pay to Sublessor such other amounts
payable by Sublessor under the Lease which are attributable to the Premises or
attributable to Sublessee, its agents, employees, customers or invitees.
Sublessee shall pay to Sublessor by way of additional rent during the Term the
following:
i. The pro rata portion allocable to the Premises of the
excess of "Operating Expenses" and the Real Estate Taxes allocable to the
Premises over the "Base Year" which shall be the first twelve months extending
from January 1, 1999 to December 31, 1999. The term "Operating Expenses" and
"Real Estate Taxes" shall have the same definition as in the Lease.
Notwithstanding any provision of this Sublease or the Lease to the contrary,
Sublessee shall not be liable to Sublessor or Landlord for any Operating
Expenses or Real Estate Taxes other than increases over the Base Year, as
defined above.
ii. Its pro rata share of any other additional rent which
shall become due during the Term. By way of example and not by way of
limitation, charges by Landlord for furnishing air conditioning or heating to
the Premises at times in addition to those certain times specified in the Lease,
costs incurred by Landlord in repairing damage to the Building caused by an
employee of Sublessee, and increased insurance premiums due as a result of
Sublessee's use of the Premises would be amounts payable by Sublessee pursuant
to this Subsection 3(b).
(c) Each amount due to Sublessor pursuant to Subsection 3(b)
above
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<PAGE>
and each other amount payable by Sublessee hereunder, shall be due and payable
on the fifth day following the date on which Landlord or Sublessor has given
notice to Sublessee of the amount thereof, but in no event later than the date
on which any such amount is due and payable under the Lease.
(d) All amounts other than Gross Rent payable to Sublessor
under this Sublease shall be deemed to be additional rent due under this
Sublease. All past due installments of Gross Rent and additional rent shall bear
interest from the date due until paid at the rate per annum equal to the rate
set forth in the Lease.
(e) Sublessee shall pay Landlord on the due dates for services
requested by Sublessee which are billed by Landlord directly to Sublessee rather
than Sublessor.
(f) Sublessor unconditionally assigns to Landlord any and all
payments due from Sublessee to Sublessor under the Sublease (the "Rents").
Sublessor acknowledges that this assignment is present, absolute and
unconditional and Landlord shall therefore have the right to collect the Rents
and to apply them in payment of any sums payable by Sublessor under the Lease.
However, Sublessor shall have a license to collect the Rents until the
occurrence of a default by Sublessor under the Lease. If a default occurs,
Sublessor's right to collect the Rents shall be suspended until the default is
cured. During such period, Landlord shall have the right to collect the Rents
and apply them toward Sublessor's obligations under the Lease. Landlord's
acceptance of any payment form Sublessee as a result of any default does not
release Sublessor form liability under the terms, covenants, conditions,
provisions or agreements under the Lease.
(g) Sublessee shall pay Rents to Sublessor at 2400 Research
Boulevard, Rockville, Maryland 20850 or at such place as Sublessor may designate
from time to time in writing unless and until it is notified by Landlord that it
shall begin paying rents directly to Landlord, in which event Sublessee shall
pay the Rents to Landlord at c/o Principal Capital Management, L.L.C., 801 Grand
Avenue, Des Moines, IA 50392-1392, Attn: Commercial Real Estate Equities.
4. Termination.
(a) If at any time prior to the expiration of the term of the Sublease,
the Lease shall terminate or be terminated for any reason (or Sublessor's right
to possession shall terminate without termination of the Lease), the Sublease
shall simultaneously terminate. However, Sublessee agrees, at the election and
upon written demand of Landlord prior to the termination of the Lease, and not
otherwise, to attorney to Landlord for the remainder of the term of the
Sublease, such attornment to be upon all of the terms and conditions of the
Lease. The foregoing provisions shall apply notwithstanding that, as a matter of
law, the Sublease may otherwise terminate upon the termination of the Lease and
shall be self-operative upon such written demand of Landlord, and no further
instrument shall be required to give effect to said provisions. Upon demand of
Landlord, however, Sublessee
3
<PAGE>
agrees to execute, from time to time, documents in confirmation of the foregoing
provisions satisfactory to Landlord in which Sublessee shall acknowledge such
attornment and shall set forth the terms and conditions of its tenancy. Nothing
contained in this paragraph shall be construed to impair or modify any right
otherwise exercisable by Landlord, whether under the Lease, any other agreement
or by law.
(b) Landlord shall not (i) be liable to Sublessee for any act, omission
or breach of the Sublease by Sublessor, (ii) be subject to any offsets or
defenses which Sublessee might have against Sublessor, (iii) be bound by any
rent or additional rent which Sublessee might have paid in advance to Sublessor,
or (iv) be bound to honor any rights of Sublessee in any security deposit made
with Sublessor, except to the extent Sublessor has turned over such security
deposit to Landlord. Sublessor hereby agrees that in the event of Lease
Termination, Sublessor shall immediately pay or transfer to Landlord any
security deposit, rent or other sums then held by Sublessor.
5. Additional Services. Should Landlord furnish additional services to
Sublessee in addition to those provided under the Lease, Sublessor consents to
Landlord billing Sublessee directly, with copies to Sublessor. Should Sublessee
fail to pay said amounts as additional rent under the Lease, Sublessor agrees to
pay such amounts to Landlord upon written demand. A failure by Sublessor to pay
upon demand within time periods provided in the Lease shall constitute a payment
default under the Lease.
6. Use. Sublessee shall use the Subleased Premises for general office use
and no other purpose without the prior written consent of Sublessor and
Landlord.
7. Notice.
(a) Notices given hereunder shall be given as required under the Lease
to the parties at the following addresses:
If to Sublessor: AXENT Technologies, Inc.
2400 Research Boulevard
Rockville, MD 20850
Attn: General Counsel
Copy to: Glenn R. Bonard, Esquire
Whiteford, Taylor & Preston L.L.P.
1025 Connecticut Avenue, N.W.
Washington, D.C. 20036-5405
If to Sublessee: Integrated Healthcare Systems
12030 Sunrise Valley Drive
Suite 200B
Reston, VA 20191
4
<PAGE>
Copy to: Alan Grofe
10880 Poplar Ford Trail
Manassas, VA 20109
(b) In the event any notice from the Landlord or otherwise relating to
the Lease is delivered to the Premises or is otherwise received by Sublessee,
Sublessee shall, as soon thereafter as possible, but in any event within
twenty-four (24) hours, deliver such notice to Sublessor if such notice is
written or advise Sublessor thereof by telephone if such notice is oral.
(c) Notices and demands required or permitted to be given by either
Sublessee or Sublessor to the other with respect hereto or to the Premises shall
be in writing and shall not be effective for any purpose unless the same shall
be served either by personal delivery with a receipt requested, by overnight air
courier service or by United States certified or registered mail, return receipt
requested, postage prepaid; provided however, that all notices of default shall
be served either by personal delivery with a receipt requested or by overnight
air courier service. Notices and demands shall be deemed to have been given two
(2) days after mailing, if mailed, or, if made by personal delivery or by
overnight air courier service, then upon such delivery. Either party may change
its address for receipt of notices by given notice to the other party.
8. Indemnification. Sublessor and Sublessee agree to indemnify and hold
Landlord harmless from and against any loss, cost, expense, damage or liability,
including reasonable attorneys' fees, incurred as a result of a claim by any
person or entity (i) that it is entitled to a commission, finder's fee or the
like payment in connection with the Sublease or (ii) relating to or arising out
of the Sublease or any related agreements or dealings.
9. Miscellaneous.
(a) This Sublease may not be amended without the prior written consent
of Landlord and Sublessor. Sublessee shall have no right to assign the Sublease
or further sublet the Subleased Premises without the prior written consent of
Sublessor and Landlord.
(b) If any provisions of this Sublease shall be invalid or
unenforceable, such provision shall be severable and such invalidity or
unenforceablility shall not impair the validity of any other provision of this
Sublease
(c) This Sublease may be executed in several counterparts, each of
which shall be deemed an original, but all of which shall constitute one and the
same instrument.
5
<PAGE>
(d) This Sublease shall be binding upon and inure to the benefit of the
parties' respective successors and assigns, subject to all agreements and
restrictions contained in the Lease and this Sublease with respect to sublease,
assignment or other transfer. The agreements contained herein and the Lease
constitute the entire understanding between the parties with respect to the
subject matter hereof and supersede all prior agreements except for the Lease,
written or oral, inconsistent herewith.
10. Additional Provisions. Addendum A attached hereto and made a part
hereof contains additional provisions regarding the sublease of the Subleased
Premises.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Sublease Agreement the
day and year first above written.
SUBLESSOR: AXENT Technologies, Inc.
ATTEST: By: /s/ Robert B. Edwards
---------------------------------------
/s/ Timothy O'Sullivan Its: VP & CFO
- ----------------------------- ---------------------------------------
SUBLESSEE: Integrated Healthcare Systems
ATTEST: By: /s/ Alan Grofe'
---------------------------------------
- ----------------------------- Its: President
---------------------------------------
COMMONWEALTH OF VIRGINIA
ss.
COUNTY OF FAIRFAX
May 21, 1999
- -------
Then personally appeared before me the above-named Alan Grofe',
(Vice) President of Integrated Healthcare Systems, and made oath that the
foregoing instrument is the free act and deed of said corporation.
/s/ ALL RAJESH KAPANI
--------------------------------------------
NOTARY PUBLIC
My Commission expires: July 31, 2000
7
<PAGE>
STATE OF MARYLAND
ss:
COUNTY OF
MONTGOMERY 1999
The personally appeared before me the above-named Robert B. Edwards
(Vice) President of AXENT Technologies, Inc. and made oath that the foregoing
instrument is the free act and deed of said Corporation and said (Vice)
President.
/s/
--------------------------------------------
NOTARY PUBLIC
My Commission expires:
Gant Redmon, Notary Public
Montgomery County
State of Maryland
My Commission Expires Jan. 15, 20001
8
<PAGE>
EXHIBIT "A"
PRIME LEASE
Sublessee acknowledges that the Sublessor has provided them with a copy of the
Prime Lease by and between Reston Plaza Office, L. L. C. (Landlord) and Axent
Technologies, Inc. (Tenant) dated "________________, 1998".
Acknowledged
Integrated Healthcare Systems, Inc. (Sublessee)
By: /s/Alan Grofe
--------------------------------
Title: President
--------------------------------
Date: 5/21/99
--------------------------------
9
<PAGE>
EXHIBIT "B"
PREMISES
10
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES OF
INTEGRATED HEALTHCARE SYSTEMS, INC.
1. IHS of Virginia, Inc., a Delaware corporation qualified to do business in
Virginia, which does business under its assumed name of "IHS".
<PAGE>
EXHIBIT 23.1
KaufmanDavis, PC
AN INDEPENDENT CPA FIRM
CONSENT OF INDEPENDENT AUDITORS
Board of Directors and Stockholder
H-Quotient, Inc.
We consent to the incorporation of our financial statements dated June 11, 1999,
with respect to the consolidated financial statements and schedules of
Integrated Healthcare Systems, Inc. and Subsidiary (hereafter referred to as
H-Quotient, Inc. and Subsidiaries) for the years ended December 31, 1997 and
December 31, 1998 in the Registration Statement dated July 23, 1999 on Form
10-SB for the registration of H-Quotient, Inc. under the Securities Exchange Act
of 1934.
/s/ Kaufman Davis, P.C.
- ------------------------
KAUFMAN DAVIS, PC
Bethesda, Maryland July 23, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-END> DEC-31-1998 MAR-31-1999
<CASH> 1,776 565,270
<SECURITIES> 0 0
<RECEIVABLES> 80,332 116,039
<ALLOWANCES> 10,000 10,000
<INVENTORY> 0 0
<CURRENT-ASSETS> 82,093 758,915
<PP&E> 134,657 149,737
<DEPRECIATION> 66,881 78,989
<TOTAL-ASSETS> 226,037 1,034,256
<CURRENT-LIABILITIES> 4,400,119 4,503,614
<BONDS> 0 0
0 0
0 0
<COMMON> 511 659
<OTHER-SE> (4,174,082) (3,469,358)
<TOTAL-LIABILITY-AND-EQUITY> 226,037 1,034,256
<SALES> 239,139 227,462
<TOTAL-REVENUES> 239,139 227,462
<CGS> 307,537 38,960
<TOTAL-COSTS> 1,707,350 277,484
<OTHER-EXPENSES> 58,207 980
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 157,970 29,833
<INCOME-PRETAX> (1,684,388) (80,815)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,684,388) (80,815)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,684,388) (80,815)
<EPS-BASIC> (0.34) (0.01)
<EPS-DILUTED> (0.34) (0.01)
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