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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 28594
FORM 10-SB
AMENDMENT NO. 2
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS
UNDER SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
001-15179
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Commission File Number
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 Telecopier (703) 716-0592
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
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Securities to be registered under Section 12(g) of the Act:
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Common Stock
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(Title of class)
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(Title of class)
The undersigned registrant hereby files this Amendment No 2 to its Form
10-SB in response to comments relating thereto contained in the Commissioner's
letter of August 24, 1999 to correct and refile Exhibit 21.1, 3.14 and 3.15. The
list of subsidiaries of the Company and to add Exhibits.
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TABLE OF CONTENTS
PART I
PAGE
Item 1 Description of Business 6
Item 2 Management's Discussion and Analysis
of Financial Condition and Results of Operations 32
Item 3 Description of Property 41
Item 4 Security Ownership of Certain Beneficial Owners and
management 42
Item 5 Directors, Executive Officers, Promoters and Control
Persons 43
Item 6 Executive Compensation 45
Item 7 Certain Relationships and Related Transactions 46
Item 8 Description of the Company's Securities 46
PART II
Item 1 Market Price of and Dividends on the Registrant's
Common Equity and Other Shareholder Matters 51
Item 2 Legal Proceedings 52
Item 3 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 54
Item 4 Recent Sales of Unregistered Securities 54
Item 5 Indemnification of Directors and Officers 58
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
3.14 Certified copy of the Certificate of Incorporation of The DataQual
Group, Inc. a wholly owned subsidiary
3.15 Copy of the By-Laws of the DataQual Group, Inc.
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
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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 Davis PC
27.1 Financial Data Schedule (prepared 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. The principal products consist of our
DataQual(R), our I-Link(sm) and our I-Link(sm) Enterprise, together with a
central data repository. DataQual is a software system designed to collect
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), which is a software application used to collect data from
dissimilar information systems located in the various hospital departments, in
turn records this collected data into the DataQual software system. I-Link(sm)
Enterprise is a software system installed on personal computer servers we
provided the client and is attached to a hospitals network (LAN), which connects
all of the hospital's computers. The I-Link Enterprise system then pulls,
corrects, groups and places, the hospital wide data, into a local database. This
data is then subsequently transmitted over a private communication network to
the central data repository maintained and operated by the client or us. 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.
With the continued growth of managed healthcare in the $1 trillion
healthcare industry, there is tremendous ongoing pressure to contain costs,
which is changing the structure of healthcare payments from traditional fee to
service reimbursement as provided by contract on a per patient basis. This, in
turn, is creating a demand for the continuing analysis and reporting of clinical
treatments and their expected outcomes. In our opinion this trend will continue
in the coming years.
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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 I-Link 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 provide enhancements of this product
through additional research and development.
o Continue expansion of the 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 Continue maintenance of our existing client base by providing
support, software upgrades and consulting services.
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Continue expansion of our operations through strategic alliances, joint
ventures, mergers or acquisitions.
In our attempts to implement this business strategy, we are presently
forced to operate at a substantial disadvantage because of our limited
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 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 handicapped by a continuing 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 software system provided on a modular basis that can
supply many of a hospital's quality and risk management and analytical and
reporting needs. DataQual is a relational database system that runs alone by
itself or on the hospital's local area networks (LANs). The system gathers data
from all information systems in the hospital, via the I-Link interface engine.
DataQual then integrates this data with pertinent quality and risk management
data, and provides reports on hospital performance and improvement issues,
either on paper or in electronic form.
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The DataQual System is a modular, integrated system , which is highly
adaptable to a hospital's changing demands. This System runs on an included
Windows NT PC server by itself or on a local area network. This Windows NT PC
server can be supplied in various configurations, allowing it to meet the
hospital quality improvement and risk management needs of many different sized
institutions. DataQual's software is sold in modules, which allows smaller
hospitals to buy the sub-systems or modules they need and add more as their
needs increase or their budgets allow.
Additionally, the DataQual system can take the hospitals sophisticated
quality and risk information that has been formatted to protect the privacy of
the patients and the confidential information of the hospital and send it, using
I-Link Enterprise, over a private communication network to a central data
repository located at its affiliated healthcare group, to a state-wide
healthcare association 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 Data Collection Software System
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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 costly labor functions 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 separately priced and independently installable. This
allows a hospital to configure the system according to their initial quality
improvement requirements and then add other function system modules as it grows
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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Once the risk related data is collected by the hospital, DataQual- RMS
can feed the information, using I-Link Enterprise, via its private communication
network into the risk central data repository, where risk information analysis
and reporting is performed. This analysis can incorporate the privately secured
data of other hospitals and be shared with the other hospitals for the purpose
of reducing any risks associated with delivering cost-effective, quality
healthcare.
The DataQual Risk Management System runs on an included Windows NT PC
server either by itself or as part of a network. It also is available with
I-Link, which connects and exchanges data among any number of dissimilar
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-Data Collection Software System
I-Link connects the DataQual quality and risk hospital based in data
repositories with the dissimilar mainframe and client/server systems used in
most hospitals. This includes the new automated patient records systems. This
recently redesigned software system 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 collection tool,
which transfers data from dissimilar software applications to the DataQual
System, regardless of differences in software languages, operating systems or
hardware platforms.
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We can customize I-Link to automatically query any hospital system for
the specific data needed and then send that data to the hospital DataQual
System. I-Link interfaces with any system without invading or altering the host
applications and without the need to know an application's software source code,
file layouts or structures. Compared with other interface systems available in
the market, the use of parameter driven tools improves the systems ease of
configuration and use. I-Link is designed to gather data as it happens when
required in a hospital environment.
We believe that when combined, DataQual QMS, DataQual RMS, and the
I-Link system can meet the overall quality and risk data analysis and reporting
needs of any hospital and its 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 a private "communication network", to a central data repository
healthcare database. This private communication network, which uses an expanded
version of the I-Link software system, 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's
central data repository. Access to the data is then provided to affiliated
hospitals 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 communication 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
call 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.
We believe, based upon information received from JCAHO, that the
healthcare providers' goals for continuous quality improvement and total quality
management increasingly will not be limited to only 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 data collection software system 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 was a statewide, five-year $2.9 million
contract. The Ohio Hospital Association ("OHA") has contracted us to automate
the collection, by OHA's The Association for Hospitals and Health Systems, of
its 1999 hospital clinical information via a private communication network, to a
statewide central data repository healthcare database. I-Link Enterprise, which
uses this private communication 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, is projected to be in excess of $1
million. This contract 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 a private communication 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.
This system, will transform a statewide manual, risk data submission process
into a fully automated one, and it will extend 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 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, 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 private communication 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 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;
o enhance our current products and develop and introduce new products
that keep pace with technological developments,
o respond to evolving client requirements,
o 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 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
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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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<PAGE>
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
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.
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 $(3,282,673) $(1,917,738) $(680,885) $(80,815)
Operations
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 37 and "Legal Proceedings" at page 52.
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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 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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<PAGE>
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 t he 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
29
<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 $6,900,000 and $7,300,000
(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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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 3,211,035 1,388,981 563,573 192,582
Profit (Loss) from operations (3,248,929) (1,701,561) (647,405) (50,022)
Interest expense, net 183,546 157,970 21,477 29,833
Other expense (income) (149,802) 58,207 12,003 960
Net Profit (loss) (3,282,673) (1,917,738) (680,885) (80,815)
Net loss per common share and
Common share equivalents (0.92) (0.39) (0.14) (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
</TABLE>
<TABLE>
<CAPTION>
Balance Sheet Data
3 Months Ended
Years Ended December 31, March 31,
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
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 (9,746,760) (11,664,498) (11,745,313)
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 a Virginia corporation organized to design, develop, market and
maintain hospital software systems that are designed to collect, analyze and
report information relating to the care of the hospital's patients.
Our primary product is the DataQual System consisting of several
subsystems, which measures and analyses the quality of the healthcare services
provided. These subsystems are supplied with information by another product of
ours, the I-Link System which gathers the information from the many different
computer systems in the various departments of the hospital and integrates this
information with the information entered into the DataQual Systems.
Our other product, I-Link Enterprise, consists of a system of PC
servers each installed on a hospital local communication network. These servers
gather, correct and group the hospital wide data, which can be combined with the
data from the DataQual System and then transmitted over our private
communication network to a central data repository,
Our systems are fully compatible with the wide range of dissimilar-
computer systems and networks used by our hospital clients. In addition, our
systems are modular and can be installed in various configurations to fit the
hospital specifications which are determined by its needs and its budget.
We have incurred losses since the inception of our operations. At
December 31, 1998, we had an accumulated deficit of $(11,745,313). To date, we
have relied substantially on private placement offerings of debt and equity to
augment our cash flow generated by operations and to fund our ongoing
operations, research and development programs and business activities.
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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 the technical obsolescence of the DOS operation systems
based on DataQual and I-Link software in 1997. The DOS based software has not
been sold since January 1997 and while we continue to support DOS based systems
under our contracts, there was an attrition of these systems under contract in
1998. These factors resulted in a decrease in software sales and 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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<PAGE>
General and administrative expenses for the year ended December 31,
1998 decreased to $1,388,981 from $3,211,035 for the year ended December 31,
1997. The decrease of $1,822,504 primarily resulted from a decrease in
amortization and legal and underwriting expenses as well as more efficient use
of the staff and associated costs. In 1997, we expensed the costs associated
with the purchase of our DOS based software products because these were rendered
technically obsolete by demand for windows-based software products in our
industry.
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.
Other income (expense), net for the year ended December 31, 1998
increased to $58,207 in expenses from $149,802. The variance of $208,009 from
1997 to 1998 resulted from forgiveness of debt income in 1997 that was generated
by a reduction in accounts payable for legal fees which has been previously
expensed as compared to costs in 1998 previously associated with the write off
of balances due from an affiliate.
Net loss for the year ended December 31, 1998 and the year ended
December 31, 1997 were $(1,917,738) and $(3,282,673), 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 a reallocation of
personnel from software support to research and development.
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 $563,573 for the three months ended March
31, 1998. The decrease of $370,991 resulted primarily from a decrease in legal
expenses in relation to contingent liabilities and investment banking costs
associated with the issuance of warrants as compensation, 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
adjustments regarding balances due from an affiliate.
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Net loss for the three months ended March 31, 1999 and the three months
ended March 31, 1998 were $(80,615) and $(680,884), 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 $441,165 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 and capitalization of software
costs.
During the three months ended March 31, 1999, we generated net cash of
$262,833 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 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.
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 $2,191,600.
From September 1996 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 Act of 1933 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.
From September 1997 to 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
135,029 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 $202,588 in cash, debt repayment and other expenses at the issuance
price of $.68 per share.
From January 1999 to April 1999 we issued 1,842,078 shares of our
common stock in exchange for $507,336 in cash and $423,706 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
believe, however, that our current operational plans for the next twelve months
will not be curtailed or delayed because of the lack of sufficient financing. We
have been able to raise capital in a series of equity and debt offerings in the
past and expect, in all likelihood that we will need to raise additional funds,
either by loans or additional equity offerings in the near future. While 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, we believe
that sufficient capital can be raised in the foreseeable future.
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.
40
<PAGE>
Net Operating Loss
For federal income tax purposes, we have net operating loss
carryforwards of approximately $6,900,000 as of December 31, 1998 and $7,300,000
(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.
41
<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 367,666 250,000 5.18%
12030 Sunrise Valley Dr.
Reston, VA 20191
Alan Grofe 312,334 250,000 4.40%
12030 Sunrise Valley Dr.
Reston, VA 20191
--------- --------- -----
All officers and directors as 680,000 500,000 9.59%
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 46.
(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.
42
<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, Chief Executive
Officer, Treasurer,
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.
43
<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.
44
<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
four 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.
<TABLE>
<CAPTION>
Name Principal Position Salary Bonus Other
- ---- ------------------ ------ ----- -----
<S> <C> <C> <C> <C>
Michael J. Black Chairman and CEO $145,0000 0 0
Alan Grofe President and COO $145,0000 0 0
</TABLE>
Mr. Black holds warrants covering 250,000 shares of Common Stock, and
Mr. Grofe, holds warrants covering 250,000 shares. For a description of the
terms of these warrants, see "Description of the Company's Securities" at page
___.
45
<PAGE>
Directors' Compensation
- -----------------------
We do not pay director's fees, but reimburses them for expenses
incurred in attending meetings.
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 4,099,971 at March 31, 1999 (10,991,755 at June
30, 1999) shares of Common Stock. The following table sets forth our
capitalization at March 31, 1999.
46
<PAGE>
<TABLE>
<CAPTION>
3 Months Ended
Years Ended December 31, 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) (9,746,760) (11,664,498) (11,745,313)
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 6,833,994 7,489,905 8,275,296
Accumulated deficit (9,746,760) (11,664,498) (11,745,313)
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>
47
<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
596 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
accumulative 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.
48
<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 4,009,971 shares of
Common Stock at March 31, 1999 (10,991,755 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 125,000 1.50 February 2003/June 2003/
75,000/50,000 2.00/3.00 February 2003/June 2003
Alan W. Grofe 125,000 1.50 February 2003/June 2003/
75,000/50,000 2.00/3.00 February 2003/June 2003
- --------------------------------------------------------------------------------
All Warrants Outstanding
49
<PAGE>
<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
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>
(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.
50
<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.
51
<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.
52
<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.
53
<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.
54
<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.
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.
55
<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.
56
<PAGE>
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 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
7,526,784 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.
57
<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
58
<PAGE>
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 INSURANCE
At present, we do not maintain Officers and Directors Liability
Insurance.
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 September 21, 1999 By /s/ Michael J. Black
-----------------------
Michael J. Black, CEO
Chairman and Chief
Executive Officer
By /s/ Alan W. Grofe
------------------------
Alan W. Grofe, President
59
<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 - 23
F-1
<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 Bethesda, MD
June 11, 1999
F-2
<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
Contract receivables, 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 73,488 175,810 94,193
Billings in excess of costs and estimated
Earnings on uncompleted contracts -- -- 602,914 --
------------ ------------ ------------ ------------
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 7,489,905 6,833,994 8,275,296 7,212,344
Accumulated deficit (11,664,498) (9,746,760) (11,745,313) (10,427,645)
------------ ------------ ------------ ------------
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-3
<PAGE>
INTEGRATED HEALTHCARE SYSTEMS, INC. AND SUBSIDIARY
Consolidated Statements of Operations
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 1,388,981 3,211,035 192,582 563,573
----------- ----------- ----------- -----------
Total operating expenses 1,940,700 3,556,387 277,484 720,009
----------- ----------- ----------- -----------
Operating loss (1,701,561) (3,248,929) (50,022) (647,405)
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 (1,917,738) (3,282,673) (80,815) (680,885)
Provision for income taxes -- -- -- --
----------- ----------- ----------- -----------
Net loss $(1,917,738) $(3,282,673) $ (80,815) $ (680,885)
=========== =========== =========== ===========
Earnings per common share:
Basic and diluted:
Net loss $ (0.39) $ (0.92) $ (0.01) $ (0.14)
=========== =========== =========== ===========
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-4
<PAGE>
INTEGRATED HEALTHCARE SYSTEMS, INC. AND SUBSIDIARY
Consolidated Statements of Shareholders'
Accumulated (Deficit)
December 31, 1998 and 1997
<TABLE>
<CAPTION>
Additional Total
Common Stock 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 and warrants:
Warrants issued in connection with
purchase of IST assets @ $.11 -- -- 134,000 134,000
Regulation A offering @ $2.00 271,984 28 543,940 543,968
Stock issuance @ $.84 100,000 10 83,893 83,903
Sale of stock for notes @ $.33 1,065,747 107 354,590 354,697
Sale of stock for notes @ $1.01 77,428 8 78,202 78,210
Stock issuance - Rule 144 @ $2.00 135,029 14 270,044 270,058
Warrants pursuant to a Regulation D
offering @$1.00 -- -- 265,188 265,188
Net loss for 1997 -- -- -- (3,282,673) (3,282,673)
------------ ------------ ------------ ------------ ------------
December 31, 1997 4,812,779 $ 483 $ 6,833,994 $ (9,746,760) $ (2,912,283)
============ ============ ============ ============ ============
Issuance of warrants pursuant to a
Regulation D offering @ $1.00 -- -- 145,000 145,000
Issuance of warrants for services
@ $.55 and $.42 -- -- 233,350 233,350
Net loss for the three months ended
March 31, 1998 (unaudited) -- -- -- (680,885) (680,885)
------------ ------------ ------------ ------------ ------------
March 31, 1998 (unaudited) 4,812,779 $ 483 $ 7,212,344 $(10,427,645) $ (3,214,818)
============ ============ ============ ============ ============
Issuance of common stock and warrants:
Regulation D offering @ $1.00 -- -- 50,000 50,000
Regulation D offering @$.10 -- -- 25,000 25,000
Stock issuance - Rule 144 @ $ .68 297,926 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 $ 7,489,905 $(11,664,498) $ (4,174,082)
============ ============ ============ ============ ============
Issuance of common stock pursuant to a
Regulation D offering:
@ $.60 (unaudited) 446,389 45 267,788 267,833
@ $.50 (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 $ 8,275,296 $(11,745,313) $ (3,469,358)
============ ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
INTEGRATED HEALTHCARE SYSTEMS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
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 $(1,917,738) $(3,282,673) $ (80,815) $ (680,885)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 39,761 23,614 12,108 9,777
Amortization 19,113 1,055,893 -- 8,192
Stock and warrants issued for current expenses 356,439 264,070 1,000 233,350
Write off of intangible assets -- 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 296,145 121,050 266,356 98,621
Accrued expenses 550,660 197,454 (181,655) 112,733
Deferred revenues 164,737 (41,789) (62,415) 20,705
Billings in excess of costs -- -- 602,914 --
----------- ----------- ----------- -----------
Net cash (used in) provided by operating
activities (369,531) (324,694) 441,165 (146,698)
----------- ----------- ----------- -----------
Cash flows from investing activities:
Additions to property and equipment (17,333) (13,572) (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) (38,572) (140,504) --
----------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from sale of warrants 220,000 265,188 -- 145,000
Proceeds from sale of common stock 79,500 347,337 327,833 --
Proceeds from notes payable 155,000 35,000 -- 90,000
Proceeds from related parties 115,376 -- -- 35,206
Repayment of notes payable (20,000) (208,873) (65,000) (20,000)
Repayment of related parties (90,100) (65,784) -- (90,000)
----------- ----------- ----------- -----------
Net cash provided by financing activities 459,776 372,868 262,833 160,206
----------- ----------- ----------- -----------
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-6
<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 - The Company follows the guidelines as promulgated under
Statement of Position (SOP) 97-2, 98-4 and 98-9 in recognizing revenue on
software sales and other services. Management believes that the implementation
of SOP 98-4 and 98-9 does not materially effect the financial statements.
Software System Sales - Revenue from software system sales that do not require
significant production modification or customization, are recognized when all of
the following criteria are met:
o execution of a written contract;
o delivery of product;
o the fee is fixed or determinable and
o collectibility is reasonably assumed.
If a software system sale includes multiple elements, the sale price is
allocated to each element according to its actual selling price.
Revenues from software system sales requiring significant modification or
customization are recognized using the percentage of completion method based on
the costs incurred relative to total estimated costs.
F-7
<PAGE>
INTEGRATED HEALTHCARE SYSTEMS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
2. Summary of Significant Accounting Policies (continued)
Contract costs include all direct material, labor costs, subcontract and those
indirect costs related to contract performance, such as equipment cost,
supplies, insurance, payroll taxes and other general costs. General,
administrative and overhead costs are charged to expense as incurred. Provision
for estimated losses on uncompleted contracts are made in the period in which
such losses are determined. Changes in job performance, job conditions,
estimated profitability, and final contract settlements may result in revisions
to costs and income, which are recognized in the period in which the revisions
are determined.
Long-term contracts include certain key elements and consist of the following:
o I-link Enterprise
o Central data repository (CDR) or data warehouse
o PC-based intelligent node or server
o On-going support and training
o Dataqual system (optional)
The Company offers non-specific upgrades to customers with annual support
agreements for a specific product when they are completed and available for
release. If an upgrade leads to a new product, the upgrade is considered a new
sale.
Consulting Services; Maintenance Contracts - Revenue 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 Revenue - Deferred revenue represents 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.
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.
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)
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................................ 30 months
Customer lists....................................... 30 months
Copyrights........................................... 30 months
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>
INTEGRATED HEALTHCARE SYSTEMS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
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.
Stock-Based Compensation - The Company continues to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board ("APB") No. 25, "Accounting for Stock Issued to Employees".
Compensation cost for stock options or other equity instruments, if any, is
measured as the excess of the quoted market price of the Company's stock at the
date of grant over the amount an employee must pay to acquire the stock.
Restricted stock, if any, is recorded as compensation cost over the requisite
vesting periods based on the market value on the date of grant.
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," established accounting and disclosure requirements
using a fair-value-based method of accounting for stock-based employee
compensation plans. The Company has elected to remain on its current method of
accounting as described above, and has adopted the disclosure requirements of
SFAS No. 123.
F-10
<PAGE>
INTEGRATED HEALTHCARE SYSTEMS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
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 approximately 1,200,000 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.
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
------------ ------------ ----------- ------------
134,657 117,324 149,737 117,324
Less: accumulated depreciation 66,881 27,120 78,989 36,897
============ ============ =========== ============
$ 67,776 $ 90,204 $ 70,748 $ 80,427
============ ============ =========== ============
</TABLE>
F-11
<PAGE>
INTEGRATED HEALTHCARE SYSTEMS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
4. Property and Equipment (continued)
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 388,052 388,052 388,052 388,052
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
----------- ----------- ----------- -----------
1,092,450 1,092,450 1,092,450 1,092,450
Less: accumulated amortization (1,092,450) (1,073,337) (1,092,450) (1,081,530)
=========== =========== =========== ===========
$ -- $ 19,113 $ -- $ 10,920
=========== =========== =========== ===========
</TABLE>
Amortization expense for intangible assets is as follows:
Year ended December 31, 1998 $ 19,113
===============
Year ended December 31, 1997 $ 1,055,893
===============
Three months ended March 31, 1999 (unaudited) $ --
===============
Three months ended March 31, 1998 (unaudited) $ 8,192
===============
F-12
<PAGE>
INTEGRATED HEALTHCARE SYSTEMS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
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-13
<PAGE>
INTEGRATED HEALTHCARE SYSTEMS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
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. Billings in Excess of Costs and Estimated Earnings
<TABLE>
<CAPTION>
Three months ended
March 31, 1999
------------------
<S> <C>
Costs incurred on uncompleted contracts $ 29,494
Gross profit recognized to date on uncompleted
contracts 131,239
---------
160,733
Less: Billings to date (763,647)
=========
$(602,914)
=========
Included in accompanying balance sheets under the following captions:
Costs and estimated earnings in excess
of billing on uncompleted contracts $ --
Billings in excess of cost and estimated
earnings on uncompleted contracts (602,914)
=========
$(602,914)
=========
</TABLE>
There was no long-term contract activity for the years ended December 31, 1998
and 1997.
F-14
<PAGE>
INTEGRATED HEALTHCARE SYSTEMS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
8. 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
allow for the issuance of 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.
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.
F-15
<PAGE>
INTEGRATED HEALTHCARE SYSTEMS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
8. Commitments and Contingencies (continued)
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.
9. Shareholders' Equity
Common stock and recapitalization - From January 1997 to September 1997, the
Company issued 271,984 shares of its common stock under terms of a Regulation A
offing of the Company's common stock at $2.00 per share to subscribers of the
offering in exchange for $347,337 in cash, $1,541 in prior year expenses and
$195,090 in current year expenses. Of the 271,984 total shares issued 173,798
shares were issued for cash, 544 shares for prior year expenses and 97,642 for
current year expenses.
In July 1997, the Company issued 100,000 shares of the Company's common stock at
$0.84 per share as 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.
In September 1997, the Company issued 1,065,747 shares of its common stock in
exchange for a $300,000 convertible note, plus accrued interest of $54,697.
These common shares are subject to the restrictions of Rule 14 of the Securities
Exchange Act of 1934. Of the 1,065,747 total shares, 905,885 shares were issued
for the convertible note and 159,862 shares were issued for the accrued
interest.
F-16
<PAGE>
INTEGRATED HEALTHCARE SYSTEMS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
9. Shareholders' Equity (continued)
From September through November 1997, the Company issued 77,428 shares of its
common stock in exchange for $66,100 in convertible notes, plus accrued interest
of $12,110. These common shares are subject to the restrictions of Rule 144 of
the Securities Exchange Act of 1934. 65,814 shares were issued for the
convertible notes and 11,614 shares for the accrued interest.
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
$161,543 in debt repayment, $39,535 in prior year expenses and $68,980 in
current year expenses. Of the 135,029 total warrants exercised, 81,017 warrants
were exercised for debt repayment, 20,254 warrants for prior year expenses and
33,758 warrants for current year expenses. These common shares are subject to
the restrictions of Rule 144 of the Securities Exchange Act of 1934
In August 1998, the Company issued 297,926 shares of its common stock in
exchange for $79,500 in cash and $123,089 in current year 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. Of the 297,926
total shares issued, 119,170 shares were issued for cash and 178,756 shares for
current year expenses.
From January 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.
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
$60,000 in cash, $115,376 in debt repayment, $341,330 in prior year expenses and
$1,000 in current year expenses. Of the 1,035,411 total shares issued 113,895
shares were issued for cash, 227,790 shares for debt repayment, 673,017 shares
for prior year expenses and 20,709 shares for current year expenses. .
F-17
<PAGE>
INTEGRATED HEALTHCARE SYSTEMS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
9. Shareholders' Equity (continued)
Stock Purchase Warrants - The Company issues from time-to-time, stock purchase
warrants to employees and nonemployees for services rendered. The objective of
issuing stock purchase warrants to employees include attracting and retaining
the best personnel and promoting the success of the Company by providing
employees the opportunity to acquire common stock. Summary information about the
Company's warrants issued, outstanding and exercisable are as follows:
<TABLE>
<CAPTION>
Number of
Exercise Exercise Shares
Period Price Range Reserved
-------------------------------- ------------- -------------
From To
---- --
<S> <C> <C> <C> <C>
Warrants outstanding as of
December 31, 1996 May, 1995 November, 2000 $ 2.00 - 7.00 1,265,000
Warrants issued during 1997 August, 1997 June, 2002 $ .75 - 2.00 1,470,000
Warrants exercised during 1997 $ 2.00 (135,029)
-------------
Warrants outstanding as of
December 31, 1997 2,599,971
-------------
Warrants issued during 1998 January, 1998 December, 2004 $ .75 - 3.00 1,410,000
-------------
Warrants outstanding as of
December 31, 1998 4,009,971
=============
</TABLE>
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 partial consideration for certain intangible assets of IST valued at
$134,000. These warrants are exercisable from August 1997 to June 2000 or June
2002. In November 1997, 135,029 warrants were exercised 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.
From January through March 1998, the Company issued 145,000 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.
F-18
<PAGE>
INTEGRATED HEALTHCARE SYSTEMS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
9. Shareholders' Equity (continued)
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 valued
at $178,750. These warrants are exercisable for a period of five years.
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 valued at $54,600.
In June 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.
The table below represents pro forma net loss and pro forma loss per share had
the Company elected to account for stock purchase warrants using the
fair-value-based method as proscribed by SFAS No. 123. In estimating the pro
forma compensation expense, the Company used the Black Scholes option pricing
model.
<TABLE>
<CAPTION>
Three months ended
December 31, March 31,
--------------------------------------- ------------------------------------
1999 1998
1998 1997 (unaudited) (unaudited)
----------------- ------------------ ---------------- --------------
<S> <C> <C> <C> <C>
Net loss as reported $(1,917,738) $(3,282,673) $(80,815) $(680,885)
Pro forma net loss $(2,512,638) $(3,282,673) $(80,815) $(680,885)
EPS as reported $ (0.39) $ (0.92) $ (0.01) $ (0.14)
Pro forma EPS $ (0.51) $ (0.92) $ (0.01) $ (0.14)
</TABLE>
F-19
<PAGE>
INTEGRATED HEALTHCARE SYSTEMS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
10. 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. The outstanding common stock of IST was sold by the Company
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 of unrestricted common stock at $2.00 per share pursuant to a Regulation
A offering and 300,000 of restricted common stock shares discounted by 25% to
$1.50 per share) 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. This nonrecurring charge is reflected in
general and administrative expenses.
11. Income Taxes
The effective income tax rate varied from the federal statutory tax rate as
follows:
<TABLE>
<CAPTION>
Three months ended
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 (18.7)% (33.4)% (97.5)% (695.7)%
Valuation allowance on net deferred
tax benefits 57.7 % 72.4 % 136.5 % 734.7 %
---------- ----------- -------------- ------------
0.0 % 0.0 % 0.0 % 0.0 %
========== =========== ============== ============
</TABLE>
F-20
<PAGE>
INTEGRATED HEALTHCARE SYSTEMS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
11. Income Taxes (continued)
The deferred tax asset and the deferred tax liability is comprised of the
following:
<TABLE>
<CAPTION>
December 31, Three months ended March 31,
------------ ----------------------------
1998 1997 1999 1998
----------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Deferred tax asset:
Expenses not currently
deductible for tax purposes $ 614,826 $ 639,785 $ 663,713 $ 562,253
Capital loss carryfoward 609,423 609,423 609,423 609,423
Net operating loss carryfoward 1,989,000 2,691,000 2,223,000 2,886,000
----------- ----------- ----------- -----------
3,213,249 3,940,208 3,496,136 4,057,676
----------- ----------- ----------- -----------
Valuation allowance (3,213,249) (3,940,208) (3,496,136) (4,057,676)
----------- ----------- ----------- -----------
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 $6,900,000 and $7,300,000 (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-21
<PAGE>
INTEGRATED HEALTHCARE SYSTEMS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
12. 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>
Net loss to Common shareholders $(1,917,738) $(3,282,673) $ (80,815) $ (680,885)
Weighted average number of outstanding
common shares - basis 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 - basic and diluted $ (0.39) $ (0.92) $ (0.01) $ (0.14)
=========== =========== ========== ==========
</TABLE>
Warrants to purchase shares of common stock are not included in computing
diluted earnings per share because their effects are antidilutive.
13. 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 $31,167 relating to salary was
made for two officers of the Company. In January 1999, these obligations were
paid through the issuance of 200,000 shares of common stock in connection with a
Regulation D, Rule 504 offering. (See Note 9. 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. Notes of $510,000 plus accrued interest of $35,325 were converted into
213,540 shares of common stock at $2.00 per shares and new notes of $118,245.
The $118,245 was converted into 59,123 shares of common stock in connection with
a Regulation A offering.
F-22
<PAGE>
INTEGRATED HEALTHCARE SYSTEMS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
13. Related Party Transactions (continued)
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 1,163,182 shares of common stock of the
Company.
14. 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
o Warrants totaling 1,205,000 were issued for $134,000 towards the
purchase of certain assets of IST (see Note 9.)
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
o 455,000 warrants issued for financial services of $233,350
o 500,000 warrants issued to officers in lieu of the Company
implementing an executive stock option program
o 10,000 warrants to a third party in connection with a short-term
loan
15. 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.
F-23
<PAGE>
INTEGRATED HEALTHCARE SYSTEMS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
15. Subsequent Events (continued)
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-24
<PAGE>
EXHIBIT 3.14
CERTIFICATE OF INCORPORATION
OF
THE DATAQUAL GROUP, INC.
______________________________
FIRST. The name of this corporation shall be:
THE DATAQUAL GROUP, INC.
SECOND. Its registered office in the State of Delaware is to be located
at 1013 Centre Road, in the City of Wilmington, County of New Castle, 18805, and
its registered agent at such address is THE COMPANY CORPORATION.
THIRD. The purpose or purposes of the corporation shall be:
To engage in any lawful act or activity for which corporations may be
organized under the General Corporation Law of Delaware.
FOURTH. The total number of shares of stock which this corporation is
authorized to issue is:
One Thousand Five Hundred (1,500) shares without par value.
FIFTH. The name and mailing address of the incorporator is as follows:
Elaine Phaneuf
The Company Corporation
1013 Centre Road
Wilmington, DE 19805
SIXTH. The Board of Directors shall have the power to adopt, amend or
repeal the by-laws.
IN WITNESS WHEREOF, The undersigned, being the incorporator
hereinbefore named, has executed, signed and acknowledged this certificate of
incorporation this fourth day of March, A.D. 1999.
/s/ Elaine Phaneuf
STATE OF DELAWARE ------------------------
SECRETARY OF STATE Elaine Phaneuf
DIVISION OF CORPORATIONS Incorporator
FILED 09:00 AM 03/06/1999
991084255 - 3012048
<PAGE>
State of Delaware
Office of the Secretary of State
________________________________
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED ARE TRUE AND CORRECT COPIES OF ALL DOCUMENTS ON FILE
OF "THE DATAQUAL GROUP, INC." AS RECEIVED AND FILED IN THIS OFFICE.
THE FOLLOWING DOCUMENTS HAVE BEEN CERTIFIED:
CERTIFICATE OF INCORPORATION, FILED THE FOURTH DAY OF MARCH, A.D. 1999,
AT 9:00 O'CLOCK A.M.
/s/ Edward J. Freel
-----------------------------------
Edward J. Freel, Secretary of State
AUTHENTICATION: 9962385
DATE: 09-09-99
<PAGE>
BY - LAWS
OF
THE DATAQUAL GROUP, 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.
Notice of meeting need not be given to any stockholder who
<PAGE>
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
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day on which the meeting is held.
(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
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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.
Section 5. Notice of Meetings. No notice shall be required for
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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
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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.
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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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
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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.
Article V
Miscellaneous
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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,
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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.
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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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"
2. The DataQual Group, Inc., a Delaware corporation
