SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission file number
JUNE 30, 1998 0-11476
HEALTHWATCH, INC. *
(Exact name of registrant as specified in its charter)
MINNESOTA 84-0916792
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9040 ROSWELL ROAD, SUITE 470
ATLANTA, GA 30350
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(770) 641-5555
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 par value
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months and (2) has been subject to such filing requirements for the past 90
days.
Yes __X__ No _____
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained herein, and no disclosure will be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB [___].
Registrant's revenues for fiscal year ended June 30, 1998: $1,383,335.
Aggregate market value of voting stock held by non-affiliates of
registrant as of October 1, 1998: Approximately $1,500,000.
Number of shares outstanding as of October 1, 1998: 2,909,121 shares of
Common Stock, $.01 par value.
Documents incorporated by reference: Items 9-12 of Part III are
incorporated by reference to the Company's Proxy Statement for the 1998 Annual
Meeting of Stockholders.
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* Registrant intends to ask stockholders at the 1998 Annual Meeting of
Stockholders to approve a change in Registrant's name to MERAD Technologies
Corporation.
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PART I
ITEM 1. BUSINESS.
INTRODUCTION
HealthWatch, Inc., d/b/a MERAD Technologies Corporation, is in the
process of changing from a company primarily involved in the manufacture and
marketing of medical products to a company primarily involved in the software
information technology ("IT") business. The Company acquired Paul Harrison
Enterprises, Inc. ("PHE") on October 1, 1998. PHE owned the MERAD technology, a
sophisticated software application utility. MERAD utilizes an advanced
multi-media object and relational database which creates knowledge objects that
can be used and reused in a virtually unlimited number of combinations to
provide efficient applications that can be accessed and processed in both an
Internet and Intranet environment. The acquisition of PHE also increased the
Company's ownership of the common stock of HALIS, Inc. ("HALIS"), a health care
IT company, from approximately 5% to 18% of HALIS' outstanding shares of common
stock.
Prior to the PHE acquisition, the Company was primarily in the medical
products business. Certain of the Company's products contained both hardware and
software components. While the hardware components are classified more as a
device, the completed medical equipment including software, include an IT
component as the equipment analyzes information and reports diagnostic results
to users. This IT software ran on device-oriented hardware regulated by the
Federal Food and Drug Administration ("FDA") whereas the Company's new software
will run on computer-oriented hardware that does not fall under FDA regulations.
References herein to "HealthWatch" or the "Company" include HealthWatch
and its consolidated subsidiaries and their predecessors unless the context
indicates otherwise. HealthWatch was incorporated in the state of Minnesota in
1983. Except for historical information contained in this report and in the
documents incorporated by reference, the matters discussed herein and therein
contain forward-looking statements that involve risks and uncertainties that
could cause actual results to differ materially from those suggested in the
forward-looking statements, including, without limitation, the effect of
economic conditions, product demand, competitive products and other risks
detailed herein and in the Company's other filings with the Securities and
Exchange Commission.
BACKGROUND
During fiscal 1997, the Company determined to expand its business to
include health care information software products and services. The decision was
based on the Company's desire to improve margins for its medical products,
particularly its Life Sciences peripheral vascular diagnostic products, and to
expand its product and service offerings in order to increase revenues and to
return the Company to profitability. In this connection, the Company entered
into a business collaboration agreement with HALIS, pursuant to which the
Company and HALIS share sales prospects and the Company is to develop an
integration database engine designed to monitor, capture and manage medical
information at the point of care.
HALIS, based in Atlanta, Georgia, supplies information technology and
services focused on the healthcare industry. Utilizing advanced health care
models and information technology, HALIS has developed the HALIS Healthcare
Enterprise System ("HES"), a single system which integrates all of the major
functions needed by clinics, hospitals, healthcare practices, payors, long-term
care facilities, laboratories, pharmacies and home healthcare facilities.
In addition to the agreement with HALIS, the Company entered into an
agreement with Paul Harrison Enterprises, Inc., pursuant to which PHE's MERAD
subsidiary would develop proprietary software technology to be used by the
Company. At this time, Paul W. Harrison, Chairman of the Board, Chief Executive
Officer and President of HALIS and Chief Executive Officer of PHE and Larry
Fisher, a Director and Executive Vice President, Chief Administrative Officer
and Secretary of HALIS, joined the Company's Board of Directors.
In connection with these transactions, PHE, Mr. Fisher and two
non-affiliated shareholders of HALIS exchanged 1,100,000 of their shares of
HALIS common stock for 880,000 shares of the Company's Common Stock and PHE was
granted an option to exchange an additional 400,000 shares of HALIS common stock
for an additional 320,000 shares of HealthWatch Common Stock, the exchange ratio
being based on the market value for each company's common stock at
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the time that the transaction was negotiated, and HALIS invested $125,000 in the
Company in consideration for which HALIS acquired 83,334 shares of the Company's
Common Stock. In furtherance of the business collaboration with HALIS, the PHE
option was exercised by PHE and its assigns and PHE exchanged an additional
1,262,000 shares of HALIS common stock for 378,000 shares of HealthWatch Common
Stock.
Based on the foregoing and the Company's determination that the IT
business offered significantly greater opportunities for the Company than did
its existing medical products business, the Company's focus during fiscal 1998
was increasingly on the development of its IT business. In an effort to gain
direct control over these efforts, the Company acquired PHE on October 1, 1998.
As a result of the PHE acquisition, the Company obtained ownership of the MERAD
technology and increased its ownership of HALIS common stock from approximately
5% to 18% of HALIS' outstanding shares of common stock. See Note 17 of Notes to
Consolidated Financial Statements for information regarding the terms of the PHE
acquisition.
During fiscal 1999, the Company intends to continue to emphasize the IT
business and expects to grow this business through a combination of licensing
partners, selected strategic acquisitions and internal sales of its software and
services. The Company also expects to continue to expand its collaborative
efforts with HALIS and to increase its efforts to market the HALIS HES product
to the Company's customer base. The Company also will explore the possibility of
developing information systems utilizing the MERAD technology for other
information-intensive industries such as financial services, insurance and real
estate. In recognition of this change in the Company's business, the Company
will ask its stockholders at the 1998 Annual Meeting of Stockholders to approve
a change in the Company's name to MERAD Technologies Corporation.
MERAD/BUSINESS DEVELOPMENT STRATEGY
MERAD is an Internet software application utility that stores,
processes, and manages uniquely organized and indexed knowledge content (rather
than lines of rigid programming code). The Company believes that MERAD's ability
to efficiently replace applications (i.e. billing) program code with end-user
knowledge content represents a significant competitive advantage for the
Company. The MERAD technology can potentially handle the 83 standard industry
classifications (SIC codes), by using its unique generic processing algorithms
to handle a significant portion of the software code which is common to many
information processing programs and by making rapid, low cost changes to
complete the balance of the coding required to meet a particular company's or an
industry's needs. The MERAD software utility utilizes an open systems approach
by incorporating industry standard technology tools, and can be run on the
Internet as well as on local networks or single computers. Utilizing the MERAD
technology, the Company can standardize and regularly update software
applications or industry specific information content. The Company expects to
also offer complementary technology to capture and integrate digital information
and provide IT services.
The Company's plan is to initially focus on three or four of the major
information intensive industries that have similar needs and SIC codes (e.g.
healthcare, insurance, financial services, and real estate). The Company's first
industry focus is healthcare. The healthcare industry is expected to spend over
$20 billion annually on information technology over the next five years. The
Company intends to cross-sell the new HALIS Healthcare Enterprise System into
the Company's established base of over 1000 healthcare customers.
The Company also intends to market information systems in other
industries with its more generic Business Enterprise System (the "BES"). The BES
can be sold to any industry with consulting made available for special needs,
ranging from advising customers on how to customize content for their specific
requirements, to providing technology expertise and customizations. The Company
intends to use the Internet to distribute and support its IT products.
The Company expects to selectively acquire other companies to help
build critical mass and to obtain additional customer base and distribution in
each focused industry, into which the Company can further cross-sell its
software products. The acquired companies will primarily be service-based
companies that need new or replacement software and information technology
solutions, and companies such as system integrators, that can provide IT
services to help implement additional systems requirements after software
installation.
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BUSINESS SEGMENTS
During the three years ended June 30, 1998, HealthWatch's business
consisted of one business segment: medical products. Revenues for the Company's
medical products for the past three fiscal years are as follows:
Year Ended June 30,
----------------------------------------------------
1998 1997 1996
---- ---- ----
Revenues:
Medical Products
Cardiology $ 62,157 $ 521,858 $ 564,993
Peripheral Vascular 387,288 453,926 472,497
IV 35,418 94,080 --
Supplies & Technical
Services 898,472 1,019,461 1,003,974
------------ ------------ ------------
TOTAL $ 1,383,335 $ 2,089,325 $ 2,041,464
For the year ended June 30, 1998, the Company reported a decline in
revenues of $459,701 for cardiology products, of $66,638 for peripheral vascular
products, of $58,662 in IV products and of $120,989 in supplies and technical
services. The reduction in 1998 in revenues for the Company's cardiology
products are due to the sale, at the end of the third quarter of fiscal 1998, of
Cambridge Medical Equipment, Ltd., in England, previously a wholly owned
subsidiary, and to the Company's decision to discontinue offering the Cambridge
line of medical products. The Company attributes the reduction in revenues for
its peripheral vascular products primarily to the limited availability of its
enhanced MVL product which became available for shipment at the end of the third
fiscal quarter. The Company's ability to sell its IV products was adversely
affected by the Company's lack of working capital which made it difficult for
the Company to develop distribution channels for this product and by the
consolidation in the healthcare industry which has increased the difficulty for
a company, such as HealthWatch, to sell one IV product in markets which are
being serviced by large entrenched healthcare companies which offer a full range
of IV products.
Foreign sales accounted for $266,456, $566,009 and $566,427 of the
Company's medical product revenues during fiscal 1998, 1997 and 1996
respectively. The revenues from the international market are generated by
distributor sales and, prior to its sale in the third quarter of fiscal 1998,
Cambridge Medical Equipments LTD., located in England. Cambridge Medical
Equipments LTD. accounted for revenues of $213,706, $456,397 and $381,739 for
the three years ended June 30, 1998, 1997 and 1996, respectively. International
product sales are primarily through distributors. For additional information
regarding the Company's business segments see Note 13 of the Notes to the
Consolidated Financial Statements.
MEDICAL PRODUCTS
PERIPHERAL VASCULAR PRODUCTS. Vascular disease diagnosis and management
has historically been done by vascular surgeons. With the aging of the U.S.
population, a greater awareness of vascular disease in general, and better
surgical and medical management options, more medical specialists are becoming
involved in the diagnosis and treatment of vascular disease. The capability and
sophistication of the equipment needed to diagnose peripheral vascular disease
varies greatly from the needs of the primary-care physician who may only be
attempting to determine whether or not a patient has symptoms of peripheral
vascular disease to the needs of the vascular laboratory which may be trying to
establish the exact location and severity of the disease.
HealthWatch currently markets two products under the "Life Sciences"
brand name. First, the Modular Vascular Lab (MVL), a computer-controlled
instrument which, through the use of various plug-in modules, can perform a wide
range of vascular diagnostic studies. During fiscal 1998, the Company
re-designed the MVL so that it could be run with Microsoft Windows based
software. The Company began shipping the re-designed version of the MVL during
the third quarter of fiscal 1998.
The MVL produces detailed color reports and is easily operated with a
remote hand controller which allows the vascular technician to concentrate on
the patient rather than on operation of the MVL. The modular concept permits the
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customer to purchase only the diagnostic testing modalities desired and to add
new modalities at any time. The MVL includes:
* MVL BASE UNIT. Includes the Modulab with space for ten plug-in
modules, a high resolution color graphics monitor, color printer,
keyboard, strip-chart recorder, remote hand-controller, foot
switch and storage cart.
* PVR MODULE. Calibrated Pulse Volume Recorder, used in the
diagnosis of arterial and venous disease in both the upper and
lower extremities.
* CWD/PPG MODULE. Continuous wave Doppler and photoplethysmograph.
The Doppler is used to measure blood velocity in both arteries
and veins by using high frequency ultrasound. The
photoplethysmograph measures blood flow using an infrared sensing
device.
* SFA-11 MODULE. Spectrum frequency analysis is used in conjunction
with the CWD/PPG module, Imager module or external input source.
The SFA-11 performs real-time analysis of Doppler frequency
shifts using computerized analysis which transforms audio or
visual images into a quantifiable frequency or velocity.
* OPG MODULE. Ocular pneumoplethysmograph, used to measure pressure
changes of the ophthalmic artery, which in turn reflects the
absence or presence of disease in blood vessels that supply
oxygen to the brain.
* IPG-II MODULE. Impedance plethysmograph, used for the detection
of deep venous thrombosis (DVT) by measuring the change in
electrical impedance (resistance) of a limb as blood flow is
occluded (obstructed) and then restored. DVT is a major source of
pulmonary emboli which can be fatal.
* PAG MODULE. Phonoangiograph, used as a sensitive quantitative
stethoscope to "listen" to the vascular system.
There is currently an installed base of over 350 MVL'S. The price for a
basic system, consisting of the MVL base unit, PVR module and CWD/PPG module, is
approximately $25,000.
The second product is the Pulse Volume Recorder (PVR-IV) with
calibrated PVR (records height and width of wave length, volume of air in cuff
and pressure), bi-directional Doppler (measures blood velocity using
ultrasound), photoplethysmograph (measures blood flow using an infrared sensing
device) and optional ocular pneumo-plethysmograph (measures pressure changes in
certain arteries). The basic unit is used to diagnose blood vessel disease in
both the upper and lower extremities. There is an installed base of over 2,500
PVR'S, of which over 1,000 are PVR-IV's. The PVR-IV is priced at $15,000. The
PVR is suitable for busy vascular labs, where high patient volume is a major
consideration, foreign markets, smaller U.S. hospitals, and physician offices
which cannot cost-justify the MVL.
While the Company has reorganized to focus its business more on its
information technology software business, it intends to maintain its more than
1,000 customer relationships that have purchased its PVR and MVL products. The
PVR product has been replaced to a large extent by the MVL products, which
requires upgrades, as well as service and supply contracts. The Company,
therefore, intends to continue to accept orders for upgrades and to provide
supplies and technical services to the Life Sciences customer base. In addition,
the Company intends to sell product extensions such as integrated patient
applications using the MVL data output that will enhance the MVL equipment
already installed.
IV PRODUCT. The PACER, the Company's only IV product, a controller,
which was approved for marketing by the FDA in April 1994, was introduced and
initial marketing efforts commenced in fiscal 1997. Due to the Company's lack of
working capital and the difficulty it encountered in marketing a single IV
product in a market increasingly dominated by large entrenched healthcare
companies offering a complete line of IV products, often on a "bundled" basis
whereby healthcare institutions contract for all of their IV products from one
or a limited number of vendors, the Company discontinued its sales efforts with
respect to the PACER during fiscal 1998.
CARDIOLOGY PRODUCTS. HealthWatch's cardiology products included the
Cambridge lines of ECG and cardiac stress test systems which included
proprietary systems developed by Cambridge and systems manufactured by other
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companies. During fiscal 1998, the Company discontinued sales of its Cambridge
ECG equipment and sold its wholly-owned subsidiary, Cambridge Medical
Equipments, Ltd. The Company's decision to discontinue the Cambridge business
was based on the determination that the market opportunity available to the
Company did not justify the investment that would have been required for the
Company to continue to offer this product line. In addition, the Company
determined that its limited working capital made it difficult for management to
oversee the Cambridge Medical Equipments, Ltd. operations which are located in
England.
SUPPLIES AND TECHNICAL SERVICES. In addition to the sale of medical
instruments, HealthWatch sells disposable supplies, such as ECG recording paper
and electrodes and electrasound gels and cuffs, to purchasers of its cardiology
and peripheral vascular equipment and provides technical service/maintenance for
such equipment. During fiscal 1998, 1997 and 1996 sales of supplies and revenues
from service and maintenance activities accounted for approximately 65%, 49% and
49%, respectively, of HealthWatch's revenues from its medical products business
segment.
SALES AND MARKETING
The Company has a Vice President of Marketing and one field sales
representative. The Company markets internationally through selected independent
manufacturers' representatives and distributors who have appropriately trained
staff capable of providing sales and service for the Company's products.
MANUFACTURING
The Company's manufacturing operations consist primarily of what is
referred to in the industry as "FAT" (final assembly and testing). The Company
has utilized outside consultants to assist in the design of its products. The
Company attempts to maintain a limited inventory of finished products and
normally attempts to fill orders within a month of their receipt. The Company
generally does not have any significant backlog of orders.
RESEARCH AND DEVELOPMENT
During the years ended June 30, 1998, 1997 and 1996, the Company spent
$231,169, $423,762 and $345,240 respectively, on research and development
activities. During fiscal 1998, the Company incurred research and development
expenses for design and software work related to its enhanced MVL product and to
expand its product and service offerings to include the monitoring, capturing
and management of medical information.
PROPRIETARY INFORMATION
The Company seeks protection of its proprietary interest in software
products and trade secrets. The Company historically has not relied on patents
to protect the proprietary aspects of its products. HealthWatch maintains
nondisclosure and confidentiality agreements with its employees. While the
enforceability of such agreements cannot be assured, the Company believes that
they provide a deterrent to the use of information which may be proprietary to
the Company.
PRODUCT WARRANTY AND SERVICE
The Company warrants its products against defects in material and
workmanship generally for one year. Warranty service is ordinarily provided by
the Company. If a product defect cannot be easily fixed at the customer's
office, the Company's policy is to replace the defective component and return it
to the Company's office for repairs.
COMPETITION
There are many companies that offer products and services which compete
with the Company's current and planned products and services. Many of the
Company's competitors have substantially greater financial and marketing
resources than the Company.
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The information technology software industry is highly competitive and
subject to continuing change in the manner in which products and services are
marketed and vendors are selected by customers. The primary competitive factors
are scope and quality of products and service and support capabilities.
Competition for medical products generally is on the basis of product
performance and cost. The Company's vascular products generally are priced in
the mid-range of competing products with the Life Sciences fully configured MVL
product priced at the high-end of the peripheral vascular market.
GOVERNMENT REGULATION
The medical devices manufactured and marketed by the Company are
subject to regulation by the Federal Food and Drug Administration (the "FDA")
and, in some instances, by state and foreign authorities. Pursuant to the
Federal Food, Drug, and Cosmetic Act (the "FFDCA") and the regulations
promulgated thereunder, the FDA regulates the clinical testing, manufacture,
packaging, labeling, distribution and promotion of medical devices.
Pursuant to the FFDCA, medical devices intended for human use are
classified into three categories, Classes I, II and III, on the basis of the
controls deemed necessary by the FDA to reasonably assure their safety and
effectiveness. Class I devices are subject to general controls (for example,
labeling, premarket notification and adherence to good manufacturing practice
regulations) and Class II devices are subject to general and special controls
(for example, performance standards, postmarket surveillance, patient
registries, and FDA guidelines). Generally, Class III devices are those which
must receive premarket approval from the FDA to ensure their safety and
effectiveness (for example, life-sustaining, life-supporting and implantable
devices, or new devices which have not been found substantially equivalent to
legally marketed devices).
Any products manufactured or distributed by the Company pursuant to FDA
clearances or approvals are subject to pervasive and continuing regulation by
the FDA. Device manufacturers are required to register their establishments and
list their devices with the FDA, and are subject to periodic inspections by the
FDA and certain state agencies. The FFDCA requires devices to be manufactured in
accordance with Good Manufacturing Procedure ("GMP") regulations which impose
certain process, procedure and documentation requirements upon the Company with
respect to manufacturing and quality assurance activities. The Company believes
that its manufacturing and quality control procedures substantially conform to
the requirements of FDA regulations.
In addition, the Medical Device Reporting regulation obligates the
Company to inform the FDA whenever there is reasonable evidence to suggest that
one of its devices may have caused or contributed to death or serious injury, or
where one of its devices malfunctions and, if the malfunction were to recur, the
device would be likely to cause or contribute to a death or serious injury.
Labeling and promotion activities are also subject to scrutiny by the
FDA and, in certain instances, by the Federal Trade Commission. The FDA actively
enforces regulations prohibiting marketing of products for unapproved uses.
International sales of medical devices are subject to the regulatory
requirements of each country. The regulatory review process varies from country
to country. Many countries also impose product standards, packaging and labeling
requirements, and import restrictions on devices. In addition, each country has
its own tariff regulations, duties and tax requirements. The Company plans to
use its distributors to assist in obtaining any necessary foreign governmental
and regulatory approvals. The Company does not currently have its products
registered or approved in any countries requiring an extensive registration or
approval process and has, therefore, not sold any products in such countries.
The Company and its products are also subject to a variety of state and
local laws and regulations in those states or localities where its products are
or will be marketed. Use of the Company's products is subject to inspection,
quality control, quality assurance, proficiency testing, documentation and
safety reporting standards promulgated by JCAHO. Various states and
municipalities may also have similar regulations.
Manufacturers are also subject to numerous federal, state and local
laws relating to such matters as safe working conditions, manufacturing
practices, environmental protection, fire hazard control and disposal of
hazardous or
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potentially hazardous substances. There can be no assurance that the Company
will not be required to incur significant costs to comply with such laws and
regulations.
EMPLOYEES
At September 30, 1998, the Company had 10 employees.
FACTORS AFFECTING FUTURE RESULTS
In addition to the factors set forth elsewhere herein, investors should
consider the following factors regarding HealthWatch:
WORKING CAPITAL REQUIREMENT; NEED FOR ADDITIONAL FINANCING. The Company
will require additional capital to finance its operations and planned growth.
There can be no assurance that the Company will be able to obtain such financing
if and when needed, or that if obtained, it will be sufficient or on terms and
conditions acceptable to the Company. Any such future equity financing could be
dilutive to the Company's shareholders. In its report accompanying the audited
financial statements for the years ended June 30, 1998, and 1997, the Company's
auditors expressed substantial doubt about the Company's ability to continue as
a going concern.
HALIS INVESTMENT. As part of HealthWatch's decision to expand its
business to include medical products and services for monitoring, capturing and
managing medical information, the Company entered into a joint venture and
co-marketing arrangement with HALIS and has made a significant investment in
HALIS through the acquisition of PHE and the exchange with certain HALIS
shareholders of shares of the Company's common stock for a portion of their
shares of HALIS common stock. As a result of these purchases, HealthWatch owns
8,077,010 shares of HALIS' common stock (approximately 18% of HALIS' outstanding
shares of common stock) which had a market value of approximately $1,100,000 at
October 14, 1998. During the fourth quarter of fiscal 1998, the Company recorded
an unrealized loss of $1,824,605 in connection with its investment in HALIS
common stock. While the Company's investment in HALIS was made for the long term
in connection with the Company's decision to expand its product offerings to
include healthcare information technology products, the Company decided that it
should write down the HALIS investment as it concluded that the decline in the
value of the HALIS shares could not be deemed to be "temporary." There can be no
assurance that the Company's HALIS investment will not need to be written down
further in the future.
HALIS' common stock is traded on the OTC Bulletin Board, under the
symbol "HLIS." The Company's ability to sell its shares of HALIS could be
adversely affected by the limited trading volume for HALIS' stock and by the
requirement that the Company sell its HALIS shares in accordance with Rule 144
promulgated by the Commission, since Paul W. Harrison, a member of the Company's
Board of Directors, is also Chairman of the Board of Directors of HALIS. Rule
144 could limit the amount of HALIS' shares which HealthWatch could sell during
any three-month period to approximately 440,000 shares. Further, there is no
assurance that a public market for HALIS' securities will continue to be made or
that the Company will be able to avail itself of a public trading market for the
HALIS common stock in the future. Moreover, sales and potential sales of
substantial amounts of HALIS' common stock in the public market could adversely
effect the prevailing market prices for the HALIS common stock and impair the
Company's ability to raise additional capital through the sale of the HALIS
common stock. While the Company intends its investment in HALIS to be for the
long-term, the Company will need to raise significant additional working capital
to fund its operations and it may, therefore, be necessary for the Company to
sell the HALIS shares to raise required working capital if the Company is unable
to raise working capital from other sources.
NEW BUSINESS VENTURES; UNPROVEN PRODUCTS. In October 1998, the Company
acquired PHE. A major factor in the Company's decision to acquire PHE was the
desire to own the MERAD software technology in order to further expand its
business to include information technology software. This business represents
significant new business venture for the Company, and the Company's ability to
successfully develop this business is subject to all of the risks inherent in
the establishment of a new business. The Company had not previously been engaged
in the information technology business.
ACQUISITIONS AND INTEGRATION. An important element of the Company's
business strategy for fiscal 1999 is to expand through acquisitions. The
Company's future success may be dependent upon its ability to finance
acquisitions
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and effectively integrate acquired businesses with the Company's operations.
Although the Company believes that it will be able to affect such integration,
there can be no assurance that the Company will be able to affect any such
acquisitions, or that such acquisitions will be successfully integrated or that
they will otherwise be successful.
DEPENDENCE ON NEW OR IMPROVED PRODUCTS; TECHNOLOGICAL CHANGES. In
general, the information technology and medical products industries are subject
to rapid and significant technological changes and frequent introduction of new
competitive products. To respond to these expected changes and to improve or
sustain the marketability of its products, the Company will be required to
commit substantial investments in product improvement and development in order
to periodically enhance its existing products and successfully introduce new
products. There can be no assurance that the Company will either have the
resources required to make such investments or, assuming it has the required
resources, be able to respond adequately to changes in technology or changes in
the markets for its products. The development of new products or technologies by
other firms could have a material adverse effect on the Company's business. In
addition, to the extent that the Company seeks to develop new products, there
can be no assurance that such products will be successfully developed or, if
developed, that such products will be successfully introduced to the
marketplace.
LENGTH OF SALES CYCLE; LIMITED SALES AND MARKETING EXPERIENCE. The
decision to purchase enterprise information software is often an enterprise-wide
decision and may require the Company to engage in a lengthy
evaluation/purchase-sales cycle. The sales cycle can range from three to nine
months or more. The sales cycle may also be subject to a prospective customer's
budgetary constraints and internal acceptance reviews, over which the Company
has little or no control. Consequently, if sales forecasted from a specific
customer for a particular quarter are not realized in that quarter, the Company
is unlikely to be able to generate revenue from alternate sources in time to
compensate for the shortfall. If a larger order is delayed or lost to a
competitor, the Company's revenues for that quarter could be materially
diminished.
The Company has limited experience in the areas of sales, marketing and
distribution. The Company's sales and marketing staff will require additional
personnel in the future. There can be no assurance that the Company will be able
to build an adequate sales and marketing staff, that establishing such a sales
and marketing staff will be cost-effective, or that the Company's sales and
marketing efforts will be successful.
LIMITED AVAILABILITY OF PROPRIETARY PROTECTION. The Company
historically has relied upon a combination of copyright, trade secret and
nondisclosure and other contractual provisions to protect its proprietary
rights. Notwithstanding the Company's efforts to protect its proprietary rights,
it may be possible for competitors of the Company to imitate the Company's
products or develop independently competing products. Disputes regarding the
Company's intellectual property could force the Company into expensive and
protracted litigation or costly agreements with third parties. An adverse
determination in a judicial or administrative proceeding or failure to reach an
agreement with a third party regarding intellectual property rights could
prevent the Company from manufacturing and selling certain of its products,
which could have a material adverse effect on the Company's business, financial
condition and results of operations.
DEPENDENCE ON MANAGEMENT AND KEY PERSONNEL. The Company's success
depends to a large degree upon the personal efforts and ability of its Chief
Executive Officer, Paul W. Harrison. The loss of the services of Mr. Harrison
would have a materially adverse effect on the Company. The Company does not
maintain key man life insurance on any of its executives.
The Company's future operating results also depend in significant part
upon its continuing ability to attract and retain highly qualified technical and
managerial personnel. Competition for such personnel is intense, and there can
be no assurance that the Company will retain its key managerial or technical
personnel or attract such personnel in the future. The Company has at times
experienced difficulty recruiting qualified personnel, and there can be no
assurance that the Company will not experience such difficulties in the future.
If the Company is unable to hire and retain qualified personnel in the future,
such inability could have a material adverse effect on the Company's business,
operating results and financial condition.
LIMITATIONS ON BROKER-DEALER SALES OF COMPANY AND HALIS COMMON STOCK;
APPLICABILITY OF "PENNY STOCK RULES". Federal regulations under the Securities
and Exchange Act of 1934, as amended, (the "Exchange Act") regulate the trading
of so-called "penny stocks" (the "Penny Stock Rules"), which are generally
defined as any security not listed
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<PAGE>
on a national securities exchange or Nasdaq, priced at less than $5.00 per share
and offered by an issuer with limited net tangible assets and revenues. In
addition, equity securities listed on Nasdaq which are priced at less than $5.00
are deemed penny stocks for the limited purpose of Section 15(b)(6) of the
Exchange Act. Therefore, during the time in which the Common Stock is quoted on
the Nasdaq SmallCap Market and is priced below $5.00 per share, trading of the
Common Stock is subject to the provisions of Section 15(b)(6) of the Exchange
Act which make it unlawful for any broker-dealer to participate in a
distribution of any penny stock without the consent of the Commission if, in the
exercise of reasonable care, the broker-dealer is aware of or should have been
aware of the participation of a previously sanctioned person. In such event, it
may be more difficult for broker-dealers to sell the Company's Common Stock and
purchasers of the shares of Common Stock may have difficulty in selling their
shares in the future in the secondary trading market.
In the event that the Company's Common Stock is delisted from the
Nasdaq SmallCap Market and the Company fails other relevant criteria, trading of
the Common Stock would be subject to the full range of the Penny Stock Rules.
HALIS' common stock is currently traded on the OTC Bulletin Board and is subject
to the Penny Stock Rules. Under these rules, broker-dealers must take certain
steps prior to selling a "penny stock," which steps include: (i) obtaining
financial and investment information from the investor; (ii) obtaining a written
suitability questionnaire and purchase agreement signed by the investor; and
(iii) providing the investor a written identification of the shares being
offered and in what quantity. If the Penny Stock Rules are not followed by the
broker-dealer, the investor has no obligation to purchase the shares.
Accordingly, delisting from the Nasdaq SmallCap Market and the application of
the comprehensive Penny Stock Rules may make it more difficult for
broker-dealers to sell the Company's Common Stock and purchasers of the shares
of Common Stock may have difficulty in selling their shares in the future in the
secondary trading market.
BUSINESS OF HALIS
HALIS is a supplier of information technology and services, focusing on
the healthcare industry. Utilizing advanced healthcare models and information
technology, including the MERAD technologies, HALIS has developed the HALIS
Healthcare Enterprise System ("HES"), a single system for the healthcare
industry. This Healthcare Enterprise System integrates all of the major
functions needed by clinics, hospitals, practices, payers, long-term care
facilities, laboratories, pharmacies and home healthcare facilities, the eight
major markets into which HALIS competes. HALIS is currently building out the
specific features required by each of these eight markets. Subsets of or all of
the Healthcare Enterprise System can be used by each of these markets and can be
combined to provide a complete solution for Integrated Healthcare Delivery
Networks. These Networks are being formed by hospitals, clinics, payers,
practice management companies, individual practices, and other entities which
are involved in the delivery and management of healthcare services. HALIS'
systems business is targeted to healthcare industry participants such as
physician practices, HMO's, home healthcare providers and hospitals. HALIS
expects to capitalize on the healthcare industry's demand for more software
variety, updates, convenience, lower pricing, and better support services.
The Company has entered into a business collaboration agreement with
HALIS pursuant to which the Company is able to market the HALIS HES product to
the Company's customer base. From time to time, the Company has obtained the
services of HALIS to assist it in developing the Company's healthcare
information technology business. The Company and HALIS have entered into a
letter of intent pursuant to which they have indicated their intent to merge the
two companies. As of the date of this report, it is uncertain whether or not the
merger will occur. However, the Company expects to work closely with HALIS in
connection with the development of the Company's healthcare IT business. The
HALIS HES product was developed utilizing the MERAD technology which was
acquired by the Company in connection with the acquisition of PHE. Sales by
HALIS which are based on the MERAD technology are subject to license fees
payable to the Company equal to 10% of HALIS' revenues for such sales.
HALIS is subject to certain informational requirements of the
Securities Exchange Act of 1934 and, in accordance therewith, files reports and
other information with the Securities and Exchange Commission (the
"Commission"). Such reports and other information can be inspected and copied at
the public reference facilities maintained by the Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's regional
offices located at Seven World Trade Center, 13th Floor, New York, New York
10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material can also be obtained at prescribed rates
by writing to the Securities and Exchange Commission, Public Reference Section,
450 Fifth Street, N.W.,
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<PAGE>
Washington, D.C. 20549. In addition, the Commission maintains a web site that
contains reports, proxy and information statements and other information
regarding HALIS at http://www.sec.gov.
HEALTHWATCH KEY EMPLOYEES; DIRECTORS
The directors and executive officers of HealthWatch are as follows:
Director
Name Since Age Positions With The Company
---- ----- --- --------------------------
Paul W. Harrison 1997 43 Chief Executive Officer and
Director
George T. Mier -- 48 Vice President of Marketing
Annette D. Agner -- 41 Treasurer/Controller
Richard T. Case 1997 47 Director
Larry Fisher 1997 53 Consultant and Director
Sanford L. Schwartz 1983 46 Director
Paul W. Harrison has extensive experience in the United States and
internationally managing information technology companies. He has been the
Chairman & CEO of HALIS, Inc. since November 1996, and a significant owner in
PHE, a privately-held information technology management company. Mr. Harrison
was the President and Managing Member of AUBIS, LLC from February 1995 to
December 1997, which owned two information system companies that were merged
into HALIS in November 1996. Mr. Harrison was an executive with and advisor to
HBO & Company, a leading healthcare information systems company, from June 1993
until December 1994. Prior to HBOC, Mr. Harrison was the CEO of BIVEN, Inc. from
April 1991 to June 1993, which sold software and other technology-related assets
to HBOC in June 1993.
George T. Mier was Director of Sales and Marketing of the Company from
March 1996 to November 1996 when he became Vice President of Marketing. Prior to
joining the Company, he was Vice President--Sales and Customer Care and Senior
Consultant for Innotech, Inc., a manufacturer of ophthalmic equipment and
disposables, from 1993 to 1995; National Sales Director, World Learning, Inc.,
an educational company from 1992 to 1993; and National Sales Manager or Regional
Manager for American Optical Corp., a medical products company, from 1988 to
1992.
Annette D. Agner has been Treasurer/Controller of the Company since
1993 and has been employed by the Company for more than ten years.
Richard T. Case has been President of Benchmark Associates, a business
consulting firm since 1985. Mr. Case was President of Polymedica Industries,
Inc., a medical products company from May 1990 to July 1992. Mr. Case also
served as a Director of the Company from 1990 to 1994.
Larry Fisher has served as Executive Vice President of HALIS, Inc.
since June 1997. Mr. Fisher was the founder of Fisher Business Systems, Inc.
("Fisher"), the predecessor of HALIS, and served as a director since its
organization in 1979. Mr. Fisher subsequently served as President, Chief
Executive Officer and Treasurer of Fisher from 1979 to 1992, and as Chairman of
the Board, from December 1992 to November 1996. He led the development of the
first generation of Fisher's products for the hospitality marketplace and is a
recognized leader in the industry. Under his management, Fisher developed the
first integrated point-of-sale and back office system for the food service
industry. He also directed Fisher's efforts in the development of its second
generation touch screen system. Prior to 1979, Mr. Fisher was employed by IBM
for 11 years in several executive sales and marketing positions. In his last
such position, Mr. Fisher was responsible for creating, implementing and
monitoring national marketing programs for the retail and hospitality
industries.
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<PAGE>
Sanford L. Schwartz has been a consultant with Creative Business
Strategies, Inc., a business/development consulting firm, since July 1992. He
served as Chief Executive Officer of the Company from June 1983 to September
1993. Mr. Schwartz is a director of Renaissance Entertainment Corporation.
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
and Exchange Act of 1934, as amended, which are intended to be covered by the
safe harbors created thereby. These statements include the plans and objectives
of HealthWatch and HALIS for future operations. The forward-looking statements
included herein are based on current expectations that involve numerous risks
and uncertainties. HealthWatch plans and objectives are based on the assumption
that their respective businesses will be successful, that competitive conditions
within the healthcare industry will not change materially or adversely and that
there will be no material adverse change in either company's operations or
business. Assumptions relating to the foregoing involve judgments with respect
to, among other things, future economic, competitive and market conditions and
future business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of HealthWatch or HALIS.
Although the Company believes that the assumptions underlying the
forward-looking statements included herein are reasonable, the inclusion of such
information should not be regarded as a representation by the Company, or any
other person, that the objectives and plans of the Company will be achieved.
ITEM 2. PROPERTIES.
The Company's principal offices are located in 10,360 square feet of
space in Vista California, leased on a month to month term for $6,861 per month.
ITEM 3. LEGAL PROCEEDINGS.
See Note 8 of Notes to Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The number of record holders of the Company's Common Stock on September
30, 1998 was 789. The high and low sale prices as reported on the Nasdaq Small
Cap Market are shown in the table below (adjusted to reflect the one-for-five
reverse stock split effective February 1998). These quotations represent prices
between dealers, and do not include retail markups, markdowns or commissions.
QUARTER ENDED HIGH LOW
------------- ---- ---
1996
----
March 31 $19.6875 $10.9375
June 30 20.94 10.00
September 30 22.50 15.9375
December 31 17.50 8.75
1997
----
March 31 16.09375 10.3125
June 30 15.15625 5.078125
September 30 6.09375 1.71875
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December 31 4.844 1.25
1998
----
March 31 2.655 0.938
June 30 1.25 0.625
September 30 1.625 0.625
The Company has never paid a cash dividend on its Common Stock. The
payment by the Company of dividends, if any, in the future rests within the
discretion of its Board of Directors and will depend, among other things, upon
the Company's earnings, capital requirements and financial condition. The
Company's 6% Series A Preferred Stock and Series P Preferred Stock restrict the
Company's ability to pay dividends on the Common Stock until all dividends on
the Preferred Stock has been paid.
During June 1998, the Company sold to a limited number of private
investors pursuant to Section 4(2) of the Securities Act and Regulation D
promulgated thereunder, 1,145,000 shares of its 6% Series A Preferred Stock,
stated value $1.00 per share. The Preferred Stock is convertible into Common
Stock of the Company at the lesser of $.52 per share or 70% of the price of the
Company's Common Stock at the time of conversion. Alexander Wescott & Co., Inc.
served as placement agent for the offering and was paid expenses and commissions
of $151,850 and was granted a warrant representing the right to acquire
1,145,000 shares of the Company's Common Stock at a purchase price of $1.20 per
share for placing the Preferred Stock. The shares of Common Stock issuable upon
conversion of the Preferred Stock are to be registered under the Securities Act
of 1933 by the end of calendar 1998.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
During fiscal 1997, the Company determined to expand its business to
include healthcare information software products and services. The decision was
based on the Company's desire to improve margins for its medical products,
particularly its Life Sciences peripheral vascular diagnostic products, and to
expand its product and service offerings in order to increase revenues and to
return the Company to profitability. To implement this change, the Company
entered into various agreements during fiscal 1998 with HALIS, Inc., a
healthcare information technology company, and Paul Harrison Enterprises, Inc.,
an affiliate of HALIS and the owner of certain software development technology
known as MERAD.
During fiscal 1998, the Company began efforts to develop proprietary
technology utilizing MERAD and to market HALIS' healthcare enterprise system to
the Company's customers. In addition, the Company sold its Cambridge Medical
Equipments, Ltd. subsidiary located in England, terminated sales of its
Cambridge product line and initiated efforts to sell the PACER, its new IV
product. The decision to terminate the Cambridge business was made in fiscal
1997, based on declining sales of these products and the Company's conclusion
that the prospects for this product line did not justify the additional
investment that would be required to maintain this product line. The decision to
seek a buyer for the PACER product followed efforts begun in late fiscal 1997 to
establish distribution channels for this product. While these efforts were
initially favorable, the Company did not have the resources required to sustain
the sales and marketing effort needed to market this product in a market
dominated by large international companies with a wide range of IV equipment and
disposable products.
Based on the foregoing developments and the Company's determination
that the software information technology (IT) business offered significantly
greater opportunities for the Company than did its existing medical products
business, the Company's focus during fiscal 1998 was increasingly on the
development of its IT business. In an effort to gain direct control over its
efforts to develop the IT business, the Company acquired PHE on October 1, 1998.
As a result of the PHE acquisition, the Company obtained ownership of the MERAD
technology and increased its ownership of HALIS common stock from approximately
5% to 18% of HALIS' outstanding shares of common stock.
During fiscal 1999, the Company intends to continue to emphasize the IT
business and expects to grow this business through a combination of licensing
partners, selected strategic acquisitions and internal sales of its software and
services. In this connection, the Company expects to continue to expand its
collaborative efforts with HALIS and to
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<PAGE>
expand its efforts to market the HALIS healthcare enterprise system to the
Company's customer base. The Company also intends to explore the possibility of
developing information systems utilizing the MERAD technology for other
information intensive industries such as financial services, insurance and real
estate.
The Company has incurred significant operating losses during the past
several years and at June 30, 1998 had a retained earnings deficit of
$18,237,396. The Company will require additional debt or equity capital to
sustain operations and to continue its business development efforts. The report
of the Company's independent public accountants for the years ended June 30,
1998 and 1997, contained a paragraph noting substantial doubt regarding the
Company's ability to continue as a going concern.
RESULTS OF OPERATIONS
1998 COMPARED TO 1997. The following table compares the results of
operations for fiscal 1998 and fiscal 1997 to present a comparative basis for
the analysis of the differences in operating results for those periods.
<TABLE>
<CAPTION>
--------------------------- 1998 vs 1997
1998 1997 Increase (Decrease)
--------------------------- ----------------------
<S> <C> <C> <C> <C>
Product sales $ 1,383,335 $ 2,089,325 $ (705,990) (33.8%)
Product cost of sales 1,359,028 1,839,475 (480,447) (26.1)
----------- -----------
Gross profit 24,307 249,850 (225,543) (90.3)
Selling, general & administrative 1,602,581 1,657,018 (54,437) (3.3)
Research & development 231,169 423,762 (192,593) (45.5)
Depreciation & amortization 276,332 286,831 (10,499) (3.7)
----------- -----------
Total operating costs & expenses 2,110,082 2,367,611 (257,529) (10.9)
----------- -----------
Loss from continuing operations (2,085,775) (2,117,761) (31,986) (1.5)
Other income (expenses):
Unrealized loss on marketplace securities (1,824,605) -- 1,824,605 NA
Loss from disposition of subsidiary (102,885) -- 102,885 NA
Interest expense (68,219) (64,081) 4,138 (6.5)
Miscellaneous (2,990) (7,418) (4,428) (59.7)
----------- -----------
Total other income (expenses) (1,998,699) (71,499) 1,927,200 2,695.4
----------- -----------
Net Loss $(4,084,474) $(2,189,260) $ 1,895,214 86.6%
=========== ===========
</TABLE>
Revenues for the 1998 period decreased 33.8% compared to the similar
period in 1997. The decreased revenues were primarily due to a lower level of
sales of the Company's MVL system pending the upgrade of this product which was
completed in the third quarter of fiscal 1998, the sale of Cambridge Medical
Equipments, Ltd., the discontinuance of the Cambridge product line and the
inability of the Company to establish a market for its new IV product. In
addition, the Company's sales and marketing efforts have been limited due to its
lack of adequate working capital.
Costs of products sold were 26.1% lower in 1998 due primarily to
decreased equipment sales. The gross margin was 1.8% in 1998 compared to 12% for
1997. The lower gross margins in 1998 were due primarily to increased costs of
parts and materials and lower initial selling prices in connection with the
introduction of the upgraded MVL product and to the generally lower revenues.
Selling, general and administrative expenses as a percent of sales were
115.8% for the 1998 period compared to 79.3% for 1997. The increase in the 1998
period was due primarily to lower revenues. Research and development expenses
decreased 45.5% in 1998 due primarily to reduction in the development cost for
the Company's PACER product and related tooling.
In the fourth quarter of fiscal 1998, the Company recorded a charge of
$1,824,605 to recognize the unrealized loss on the HALIS common stock. While the
HALIS investment was made as part of the creation of a long-term business
relationship with HALIS and not for resale, the Company determined that it
should record the unrealized loss on this asset since the reduction in the
market price for the HALIS common stock could not be deemed to be
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<PAGE>
temporary. The Company recorded a loss of $102,885 in connection with the sale
of its Cambridge Medical Equipments, Ltd. subsidiary. Interest expense increased
6.5% in 1998.
1997 COMPARED TO 1996. The following table compares the results of
operations for fiscal 1997 and fiscal 1996 to present a comparative basis for
the analysis of the differences in operating results for those periods.
<TABLE>
<CAPTION>
--------------------------- 1997 vs 1996
1997 1996 Increase (Decrease)
--------------------------- ----------------------
<S> <C> <C> <C> <C>
Product sales $ 2,089,325 2,041,464 47,861 2.3%
Product cost of sales 1,839,475 1,603,454 236,021 14.7
----------- -----------
Gross profit 249,850 438,010 (188,160) (43.0)
Selling, general & administrative 1,657,018 1,685,445 (28,427) (1.7)
Research & development 423,762 345,240 78,522 22.7
Depreciation & amortization 286,831 325,872 (39,041) (12.0)
----------- -----------
Total operating costs & expenses 2,367,611 2,356,557 11,054 0.5
----------- -----------
Loss from continuing operations (2,117,761) (1,918,547) 199,214 10.4
Other income (expenses):
Interest income 0 8,030 (8,030) N/A
Interest expense (64,081) (66,196) (2,115) (3.2)
Miscellaneous (7,418) 0 7,418 N/A
----------- -----------
Total other income (expenses) (71,499) (58,166) 13,333 22.9
Extraordinary item 0 7,974 (7,974) N/A
----------- -----------
Net (loss) ($2,189,260) ($1,968,739) 220,521 11.2
=========== ===========
</TABLE>
Revenues for the 1997 period increased 2.3% compared to the similar
period in 1996. The increased revenues were primarily due to sales of the
Company's first IV product, the PACER. The Company believes that sales of its
Life Sciences and Cambridge products were lower in the 1997 period as a result
of the Company's lack of adequate working capital which has adversely affected
its level of sales as the Company has not been able to support both the
development of its new IV product and selling efforts and enhancements to its
existing products. In addition, the Company believes that uncertainty in the
medical community regarding the reimbursement effects of health-care reforms;
consolidations of hospital and other health-care institutions resulting in fewer
customers for the Company's diagnostic products and delays in making purchase
commitments by institutions engaged in merger or consolidation discussions; and
competitive pressure on product prices also contribute to depressed sales.
Cost of products sold were 14.7% higher in 1997 due primarily to
increased equipment sales and an increase in inventory allowance. Gross margins
were 12% for 1997 compared to 21.5% for 1996. The lower gross margins in 1997
were due primarily to increased cost of parts and materials and increased salary
expenses.
Selling, general and administrative expenses as a percent of sales were
79.3% for the 1997 period compared to 82.6% for 1996. The decrease in the 1997
period was due primarily to reduced selling expenses and higher sales revenue.
Research and development expenses increased 22.7% in 1997. This increase was due
primarily to research relating to expanding the Company's IV product line and
the expense of tooling which had previously been capitalized.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company had $1,038,705 of cash and accounts
receivable. Due to the Company's operating losses, it has been required to raise
additional debt and equity capital to fund its operations. Capital expenditures
during this period have been limited to routine capital purchases. During fiscal
1998, the Company raised $1,856,448 of additional working capital through the
issuance of its securities. The Company's 10% Convertible Secured Debentures in
the principal amount of $580,000 were past due as of June 30, 1998. The Company
believes it needs to raise approximately $1,000,000 of additional working
capital to sustain operations during the next twelve months and to pay the
Debentures.
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<PAGE>
In the event that the Company is unable to raise additional capital, it
may be required to sell shares of the HALIS common stock. The HALIS common stock
is traded in the over-the-counter market on the OTC Bulletin Board. The
Company's ability to sell its HALIS shares could be adversely affected by the
limited trading volume for HALIS' stock and the requirement that the Company
sell its HALIS shares in accordance with Rule 144 promulgated by the Commission
which could limit the number of HALIS shares which could be sold in any
three-month period to approximately 440,000 shares. There can be no assurance as
to the price the Company could receive for the HALIS common stock if it were
required to sell the stock to raise additional working capital.
YEAR 2000 COMPLIANCE
The Company is implementing its Year 2000 compliance plan on two paths.
First, the Company is now offering IT solutions and software that is already
Year 2000 compliant. The MERAD software it acquired as part of the PHE merger is
Year 2000 compliant by design. Second, the Company will be converting its
internal information systems to the new MERAD business software program, or to
validated Year 2000 compliant business applications over the next nine months,
with a target date of no later than FYE - June 30, 1999.
ITEM 7. FINANCIAL STATEMENTS.
The Financial Statements are attached at the end of this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
Incorporated herein by reference to the Company's Proxy Statement for
the 1998 Annual Meeting of Stockholders.
ITEM 10. EXECUTIVE COMPENSATION.
Incorporated herein by reference to the Company's Proxy Statement for
the 1998 Annual Meeting of Stockholders.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated herein by reference to the Company's Proxy Statement for
the 1998 Annual Meeting of Stockholders.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference to the Company's Proxy Statement for
the 1998 Annual Meeting of Stockholders.
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K.
(a) Listing of Exhibits:
3.1 Articles of Incorporation, as amended, of the Company (1).
3.2 Bylaws, as amended, of the Company (2).
4.1 Specimen form of the Company's Common Stock certificate (2).
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<PAGE>
4.2 HealthWatch, Inc. Stock Option Plan of 1989 (3).
4.3 Form of Incentive Stock Option Agreement (3).
4.4 Form of Nonstatutory Stock Option Agreement (3).
4.5 HealthWatch, Inc. Stock Option Plan of 1993 (4).
4.6 HealthWatch, Inc. Stock Option Plan of 1995 (5).
4.7 HealthWatch, Inc. 1995 Stock Grant and Salary Deferral Plan
(5).
4.8 Subscription and Purchase Agreement dated as of the 14th day
of August 1992 between the Company and the Purchasers of the
Company's 10% convertible senior debentures due 1997
(including as an appendix thereto the form of the debenture
certificate) (6).
4.9 Subscription and Purchase Agreement between HealthWatch, Inc.
and HALIS, Inc.(7).
4.10 Certificate of the Designation, Preferences, Rights and
Limitations of the 6% Series A Convertible Preferred Stock of
HealthWatch, Inc. -- filed herewith.
4.11 Certificate of the Designation, Preferences, Rights and
Limitations of the Series P Preferred Stock of HealthWatch,
Inc. -- filed herewith.
10.1 License Agreement dated February 27, 1992, as amended
September 13, 1993, between Howard R. Everhart and Metamed,
Inc. (6).
10.2 Second Amendment to License Agreement dated May 9, 1995
between Howard R. Everhart and HealthWatch Technologies, Inc.
(7).
10.3 Business Collaboration Agreement dated as of October 10, 1997
between the Company and HALIS, Inc. (8).
10.4 License and Software Development Agreement dated as of October
10, 1997 between the Company and MERAD Corporation (8).
10.5 Consulting Agreement dated as of October 10, 1997 among the
Company, Paul Harrison Enterprises, Inc. and Paul Harrison
(8).
10.6 Consulting Agreement dated as of October 10, 1997 between the
Company and Larry Fisher (8).
10.7 Agreement and Plan of Merger dated as of September 30, 1998
among HealthWatch, Inc., MERAD Software, Inc. and Paul
Harrison Enterprises, Inc. (9).
10.8 Letter of Intent between HealthWatch, Inc. and HALIS, Inc.
dated July 14, 1998 -- filed herewith.
21 Subsidiaries of the Company at June 30, 1998 (6).
23.1 Consent of Silverman Olson Thorvilson & Kaufmann, Ltd. --
filed herewith.
27.1 Financial Data Schedule - filed herewith.
- ----------------------
(1) Incorporated herein by reference to the Company's Annual Report, Form
10-K, for the year ended June 30, 1990 (File No. 0-11476).
(2) Incorporated herein by reference to Registration Statement, Form S-18
(File No. 2-85688D).
(3) Incorporated herein by reference to Registration Statement, Form S-2
(File No. 33-42831).
(4) Incorporated herein by reference to the Company's Annual Report, Form
10-KSB, for the year ended June 30, 1994 (File No. 0-11476).
(5) Incorporated herein by reference to the Company's Annual Report, Form
10-KSB, for the year ended June 30, 1996 (File No. 0-11476).
(6) Incorporated herein by reference to Registration Statement, Form SB-2
(File No. 33-73462).
(7) Incorporated herein by reference to the Company's Annual Report, Form
10-KSB, for the year ended June 30, 1997 (File No. 0-11476).
(8) Incorporated herein by reference to the Company's Quarterly Report,
Form 10-QSB, for the quarter ended December 31, 1997.
(9) Incorporated herein by reference to the Company's Current Report, Form
8-K, dated October 1, 1998.
(b) During the quarter ended June 30, 1998, Registrant did not file a
report on Form 8-K.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HEALTHWATCH, INC.
Date: October 13, 1998 By /s/ Paul W. Harrison
------------------------------------------
Paul W. Harrison (Chief Executive Officer)
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
/s/ Paul W. Harrison October 13, 1998
- ------------------------------------------------------
Paul W. Harrison, (Chief Executive Officer)
(Principal Executive Officer)
/s/ Annette D. Agner October 13, 1998
- ------------------------------------------------------
Annette D. Agner
Controller (Principal Financial and Accounting Officer)
/s/ Richard T. Case October 13, 1998
- ------------------------------------------------------
Richard T. Case
(Director)
/s/ Larry Fisher October 13, 1998
- ------------------------------------------------------
Larry Fisher
(Director)
/s/ Sanford L. Schwartz October 13, 1998
- ------------------------------------------------------
Sanford L. Schwartz
(Director)
-18-
<PAGE>
HEALTHWATCH, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
Independent Auditors' Report F-2
Consolidated Balance Sheet F-3
Consolidated Statement of Operations F-4
Consolidated Statement of Shareholders' Equity F-5
Consolidated Statement of Cash Flows F-6 - F-7
Notes to Consolidated Financial Statements F-8 - F-26
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
HealthWatch, Inc.
Vista, California
We have audited the accompanying consolidated balance sheet of HealthWatch, Inc.
and its subsidiaries, as of June 30, 1998 and 1997, and the related consolidated
statements of operations, shareholders' equity 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of HealthWatch, Inc.
and its subsidiaries as of June 30, 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.
As discussed in Note 2 to the financial statements, the Company's recurring
losses, negative working capital and negative cash flow from operations raises
substantial doubt about its ability to continue as a going concern. Management's
plans as to these matters are also described in Note 2. The 1998 and 1997
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
SILVERMAN OLSON THORVILSON & KAUFMANN LTD
CERTIFIED PUBLIC ACCOUNTANTS
Minneapolis, Minnesota
August 14, 1998, except for Notes 10 and 17 which
are dated September 30, 1998
<PAGE>
HEALTHWATCH, INC.
CONSOLIDATED BALANCE SHEET
JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
ASSETS ------------ ------------
<S> <C> <C>
Current assets:
Cash $ 854,290 $ 44,634
Accounts receivable, net of allowance for doubtful
accounts of $20,584 and $21,125, respectively 184,415 289,817
Inventory (Note 4) 372,273 676,467
Other current assets 23,713 46,827
------------ ------------
Total current assets 1,434,691 1,057,745
Marketable equity securities - related party (Note 3) 318,708 --
Property and equipment, net (Note 5) 30,794 64,329
Intangible assets, net (Note 6) 675,552 922,392
Other assets 9,251 44,283
------------ ------------
Total assets $ 2,468,996 $ 2,088,749
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 315,767 $ 266,932
Accrued compensation and payroll taxes 281,860 229,685
Other accrued liabilities - related parties 202,892 44,318
Other accrued liabilities - unrelated parties 357,495 275,248
Deferred revenue 36,964 65,255
Current portion of debentures payable -
related parties (Note 7) 15,000 30,000
Current portion of debentures payable -
unrelated parties (Note 7) 565,000 550,000
------------ ------------
Total current liabilities 1,774,978 1,461,438
------------ ------------
Contingencies and commitments (Note 8) -- --
Shareholders' equity (Notes 9 and 10):
Cumulative preferred stock, $.01 par value; 5,000,000
shares authorized, 1,145,000 and 0 shares issued and
outstanding, respectively (Notes 9 and 10) 11,450 --
Common stock, $.01 par value; 50,000,000 shares
authorized, 2,420,721 and 702,018 issued and
outstanding, respectively (Note 10) 24,207 7,020
Additional paid-in capital 18,895,757 14,823,100
Accumulated deficit (18,237,396) (14,152,922)
Equity adjustment from foreign currency translation -- (49,887)
------------ ------------
Total shareholders' equity 694,018 627,311
------------ ------------
Total liabilities and shareholders' equity $ 2,468,996 $ 2,088,749
============ ============
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
HEALTHWATCH, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Product sales $ 1,383,335 $ 2,089,325
Product cost of sales 1,359,028 1,839,475
----------- -----------
Gross profit 24,307 249,850
Operating expenses:
Selling, general and administrative - related parties 261,906 108,303
Selling, general and administrative - unrelated parties 1,340,675 1,548,715
Depreciation and amortization 276,332 286,831
Research and development 231,169 423,762
----------- -----------
Total operating expenses 2,110,082 2,367,611
----------- -----------
Loss from operations (2,085,775) (2,117,761)
Other income (expense):
Unrealized loss on marketable equity securities - related party
(Note 3) (1,824,605) --
Loss from disposition of subsidiary (Note 14) (102,885) --
Interest expense - unrelated parties (65,560) (58,856)
Interest expense - related parties (2,659) (5,225)
Loss on disposal of equipment (4,043) (7,576)
Miscellaneous 1,053 158
----------- -----------
Total other income (expense) (1,998,699) (71,499)
----------- -----------
Net loss $(4,084,474) $(2,189,260)
=========== ===========
Basic and diluted net loss per share $ (2.45) $ (4.49)
=========== ===========
Weighted average number of shares outstanding 1,669,325 488,114
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
HEALTHWATCH, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
PREFERRED STOCK (NOTE 9) COMMON STOCK (NOTE 10) ADDITIONAL
------------------------ ----------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- ------------ --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1996 200,000 $ 2,000 324,916 $ 3,249 $ 13,080,819
Series B preferred stock issued in private offering
(Note 9) 500,000 1,109,496 -- -- --
Common stock issued for conversion of Series B
preferred stock (Note 9) (500,000) (1,109,496) 300,000 3,000 1,106,496
Common stock issued for conversion of Series A
preferred stock (200,000) (2,000) 31,438 314 1,686
Common stock issued for services -- -- 16,770 168 279,001
Common stock options exercised -- -- 11,648 116 122,184
Common stock warrants exercised -- -- 16,086 161 221,326
Common stock bonuses -- -- 1,160 12 11,588
Equity adjustment from foreign currency translation -- -- -- -- --
Net loss -- -- -- -- --
--------- ------------ --------- ------------ ------------
Balance at June 30, 1997 -- $ -- 702,018 $ 7,020 $ 14,823,100
Series A preferred stock issued in private offering
(Note 9) 1,145,000 11,450 -- -- 981,700
Series H preferred stock issued in private offering
(Note 9) 20,834 208 -- -- 120,594
Common stock issued for conversion of Series H
preferred stock (Note 9) (20,834) (208) 83,334 833 (625)
Common stock issued in exchange for marketable
equity securities (Note 3 and 10) -- -- 1,089,600 10,896 2,113,167
Common stock issued in private offerings (Note 10) -- -- 441,866 4,419 657,631
Common stock issued for services -- -- 29,848 298 82,865
Common stock options exercised -- -- 15,600 156 46,944
Common stock warrants exercised -- -- 41,355 414 32,932
Common stock bonuses -- -- 17,100 171 37,449
Equity adjustment from foreign currency translation -
sale of subsidiary -- -- -- -- --
Net loss -- -- -- -- --
--------- ------------ --------- ------------ ------------
Balance at June 30, 1998 1,145,000 $ 11,450 2,420,721 $ 24,207 $ 18,895,757
========= ============ ========= ============ ============
</TABLE>
[WIDE TABLE CONTINUED FROM ABOVE]
<TABLE>
<CAPTION>
TOTAL
ACCUMULATED EQUITY SHAREHOLDERS'
DEFICIT ADJUSTMENT EQUITY
------------ ------------ ------------
<S> <C> <C> <C>
Balance at June 30, 1996 $(11,963,662) $ (38,559) $ 1,083,847
Series B preferred stock issued in private offering
(Note 9) -- -- 1,109,496
Common stock issued for conversion of Series B
preferred stock (Note 9) -- -- --
Common stock issued for conversion of Series A
preferred stock -- -- --
Common stock issued for services -- -- 279,169
Common stock options exercised -- -- 122,300
Common stock warrants exercised -- -- 221,487
Common stock bonuses -- -- 11,600
Equity adjustment from foreign currency translation -- (11,328) (11,328)
Net loss (2,189,260) -- (2,189,260)
------------ ------------ ------------
Balance at June 30, 1997 $(14,152,922) $ (49,887) $ 627,311
Series A preferred stock issued in private offering
(Note 9) -- -- 993,150
Series H preferred stock issued in private offering
(Note 9) -- -- 120,802
Common stock issued for conversion of Series H
preferred stock (Note 9) -- -- --
Common stock issued in exchange for marketable
equity securities (Note 3 and 10) -- -- 2,124,063
Common stock issued in private offerings (Note 10) -- -- 662,050
Common stock issued for services -- -- 83,163
Common stock options exercised -- -- 47,100
Common stock warrants exercised -- -- 33,346
Common stock bonuses -- -- 37,620
Equity adjustment from foreign currency translation -
sale of subsidiary -- 49,887 49,887
Net loss (4,084,474) -- (4,084,474)
------------ ------------ ------------
Balance at June 30, 1998 $(18,237,396) -- $ 694,018
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
HEALTHWATCH, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,084,474) $(2,189,260)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 276,332 286,831
Common stock issued for payment of expenses 120,783 290,769
Loss on disposal of equipment 4,043 7,576
Unrealized loss on marketable equity securities 1,824,605 --
Loss from disposition of subsidiary 102,885 --
(Increase) decrease in assets:
Accounts receivable 52,009 (60,274)
Inventory 240,909 142,468
Other current assets (5,820) (19,693)
Other assets 35,032 73,688
Increase (decrease) in liabilities:
Accounts payable 63,093 51,128
Accrued liabilities - related parties 158,574 10,164
Accrued liabilities - unrelated parties 226,766 (28,612)
Deferred revenue (28,291) (105,947)
----------- -----------
Net cash used in operating activities (1,013,554) (1,541,162)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment -- (40,910)
Proceeds from sale of equipment -- 1,100
Cash forfeited in sale of subsidiary (12,008) --
----------- -----------
Net cash used in investing activities (12,008) (39,810)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of preferred stock 1,113,952 1,109,496
Net proceeds from issuance of common stock 742,496 343,787
Issuance costs paid in common stock swap (Note 10) (19,250) (19,250)
Proceeds from subscriptions receivable -- 104,568
----------- -----------
Net cash provided by financing activities 1,837,198 1,557,851
----------- -----------
Effect of exchange rate changes on cash (1,980) (11,328)
----------- -----------
Increase (decrease) in cash 809,656 (34,449)
Cash - beginning of year 44,634 79,083
----------- -----------
Cash - end of year $ 854,290 $ 44,634
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
HEALTHWATCH, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(CONTINUED)
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
1998 1997
----------- -----------
Cash paid during the year for interest $ 2,770 $ 64,986
=========== ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the year ended June 30, 1998:
The Company issued 29,848 shares of common stock valued at $83,163 in
exchange for services.
The Company issued 17,100 shares of common stock valued at $37,620 for
employee bonuses.
The Company issued 1,089,600 shares of common stock in exchange for
1,362,000 shares of issued and outstanding Halis, Inc. common stock (Notes
3, 10 and 11).
The Company converted 20,834 shares of Series H preferred stock valued at
$120,802 to 83,334 shares of common stock (Note 9)
During the year ended June 30, 1997:
Shareholders converted 500,000 shares of Series B preferred stock valued at
$1,109,496 to 1,500,000 shares of common stock (Note 9).
Shareholders converted 200,000 shares of Series A preferred stock valued at
$300,000 to 157,192 shares of common stock (Note 9).
The Company issued 83,850 shares of common stock valued at $279,169 in
exchange for services.
The Company issued 5,800 shares of common stock valued at $11,600 for
employee bonuses.
See accompanying notes to financial statements.
F-6
<PAGE>
HEALTHWATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Organization:
HealthWatch, Inc. (HealthWatch or the Company) manufactures and
distributes noninvasive vascular diagnostic medical instruments to
hospitals and medical clinics worldwide with the majority of sales
occurring in the United States and Great Britain. In addition, the
Company has developed a proprietary device used to monitor and
control intravenous ("IV") drug infusion. The Company began selling
this device during fiscal year 1997 to hospitals and medical clinics
throughout the United States. The Company grants credit to its
customers in the normal course of business.
Principles of Consolidation:
The consolidated financial statements include the accounts of
HealthWatch and HealthWatch Technologies, Inc., a wholly-owned
subsidiary of the Company, and its wholly-owned subsidiary Life
Sciences, Inc. In March 1998, all issued and outstanding shares of
common stock in Cambridge Medical Equipments Limited, a wholly-owned
subsidiary of HealthWatch Technologies, Inc., were sold (Note 14).
Prior to that sale, the consolidated financial statements also
included Cambridge Medical Equipments Limited.
All significant intercompany accounts and transactions have been
eliminated.
Marketable Equity Securities:
The Company has adopted the provisions of Statement of Financial
Accounting Standard No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" (SFAS 115). This statement requires that
investments in securities be classified in one of three categories:
trading, available-for-sale or held-to-maturity. The Company
currently classifies all investment securities as
available-for-sale. Under SFAS 115 securities accounted for as
available-for-sale includes bonds, notes, common stock and
non-redeemable preferred stock not classified as trading or
held-to-maturity. Securities available-for-sale are reported at fair
value, adjusted for other-than-temporary declines in value.
Unrealized holding gains and temporary losses, net of tax, on
securities classified as available-for-sale are reported as a net
amount in a separate component of stockholders equity until
realized. Realized gains and losses on the sale of securities
classified as available-for-sale and unrealized declines in value of
securities classified as available for sale which are deemed to be
other than temporary are determined using the
specific-identification method and are reflected as a separate
component in the consolidated statement of operations.
Inventory:
Inventory is recorded at the lower of cost (determined on a
first-in, first-out basis) or market.
F-7
<PAGE>
HEALTHWATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and Equipment and Intangible Assets:
Property and equipment and intangible assets are stated at cost.
Depreciation and amortization are computed using straight-line
methods and is expensed based upon the estimated useful lives of the
assets.
Expenditures for additions and improvements are capitalized, while
repairs and maintenance are expensed as incurred.
Long-Lived Assets:
Effective July 1, 1996, the Company adopted SFAS No. 121,
"Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to be Disposed of". The standard establishes
guidelines regarding when impairment losses on long-lived assets
should be recognized and how impairment losses should be measured.
The adoption of this standard did not have an impact on the
Company's financial position or results of operations.
Stock Based Compensation:
Effective July 1, 1996, the Company adopted the disclosure
requirements of SFAS No. 123, "Accounting for Stock-Based
Compensation". SFAS No. 123 establishes a fair value-based method of
measuring stock-based compensation, but does not require an entity
to adopt the new method for preparing its basic financial
statements. For entities not adopting the new method, SFAS No. 123
requires disclosures in the footnotes of pro forma net earnings and
earnings per share information as if the fair value-based method had
been adopted (Note 10).
Deferred Revenue:
Deferred revenue represents amounts received on service contracts
but not yet earned. Revenue is recognized on a straight-line basis
over the life of the contract.
Equity Adjustment From Foreign Currency Translation:
The equity adjustment from foreign currency translation arose upon
translating Cambridge Medical Equipments Limited's activity from
British pounds to U.S. dollars (Note 14).
Revenue Recognition:
The Company recognizes revenue from product sales at the time
ownership transfers to the customer, principally, at shipment.
F-8
<PAGE>
HEALTHWATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
NOTE 1: 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, if any. Deferred taxes represent the net
tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes.
Net Loss Per Share:
In February 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 128, Earnings Per Share ("EPS"). SFAS No. 128
requires dual presentation of basic EPS and diluted EPS on the face
of all income statements issued after December 15, 1997 for all
entities with complex capital structures. The adoption of SFAS No.
128 had no effect on the Company's financial statements. Basic EPS
is computed as net income (loss) available to common shareholders
divided by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that
could occur from common shares issuable through stock options and
warrants. As the Company's stock options and warrants are
antidilutive for all periods presented only basic EPS is presented.
At June 30, 1998, outstanding options and warrants to purchase
2,357,612 shares of the Company's common stock were not included in
the computation of diluted EPS as their effect would be
antidilutive.
Reverse Stock Split:
On January 22, 1998, the Company's Board of Directors approved a
one-for-five reverse stock split of the Company's common stock
effective February 23, 1998. Accordingly, all share, per share,
weighted average share, stock option and stock warrant information
has been restated to reflect the reverse stock split.
Concentrations:
Financial instruments that potentially subject the Company to
concentration risk consist principally of cash, marketable
securities and accounts receivable. The Company maintains cash in a
bank deposit account which, at times, may exceed federally insured
limits. The Company believes it has its cash deposits at high
quality financial institutions. The Company believes no significant
credit risk exists with respect to these deposits.
The Company currently has its entire investment in marketable
securities in the common stock of Halis, Inc. (Halis) (Notes 3, 10
and 11). This investment is subject to the market performance of
Halis' common stock.
Accounts receivable arise from the sale of medical products to
hospitals and medical clinics worldwide. The Company performs
ongoing credit evaluations of its customers' financial condition,
and generally requires no collateral from its customers. The
Company's credit losses are subject to general economic conditions
of the medical industry.
F-9
<PAGE>
HEALTHWATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
New Accounting Pronouncements:
Statements of Financial Accounting Standards No. 129 "Disclosure of
Information about Capital Structure" (SFAS No. 129) issued by the
SFAS is effective for financial statements ending after December 15,
1997. The new standard reinstates various securities disclosure
requirements previously in effect under Accounting Principles Board
Opinion No. 15, which has been superseded by SFAS No. 128. The
adoption of SFAS No. 129 did not have a material effect on the
Company's financial position, results of operations or the form and
content of its disclosures.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". SFAS No. 130 requires that an
enterprise report, by major components and as a single total, the
change in its net assets during the period from non-owner sources.
SFAS 131 establishes annual and interim reporting standards for an
enterprise's operating segments and related disclosures about its
products, services, geographic areas and major customers. Both
statements are effective for fiscal years beginning after December
15, 1997, with earlier application permitted. The Company has not
elected earlier adoption. Had the Company elected earlier adoption,
these statements would not have materially impacted the Company's
financial position, results of operations or cash flows as
originally reported.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts and
disclosures. Accordingly, actual results could differ from those
estimates.
Reclassifications:
Certain reclassifications have been made in the 1997 financial
statements in order to conform with 1998 financial statement
presentation. These reclassifications have no effect on accumulated
deficit or net loss, as originally reported.
NOTE 2: MANAGEMENT'S OPERATING PLANS
During 1998, the Company incurred a net loss of $4,084,474 and negative
cash flow from operations of $1,013,554, resulting in a net working
capital deficit of $340,287 and an accumulated deficit totaling
$18,237,396 at June 30, 1998. Given these results combined with the
Company's defaults under its debenture agreements (Note 7), and the
Company's commitments to loan related parties up to $400,000 (Notes 11
and 17) additional capital will be needed to sustain the Company's
operations.
F-10
<PAGE>
HEALTHWATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
NOTE 2: MANAGEMENT'S OPERATING PLANS (CONTINUED)
Management's plans in this regard include the completion of the
acquisition of Paul Harrison Enterprises, Inc. (PHE) (Note 17). The
acquisition of PHE will provide the Company with ownership of the MERAD
technology currently licensed by the company (Note 11). The Company
plans to use the MERAD technology to develop software based products
for the health care and other industries as well as for its current
line of noninvasive vascular diagnostic medical products. The Company
believes that the MERAD technology will contribute greatly toward the
future operations of the Company, although no assurance regarding the
commercial success of the technology can be provided at this time.
Additionally, the Company has commenced efforts to raise, through, the
sale of preferred stock, the additional capital required to fund
planned 1999 activities.
In the event that management's plans as described above are not
successful, the Company could be forced to reduce its operations,
curtail acquisitions or other projects, liquidate any excess inventory
and sell any non-performing operating lines. The actions described
above may not be sufficient to prevent the Company from liquidating.
The consolidated financial statements do not contain any adjustments,
which might be necessary, if the Company is unable to continue as a
going concern.
NOTE 3: MARKETABLE EQUITY SECURITIES - RELATED PARTY
During fiscal 1998, the Company issued 1,089,600 shares of its common
stock in exchange for 1,362,000 shares of the issued and outstanding
registered shares of Halis (Note 10 and 11). In addition, the Company
paid $19,250 of costs directly related to this transaction. The Halis
shares received were recorded at their fair market value as of the
exchange dates of $2,143,313, with the Company recording net equity
related to the issuance of its shares of $2,124,063 (net of issuance
costs). As of June 30, 1998, the Company has classified all common
shares of Halis as available-for-sale.
The amortized cost, gross unrealized holding gains, gross unrealized
holding losses and fair value of the available-for-sale securities at
June 30, 1998 are as follows:
Gross Gross
Amortized Unrealized Unrealized
Cost Holding Gains Holding Losses Fair Value
--------- ------------- -------------- ----------
Halis Common Stock $ 318,708 $ -- $ -- $ 318,708
========= ========== ========== =========
Throughout 1998, the investment in the Halis common stock experienced a
decline in value and during the fourth quarter of 1998 (Note 16),
management deemed the decline to be "other-than-temporary". As a
result, the unrealized loss aggregating $1,824,605 has been reflected
as a separate component in the statement of operations and the
amortized cost has been written down to its new cost basis of $318,708.
F-11
<PAGE>
HEALTHWATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
NOTE 4: INVENTORY
Inventory consisted of the following at June 30:
1998 1997
---------- ----------
Raw Materials $ 159,655 $ 508,147
Work in process 75,316 83,551
Finished goods 137,302 84,769
---------- ----------
Total inventory $ 372,273 $ 676,467
========== ==========
NOTE 5: PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at June 30:
Estimated
Useful Life
1998 1997 In Years
---------- ----------- -----------
Furniture and equipment $ 633,979 $ 633,979 3-5
Leasehold improvements -- 29,197 5-6
---------- -----------
Total property and equipment 633,979 663,176
Less accumulated depreciation (603,185) (598,847)
---------- ----------
Property and equipment, net $ 30,794 $ 64,329
========== ==========
Depreciation expense was $29,492 and $39,991 for 1998 and 1997,
respectively.
NOTE 6: INTANGIBLE ASSETS
Intangible assets arose in the acquisition of Life Sciences, Inc. and
consisted of the following at June 30:
Estimated
Useful Life
1998 1997 In Years
----------- ----------- -----------
Technology $ 1,594,838 $ 1,594,838 10
Drawings and documentation 347,149 347,149 10
Life Sciences name 300,000 300,000 10
Applications 250,000 250,000 10
Customer base 225,000 225,000 10
----------- -----------
2,716,987 2,716,987
Less accumulated amortization (2,041,435) (1,794,595)
----------- -----------
Intangible assets, net $ 675,552 $ 922,392
=========== ===========
Amortization expense was $246,840 and $246,840 for 1998 and 1997,
respectively.
F-12
<PAGE>
HEALTHWATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
NOTE 7: DEBENTURES PAYABLE
Debentures payable accrue interest at an annual rate of 10%, payable
quarterly and are secured by substantially all corporate assets. The
debentures matured March 1, 1998. As of June 30, 1998, the debentures
had not been extended and the Company was in default under the
debenture agreements. The debentures could be converted into common
stock, at the option of the holder, at a conversion rate of one share
of common stock for every $70.00 of debentures converted. During 1998
and 1997, no debentures were converted to common stock.
Debentures payable to related parties consist of debentures issued to a
director/shareholder of HealthWatch.
The Company believes that the carrying value of the debt approximates
its fair value at June 30, 1998 and 1997, as the Company's borrowing
terms have not changed substantially since the issuance of its
debentures.
NOTE 8: CONTINGENCIES AND COMMITMENTS
Financial Instruments:
At June 30, 1998, the Company had deposits in excess of federally
insured amounts aggregating $771,672 at one financial institution.
Operating Leases:
The Company subleases its corporate offices and manufacturing
facilities on a month-to-month basis.
Rent expense for 1998 and 1997 was $152,899 and $160,800,
respectively.
Warranty Reserve:
The Company sells the majority of its products with repair or
replacement warranties. The Company has established an accrued
warranty reserve of $9,179, at June 30, 1998 and 1997 for estimated
future warranty claims. These amounts are included in other accrued
liabilities - unrelated parties.
401(k) Savings Plan:
During 1997, the Company established a 401(k) savings plan covering
all employees meeting certain age and length of service
requirements. The Company may contribute annually a discretionary
amount, as determined by the board of directors. Participants vest
immediately in their contributions and over a five-year period for
any Company contributions. The Company did not make any matching
contributions during the year ended June 30, 1998 or 1997.
F-13
<PAGE>
HEALTHWATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
NOTE 8: CONTINGENCIES AND COMMITMENTS (CONTINUED)
Advisory Board:
In May and July 1996, the Company entered into a thirteen-month
agreement with four individuals ("the Advisory Board") to provide
consultation and advice relating to the introduction of the
Company's proprietary intra-venous infusion device into the
health-care market. Upon commencement of the agreement, the Company
agreed to pay the Advisory Board a total of $5,000, issue 382 shares
of common stock and non-statutory stock options to purchase an
additional 2,888 shares of common stock at a per share price ranging
from $15.00 to $18.00. In addition, the Company agrees to pay the
advisors a total of $2,000 and issue common stock with a fair market
value totaling $52,500 over the term of the agreement. During 1998
and 1997, the Company incurred expenses aggregating $2,000 and
$62,688, respectively, of which $15,000 and $13,000, respectively,
was unpaid and included in accrued expenses - unrelated parties on
the accompanying balance sheet.
Litigation:
On September 30, 1997, the Company was served with a complaint, in
the amount of $275,000, by an individual who was an employee of the
Company's then investment banker, alleging that the Company had
failed to deliver securities to an individual, who had assigned her
rights to the employee. At the time that the Company was to deliver
the securities, it was informed by the investment banker that the
rightful owner of the securities was an individual other than the
claimant. Prior to the commencement of the litigation, the Company
issued the securities and placed them in an escrow pending the
resolution of the ownership. Management intends to vigorously defend
its position in this matter. No adjustments have been made to the
June 30, 1998 or 1997 financial statements as the amount of any
potential loss, as well as its likelihood of occurrence is not
determinable.
NOTE 9: PREFERRED STOCK
Convertible Series A Preferred Stock:
In June 1998, the Company issued 1,145,000 shares of non-voting
Series A $.01 par value, 6% cumulative and convertible preferred
stock for net proceeds of $993,150. Series A preferred shareholders
have the option to convert the Series A preferred stock, which has a
stated value of $1.00 per share, into fully-paid and non-assessable
shares of $.01 par value common stock at a conversion rate equal to
the lessor of $.52 per share or 70% of the market value for the
common stock at the time of conversion. Dividends are payable
semi-annually, if declared, at a rate of $.06 per share. No
dividends were declared during the year ended June 30, 1998. The
Series A preferred stock has dividend and liquidation preferences
over common stock.
F-14
<PAGE>
HEALTHWATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
NOTE 9: PREFERRED STOCK (CONTINUED)
Convertible Series B Preferred Stock:
During 1997, the Company issued 500,000 shares of non-voting Series
B preferred stock with a stated value of $2.25 along with three
stock purchase warrants, representing the right to purchase shares
of the Company's common stock, for net proceeds of $1,109,496. The
500,000 shares of Series B preferred stock are convertible into
300,000 shares of $.01 par value common stock at the option of the
shareholder. Dividends are payable quarterly, if declared, at a rate
of $.225 per share. No dividends were declared during the year ended
June 30, 1997. The Series B preferred stock has dividend and
liquidation preferences over both common stock and Series A
preferred stock.
During 1997, the Series B shareholders converted their 500,000
shares of preferred stock into 300,000 shares of common stock in
accordance with the agreement's conversion option.
Convertible Series H Preferred Stock:
During 1998, the Company issued 20,834 shares of non-voting Series H
$.01 par value convertible preferred stock to Halis (Note 10 and 11)
for net proceeds of $120,802. Series H preferred shareholders have
the option to convert each share of Series H preferred stock into
four fully-paid and non-assessable shares of $.01 par value common
stock. The Series H preferred stock has liquidation preferences over
common stock and Series A and B preferred stock.
During 1998, Halis converted its 20,834 shares of Series H preferred
stock into 83,334 shares of common stock in accordance with the
conversion option.
NOTE 10: SHAREHOLDERS' EQUITY
Private Placement of Common Stock:
During 1998, the Company offered and issued 20,000 shares of common
stock at $1.75 per share to an existing shareholder of the Company.
Net proceeds to the Company aggregated $35,000.
The Company offered up to 360,000 shares of its common stock at
$1.50 per share. Pursuant to the offering, the Company issued
349,333 shares of common stock to Halis shareholders resulting in
proceeds, net of direct expenses (aggregating $4,760) of $519,240.
The Company offered 30 units of its securities at $6,000 per unit.
Each unit consisting of 4,000 shares of common stock and 2,000 stock
purchase warrants, representing the right to purchase additional
shares of common stock at $.75 per share. Pursuant to the offering,
the Company sold 18.133 units or 72,533 shares of common stock and
36,267 warrants to purchase common stock to Halis shareholders,
resulting in proceeds, net of commissions and other expenses
(aggregating $990) of $107,810.
F-15
<PAGE>
HEALTHWATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
NOTE 10: SHAREHOLDERS' EQUITY (CONTINUED)
Securities Offerings - Halis, Inc (Halis):
During 1998, the Company pursued a joint venture and co-marketing
arrangement with Halis (Note 11 and 17), a publicly traded Georgia
Corporation. Pursuant to this arrangement, the Company entered into
the following series of transactions with Halis and certain
shareholders and affiliates of Halis.
* The Company offered and issued 20,834 shares of Series H
preferred stock to Halis at $6.00 per share resulting in
proceeds, net of direct expenses (aggregating $4,202), of
$120,802 (Note 9).
* The Company approved the exchange of up to 1,258,000 shares of
its common stock for 2,367,000 shares of issued and outstanding
Halis common stock with various Halis shareholders and
affiliates. All such shares of Halis common stock received by
HealthWatch pursuant to this exchange have been registered with
the SEC and are marketable by HealthWatch pursuant to Rule 144
promulgated by the Securities and Exchange Commission. In
addition, HealthWatch granted an option to exchange an
additional 400,000 shares of Halis common stock for 320,000
shares of HealthWatch common provided that immediately following
any such exchange Halis and its affiliates own less than 48% of
HealthWatch's then outstanding shares of common stock. During
1998, the Company issued 1,089,600 shares of common stock in
exchange for 1,362,000 shares of Halis' issued and outstanding
common stock (Note 3).
As of June 30, 1998, the Company had entered into two
subscription and exchange agreements with Paul Harrison
Enterprises, ("PHE") (Note 11). Pursuant to these agreements,
HealthWatch agreed to issue an additional 488,400 shares of its
common stock in exchange for 1,400,000 shares of Halis common
stock owned by PHE. During July and September 1998, the
exchanges under these two subscription agreements were
completed.
Stock Options:
At June 30, 1998, an aggregate of 480,000 shares of common stock
were reserved for issuance under the Company's 1983 Incentive Stock
Option Plan and 1989, 1994 and 1995 Stock Option Plans. Pursuant to
the plans, the Board of Directors may grant options to key
individuals at their discretion. Option prices under the Incentive
Stock Option Plan may not be less than the fair market value on the
date the option is granted, whereas, non-statutory stock option
prices may not be less than 85% of the fair market value on the date
the option is granted. The options vest over a period of one to
three years.
F-16
<PAGE>
HEALTHWATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
NOTE 10: SHAREHOLDERS' EQUITY (CONTINUED)
Stock Options (Continued):
A summary of the status of the Company's stock option plans as of
June 30, 1998 and 1997 and changes during the years ending on those
dates is presented below:
<TABLE>
<CAPTION>
1998 1997
-------------------------- --------------------------
Weighted- Weighted-
Average Average
Shares Exercise Price Shares Exercise Price
---------- -------------- ---------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 354,600 $ 11.09 56,126 $ 16.25
Granted 831,714 $ 1.01 326,779 $ 10.25
Exercised (15,600) $ 3.02 (11,648) $ 10.50
Forfeited (311,019) $ 10.59 (16,657) $ 18.25
---------- ------- ---------- -------
Outstanding at end of year 859,695 $ 1.29 354,600 $ 11.10
========== ======= ========== =======
Options exercisable at end of year 337,572 $ 1.22 102,124 $ 11.50
========== ======= ========== =======
Weighted-average fair value of
options granted during the year $ .51 $ 2.75
========== ==========
</TABLE>
The following table summarizes information about stock options
outstanding at June 30, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------ -----------------------------
Weighted-
Number Average Weighted- Number Weighted-
Exercise Outstanding Remaining Average Outstanding Average
Prices at 6/30/98 Contractual Life Exercise Price at 6/30/98 Exercise Price
------ ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
$ 13.30 285 .7 Years $ 13.30 285 $ 13.30
$ 15.30 3,428 .8 Years $ 15.30 3,428 $ 15.30
$ 15.00 680 1.0 Years $ 15.00 453 $ 15.00
$ 13.15 1,080 1.1 Years $ 13.15 720 $ 13.15
$ 18.15 1,080 1.1 Years $ 18.15 720 $ 18.15
$ 13.30 1,428 1.9 Years $ 13.30 754 $ 13.30
$ 6.75 20,000 3.5 Years $ 6.75 15,000 $ 6.75
$ 2.80 136,334 4.2 Years $ 2.80 3,000 $ 2.80
$ .66 215,380 4.2 Years $ .66 167,212 $ .66
$ .66 230,000 4.3 Years $ .66 146,000 $ .66
$ .66 250,000 4.9 Years $ .66 -- $ .66
---------- ---------
859,695 337,572
========== =========
</TABLE>
Various officers and directors have been granted a total of 807,142
options under the Company's Stock Option Plans (Note 11) which are
included in the above table.
F-17
<PAGE>
HEALTHWATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
NOTE 10: SHAREHOLDERS' EQUITY (CONTINUED)
Stock Options (Continued):
SFAS No. 123, "Accounting for Stock-Based Compensation", requires
the Company to provide pro forma information regarding net income
and earnings per share as if compensation cost for the Company's
stock option plans had been determined in accordance with the fair
value based method prescribed in SFAS No. 123. The Company estimates
the fair value of each stock option at the grant date by using the
Black-Scholes option-pricing model with the following weighted
average assumptions used for grants in 1998 and 1997, respectively:
no dividend yield for each year; expected volatility of 147.50% and
106.25%; respectively, and risk free interest rates of 5.98% and
6.14%, respectively.
Under the accounting provisions of SFAS No. 123, the Company's net
loss and earnings per share would have been reduced to the pro forma
amounts indicated below:
1998 1997
----------- -----------
Net loss:
As reported $(4,084,474) $(2,189,260)
Pro forma $(4,892,134) $(2,481,201)
Net loss per share:
As reported $ (2.45) $ (4.49)
Pro forma $ (2.93) $ (5.08)
Stock Warrants:
At June 30, 1998, the Company had warrants outstanding as follows:
Common Shares Exercise Expiration
Under Warrant Price Per Share Date
------------- --------------- -------------
120,000 $ 10.00 November 1998
2,917 $ .75 December 1998
100,000 $ 10.00 January 1999
80,000 $ 10.00 March 1999
50,000 $ 1.72 January 2003
1,145,000 $ 1.20 June 2003
----------
1,497,917
==========
F-18
<PAGE>
HEALTHWATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
NOTE 11: RELATED PARTY TRANSACTIONS
Officer and Director Options:
At June 30, 1998, the Company had outstanding the following
qualified and nonqualified stock options granted to officers and
directors:
Common Shares Exercise Expiration
Under Option Price Per Share Date
------------ --------------- -------------
1,428 $ 13.30 May 2000
20,000 $ 6.75 December 2001
172,380 $ .66 August 2002
133,334 $ 2.80 August 2002
230,000 $ .66 October 2002
250,000 $ .66 May 2003
----------
807,142
==========
Of the total outstanding options granted to officers and directors
as discussed above, options to acquire up to an aggregate of 304,134
shares of common stock are exercisable at June 30, 1998.
Officer and Director Warrants:
At June 30, 1998, the Company had outstanding to officers and
directors, stock warrants to purchase 33,334 shares of common stock
at $1.72 per share. The warrants expire January 2003.
Software License and Development Agreement:
In October 1997, the Company entered into a software license and
development agreement with MERAD, Corporation (MERAD), a company
owned by Paul Harrison Enterprises (PHE), an entity controlled by an
officer/director of HealthWatch. Pursuant to the agreement,
HealthWatch will license certain computer architecture, concepts,
algorithms and processes from MERAD which the Company plans to
integrate into its current line of noninvasive vascular diagnostic
equipment. In addition, MERAD will develop healthcare software for
the Company. In exchange for these licenses and services, the
Company agreed to pay MERAD a development fee of $15,000 per month
during the period January 1998 through January 2000. In addition,
HealthWatch will pay MERAD a fee based on a variable rate of gross
software revenues as follows:
Rate Gross Aggregate Software Revenues
---- ---------------------------------
5.0% $0 to $5,000,000
2.5% $5,000,001 to $10,000,000
1.0% In excess of $10,000,000
During 1998, the Company had incurred $90,000 of development fees,
of which $90,000 remained unpaid at June 30, 1998 and is included in
other accrued liabilities - related parties. No software revenue was
earned during 1998 and accordingly, no variable rate license fees
were incurred.
F-19
<PAGE>
HEALTHWATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
NOTE 11: RELATED PARTY TRANSACTIONS (CONTINUED)
Technology and Patent Licensing Agreement:
The Company has an agreement with a former officer/director to
license certain technology and patent rights through April 2000 in
exchange for a fee. The fee is based on a variable rate based on
unit sales. The maximum and minimum fees to be paid for each of the
years are as follows:
Year Ending Minimum Maximum
June 30, Fee Fee
----------- ---------- ----------
1997 $ 40,000 $ 325,000
1998 40,000 150,000
1999 40,000 40,000
---------- ----------
$ 120,000 $ 515,000
========== ==========
During 1998 and 1997, licensing fee expense was $40,000 and $45,383,
respectively of which $5,000 and $11,445, respectively, remains
unpaid at June 30, 1998 and 1997 and is included in other accrued
liabilities - related parties.
Consulting Agreements:
During October 1997, the Company entered into an agreement with an
officer/director and an entity owned by the officer, PHE. Pursuant
to the agreement, the officer and PHE will provide the Company with
various consulting services through December 1998, in exchange for a
nonstatutory option to purchase up to 150,000 shares of the
Company's common stock at $.66 per share. In addition, the Company
agreed to pay PHE a monthly fee of $5,000 beginning in January 1998
and committed to loan the officer/director up to $200,000 at 7% with
a maturity in July 2002. During 1998, the Company had incurred
$30,000 of consulting expenses, of which $30,000 remained unpaid at
June 30, 1998 and is included in other accrued liabilities - related
parties. No amounts had been loaned to this officer as of June 30,
1998.
During October 1997, the Company entered into an agreement with
another officer/director of HealthWatch. Pursuant to the agreement,
the officer/director will provide the Company with various
consulting services through December 1998, in exchange for a
nonstatutory option to purchase up to 80,000 shares of the Company's
common stock at $.66 per share. In addition, the Company agreed to
pay the officer/director a monthly fee of $5,000 beginning in March
1998. During 1998, the Company had incurred $20,000 of which $10,000
remained unpaid at June 30, 1998 and is included in other accrued
liabilities - related parties.
Creative Business Strategies, Inc. (CBS), a company owned by two
persons, a current director/shareholder of the Company and a former
director/shareholder, provides the Company with business development
consulting services in exchange for a fee. During 1998 and 1997, the
Company had incurred $31,906 and $32,567, respectively, of fees to
CBS, of which $15,326 and $9,323, remained unpaid at June 30, 1998
and 1997, respectively, and are included in other accrued
liabilities - related parties. In addition, during 1997, the Company
paid $25,303 of such fees by issuing 9,048 shares of common stock.
F-20
<PAGE>
HEALTHWATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
NOTE 11: RELATED PARTY TRANSACTIONS (CONTINUED)
Consulting Agreements (Continued):
During 1997, the Company incurred legal fees aggregating $30,353, to
an entity in which one of its principals was an officer of the
Company from October, 1995 through March 1997 and was a member of
the board of directors during 1997. As of June 30, 1997, $22,023, of
the fees remain unpaid and are included in other accrued liabilities
- related parties. During 1998, this individual was not deemed to be
a related party.
Employment Agreement:
During 1998, the Company entered into a termination agreement with
an officer under which the officer is entitled to receive a
severance package totaling $71,500 payable over a five-month period.
At June 30, 1998, $59,000 of the balance remained unpaid and is
included in accrued compensation and payroll taxes.
Purchased Services:
During 1998, the Company purchased systems integration services and
marketing support services from Halis (Notes 3, 10 and 17), a
company that has two common officers/directors with HealthWatch.
Total purchased services from Halis aggregated $50,000, all of which
remained unpaid at June 30, 1998 and is included in other accrued
liabilities - related parties.
NOTE 12: INCOME TAXES
The effective tax rate varies from the maximum federal statutory
rate as a result of the following items:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Tax benefit computed at the maximum federal
statutory rate (34.0)% (34.0)%
Increase in taxes resulting from:
Amortization of intangible assets 2.0 6.0
Unrealized loss on marketable equity securities 15.0 --
Loss to be carried forward 17.0 28.0
----------- -----------
Income tax provision --% --%
=========== ===========
</TABLE>
Deferred taxes consisted of the following at June 30:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Asset:
Net operating loss carryforward $ 2,640,000 $ 2,206,000
Unrealized loss on marketable equity securities 425,000 --
Other 164,000 137,000
----------- -----------
Net deferred tax asset 3,229,000 2,343,000
Less valuation allowance (3,229,000) (2,343,000)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
</TABLE>
F-21
<PAGE>
HEALTHWATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
NOTE 12: INCOME TAXES (CONTINUED)
For financial statement purposes, no tax benefit has been reported in
1998 and 1997 as the Company has had significant losses in recent years
and realization of the tax benefits is uncertain. Accordingly, a
valuation allowance has been established for the full amount of the
deferred tax asset.
The net change in the deferred tax valuation allowance was an increase
of $886,000 and $446,000 for the years ended June 30, 1998 and 1997,
respectively.
At June 30, 1998, the Company had net operating loss carryforwards and
unused investment tax credits as follows for income tax purposes:
Carryforward Net Operating Investment
Expires Loss Tax Credits
June 30, Carryforwards Carryforward
------------ ------------- ------------
2000 $ -- $ 9,634
2001 -- 3,798
2002 627,889 14,560
2003 11,744 --
2004 122,457 --
2005 1,371 --
2006 235,901 --
2007 1,461,790 --
2008 281,054 --
2009 1,644,839 --
2010 1,666,725 --
2011 1,815,490 --
2012 1,881,569 --
2013 1,725,000 --
------------- ------------
$ 11,475,829 $ 27,992
============= ============
The utilization of the carryforwards is dependent upon the ability to
generate sufficient taxable income during the carryforward period. In
addition, the availability of these net operating loss carryforwards to
offset future taxable income may be significantly limited due to
ownership changes as defined in the Internal Revenue Code.
F-22
<PAGE>
HEALTHWATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
NOTE 13: GEOGRAPHICAL SEGMENT INFORMATION
1998 1997
----------- -----------
Revenues:
United States $ 1,169,629 $ 1,632,928
Great Britain 213,706 456,397
Elimination's -- --
----------- -----------
Consolidated $ 1,383,335 $ 2,089,325
=========== ===========
Operating profit (loss):
United States $(2,034,418) $(2,152,148)
GREAT BRITAIN (51,357) 34,387
Elimination's -- --
----------- -----------
Consolidated $(2,085,775) $(2,117,761)
=========== ===========
Identifiable Assets:
United States $ 2,468,996 $ 1,851,015
Great Britain -- 237,734
Elimination's -- --
----------- -----------
Consolidated $ 2,468,996 $ 2,088,749
=========== ===========
Exports of U.S. produced medical products were $52,750 and $109,612
during 1998 and 1997, respectively.
NOTE 14: SALE OF CAMBRIDGE MEDICAL EQUIPMENTS LIMITED
During March 1998, the Company sold all of the issued and outstanding
shares of stock in its wholly owned subsidiary, Cambridge Medical
Equipments Limited (Cambridge), located in Great Britain. In connection
with the sale, the Company sold net assets of Cambridge with a net book
value aggregating $102,886 for $1.00 and recognized a loss on sale of
the subsidiary of $102,885.
NOTE 15: YEAR 2000 ISSUE (UNAUDITED)
The Company's management has begun the process of identifying changes
which need to be made to its computer systems and applications and
operational systems to insure that the year 2000 date conversion will
have no effect on customers or disruption to business operations. These
actions are necessary to ensure that the systems and applications will
recognize and process business transactions in the year 2000 and
beyond. Management is also communicating with suppliers, dealers,
financial institutions and others with which it does business to
coordinate the year conversion. The total cost of compliance and its
effect on the Company's future results of operations is being
determined as part of the detailed conversion planning and is not known
as of June 30, 1998.
F-23
<PAGE>
HEALTHWATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
NOTE 16: FOURTH QUARTER ADJUSTMENT
During the quarter ended June 30, 1998, the Company deemed the
continued decline in the value of the investment in Halis' common stock
(Note 3) to be "other-than-temporary". As a result, the unrealized loss
represented $1,824,605 of additional expenses and is reflected in other
income and expense on the accompanying statement of operations.
NOTE 17: SUBSEQUENT EVENTS
Letter of Intent to Acquire Halis, Inc.:
On July 14, 1998, the Company entered into a letter of intent to
acquire all of the issued and outstanding shares of Halis's common
stock (Notes 3, 10 & 11). As of September 30, 1998, consummation of
the transaction is uncertain. Pursuant to the letter of intent the
Company committed to loan Halis up to $250,000 ($50,000 per month),
in exchange for a 6% convertible debenture maturing in February
2000. As of September 30, 1998, the Company had made loans
aggregating $150,000 to Halis.
Acquisition of Paul Harrison Enterprises, Inc.:
On September 30, 1998, HealthWatch entered into an agreement to
purchase Paul Harrison Enterprises, Inc. (PHE) and its wholly owned
subsidiary, MERAD Software, Inc. (MERAD) (Notes 10 and 11). Pursuant
to the agreement, HealthWatch will issue 334,443 shares of series P
preferred stock in exchange for all of the issued and outstanding
common stock of PHE. In addition, HealthWatch will pay to the
shareholders of PHE additional consideration based on a variable
rate of gross revenues related to the MERAD technology. The
additional consideration, payable quarterly in equal increments of
HealthWatch's common stock and cash, equals 5% of the first
$1,000,000 in gross revenues related to the MERAD technology and 10%
of revenues thereafter in any fiscal year. The additional
consideration is payable for a period of ten years or until
HealthWatch has paid in aggregate $7,000,000 in additional
consideration.
The Series P preferred stock is non-voting with a stated value of
$10.00 per share. The preferred stock is convertible into ten shares
of fully-paid and non-assessable common share, provided the
conversion feature is approved by vote of the Company's
shareholders; and provided, through March 2000, that immediately
following the conversion the PHE shareholders own less than 45% of
HealthWatch's then outstanding shares of common stock. Dividends are
cumulative and payable semi-annually, if declared, at a variable
rate, $1.20 per share through January 1999 increasing to $1.80 on
February 1, 1999 and to $2.40 per share on August 1, 1999 if not
converted into common stock. The series P preferred stock has
dividend and liquidation preferences over all common stock.
Management has determined the fair market value of these shares to
be $2,560,000 based on the approximate trading price for HealthWatch
common stock at the date of the transaction, discounted to factor in
the reduction in value stemming from the non-marketable restrictions
of the preferred shares issued.
F-24
<PAGE>
HEALTHWATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
NOTE 17: SUBSEQUENT EVENTS (CONTINUED)
Acquisition of Paul Harrison Enterprises, Inc. (Continued):
HealthWatch will account for the acquisition under the purchase
method of accounting whereby the assets and liabilities of PHE are
recorded at their fair market value as of the date of the
acquisition. The $938,064 excess purchase price over the fair market
value of the net tangible assets acquired has been identified as
technology acquired and will be amortized over a ten-year period.
Summarized below is the unaudited condensed and proforma
consolidated balance sheet and statement of operations as if the
acquisition had taken place at the beginning of the year ended June
30, 1998. It was assumed that the 334,443 of preferred shares issued
in connection with this acquisition were outstanding at the
beginning of the proforma period.
<TABLE>
<CAPTION>
Proforma Condensed Consolidated Balance Sheet (Unaudited)
----------------------------------------------------------------------------------------
Paul Harrison Proforma Proforma
HealthWatch, Inc. Enterprises, Inc. Acquisition Consolidating HealthWatch, Inc.
Consolidated Consolidated Adjustment Entries Consolidated
----------------- ----------------- ---------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
Current assets $ 1,434,691 $ 129,120 $ -- $ (95,000)(4) $ 1,468,811
Marketable equity (710,720)(3)
securities - related party 318,708 525,000 -- 1,149,332 (2) 1,282,320
Technology and other
intangible assets 715,597 255,038 -- 938,064 (2) 1,908,699
Investment in subsidiary -- -- 2,560,000(1) (2,560,000)(2) --
----------- ----------- ----------- ----------- -----------
Total assets $ 2,468,996 $ 909,158 $ 2,560,000 $(1,278,324) $ 4,659,830
=========== =========== =========== =========== ===========
Current liabilities $ 1,774,978 $ 436,604 -- $ (95,000)(4) $ 2,116,582
Long-term debt -- -- -- -- --
(710,720)(3)
Shareholders' equity 694,018 472,554 2,560,000(1) (472,604)(2) 2,543,248
----------- ----------- ----------- ----------- -----------
Total liabilities and
equity $ 2,468,996 $ 909,158 $ 2,560,000 $(1,278,324) $ 4,659,830
=========== =========== =========== =========== ===========
</TABLE>
1. To reflect the acquisition of Paul Harrison Enterprises, Inc. (PHE) on
HealthWatch, Inc. consolidated as if the acquisition had occurred on June
30, 1998.
2. To record net assets purchased at fair market value and eliminate the
intercompany investment and PHE's equity.
3. To retire HealthWatch, Inc.'s common stock purchased as part of the
acquisition of PHE.
4. To eliminate intercompany balances as of June 30, 1998.
F-25
<PAGE>
HEALTHWATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
NOTE 17: SUBSEQUENT EVENTS (CONTINUED)
Acquisition of Paul Harrison Enterprises, Inc. (Continued):
<TABLE>
<CAPTION>
Proforma Condensed Consolidated Statement of Operations (Unaudited)
---------------------------------------------------------------------------------------
Paul Harrison Proforma Proforma
HealthWatch, Inc. Enterprises, Inc. Acquisition Consolidating HealthWatch, Inc.
Consolidated Consolidated Adjustment Entries Consolidated
----------------- ----------------- ---------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
Sales $ 1,383,335 $ 105,000 $ -- $ 95,000(1) $ 1,393,335
Cost of sales 1,359,028 -- -- -- 1,359,028
----------- ----------- ----------- ----------- -----------
Gross profit 24,307 105,000 -- 95,000 34,307
Operating expenses 2,110,082 495,902 -- (95,000)(1) 2,510,984
----------- ----------- ----------- ----------- -----------
Loss from operations (2,085,775) (390,902) -- -- (2,476,677)
Other income (expense) (1,998,699) 129,265 -- -- (1,869,434)
----------- ----------- ----------- ----------- -----------
Net loss $(4,084,474) $ (261,637) $ -- $ -- $(4,346,111)
=========== =========== =========== =========== ===========
Net loss per share $ (2.45) $ (2.60)
=========== ===========
Weighted average
number of shares
outstanding 1,669,325 1,669,325
=========== ===========
</TABLE>
(1) To eliminate intercompany activity during the year ended June 30, 1998.
F-26
EXHIBIT 4.10
CERTIFICATE OF THE DESIGNATION,
PREFERENCES, RIGHTS AND LIMITATIONS OF THE
6% SERIES A CONVERTIBLE PREFERRED STOCK OF
HEALTHWATCH, INC.
HealthWatch, Inc., hereinafter called the "Corporation", a corporation
organized and existing under the Minnesota Business Corporation Act does hereby
certify that, pursuant to authority conferred upon the Board of Directors by the
Articles of Incorporation, as amended, of the Corporation, said Board of
Directors at a meeting duly called and held on May 27, 1998, and at which a
quorum was at all times present, duly adopted a Resolution providing for the
issuance of a series of 1,500,000 shares of 6% Series A Convertible Preferred
Stock, which Resolution is as follows:
"RESOLVED, that pursuant to the authority expressly granted to and
vested in the Board of Directors of this Corporation in accordance with the
provisions of its Articles of Incorporation, as amended, a series of Preferred
Stock of the Corporation be and it hereby is given the distinctive designation
of "6% Series A Convertible Preferred Stock" (hereinafter referred to as the "6%
Series A Preferred Stock"), said Series to consist of One Million Five Hundred
Thousand (1,500,000) shares of the stated value of One Dollar ($1.00) per share.
The preferences and relative, participating, optional or other special rights,
and the qualifications, limitations or restrictions thereof shall be as follows:
1. Dividends
(a) The holders of shares of 6% Series A Preferred Stock shall be
entitled to receive dividends at the rate of $0.06 per share
(as adjusted for any stock dividends, combinations or splits
with respect to such shares) per annum, payable out of funds
legally available therefor. Such dividends shall commence upon
issuance and shall be payable when, as and if declared by the
Board of Directors, in preference to any dividend to any
shares of Common Stock, and shall be cumulative. Dividends
shall be paid semi-annually on June 30 and December 31,
commencing December 31, 1998, to holders of record as of the
close of business five business days before the dividend
payment date. Interest shall be paid in cash or, at the option
of the Corporation, in shares of the Corporation's Common
Stock, the value of such stock for the purpose of such payment
to be equal to the average five-day closing bid price for the
Common Stock for the five-day period immediately preceding the
record date for such payment.
(b) No dividends (other than those payable solely in the Common
Stock of the Corporation) shall be paid on any shares of
Common Stock of the Corporation during any fiscal year of the
Corporation until dividends, combinations or splits with
respect to such shares) on the 6% Series A
<PAGE>
Preferred Stock shall have been paid or declared and set apart
during that fiscal year and any prior year in which dividends
accumulated but remain unpaid. Following any such payment or
declaration, the holders of any shares of Common Stock shall
be entitled to receive dividends, payable out of funds legally
available therefor, when, as and if declared by the Board of
Directors.
(c) No right shall accrue to holders of shares of 6% Series A
Preferred Stock by reason of the fact that dividends on said
shares are not declared in any prior year, nor shall any
undeclared or unpaid dividend bear or accrue any interest.
In the event the Corporation shall declare a distribution payable in
securities of other persons, evidences of indebtedness issued by the Corporation
or other persons, assets (excluding cash dividends) or options or rights to
purchase any such securities or evidences of indebtedness, then, in each such
case the holders of the 6% Series A Preferred Stock shall be entitled to a
proportionate share of any such distribution as though the holders of the 6%
Series A Preferred Stock were the holders of the number of shares of Common
Stock of the Corporation into which their shares of 6% Series A Preferred Stock
were then convertible as of the record date fixed for the determination of the
holders of Common Stock of the Corporation entitled to receive such
distribution.
2. Liquidation Preference
(a) In the event of any liquidation, dissolution or winding up of
the Corporation, whether voluntary or involuntary, the holders
of the 6% Series A Preferred Stock shall be entitled to
receive, prior and in preference to any distribution of any of
the assets or surplus funds of the Corporation to the holders
of shares of Common Stock by reason of their ownership
thereof, the amount of $1.00 per share (as adjusted for any
stock dividends, combinations or splits with respect to such
shares), plus all accrued or declared but unpaid dividends on
such share for each share of 6% Series A Preferred Stock then
held by them. If upon the occurrence of such event, the assets
and funds thus distributed among the holders of the 6% Series
A Preferred Stock shall be insufficient to permit the payment
to such holders of the full aforesaid preferential amount,
then the entire assets and funds of the Corporation legally
available for distribution shall be distributed ratably among
the holders of the 6% Series A Preferred Stock in proportion
to the preferential amount each such holder is otherwise
entitled to receive.
(b) After payment to the holders of the 6% Series A Preferred
Stock of the amounts set forth in Section 2(a) above, and the
payment to the holders of any other series of Preferred Stock
which may hereafter be established by the Board of Directors
of any liquidation preferences for such additional
2
<PAGE>
series of Preferred Stock, the entire remaining assets and
funds of the Corporation legally available for distribution,
if any, shall be distributed among the holders of the Common
Stock and any other series of Preferred Stock which may
hereafter be established by the Board of Directors in
proportion to the shares of Common Stock then held by them.
(c) Whenever the distribution provided for in this Section 2 shall
be payable in securities or property other than cash, the
value of such distribution shall be the fair market value of
such securities or other property as determined in good faith
by the Board of Directors.
3. Voting Rights
Unless and except to the extent otherwise required by law, the holders
of the 6% Series A Preferred Stock shall have no voting power; provided that if
any dividends on the 6% Series A Preferred Stock declared by the Board of
Directors in accordance with Section 1 hereof have not been paid for a period of
one year or more, the holders of 6% Series A Preferred Stock shall, until such
dividends have been paid, be entitled, with the holders of the Common Stock,
voting as a class, to vote or act by written consent for the election of
directors, with the number of votes per share of 6% Series A Preferred Stock in
such election to be equal to the number of shares of Common Stock then issuable
upon conversion of such 6% Series A Preferred Stock. Unless and except to the
extent otherwise required by law, the holders of the 6% Series A Preferred Stock
shall have no right to vote as a class with respect to any matter. Should the 6%
Series A Preferred Stock be entitled to vote on any matter pursuant to a
requirement of law, each holder of such stock shall be entitled to one vote in
respect to each share of such stock held of record in respect to such matter,
unless some other vote is required by law.
4. Conversion of 6% Series A Preferred Stock into Common Stock
(a) Subject to the provisions of this Section 4, the holder of
record of any share or shares of 6% Series A Preferred Stock
shall have the right, at his option, at any time after
issuance, to convert each said share or shares of 6% Series A
Preferred Stock into fully-paid and non-assessable shares of
Common Stock, $.01 par value (herein referred to as "Common
Stock), of the Corporation. The conversion price for each
share of 6% Series A Preferred Stock in effect on any
conversion date shall be the lesser of seventy percent (70%)
of (i) the five-day average closing bid price for the
Corporation's Common Stock preceding the conversion date or
(ii) the five-day average closing bid price thereof preceding
the original issue date of the 6% Series A Preferred Stock.
The closing bid price for the Corporation's Common Stock shall
be as reported by The Nasdaq Small Cap Market, or such other
market or exchange on which the Corporation's Common Stock may
be listed in the event that it ceases to be listed on the
Nasdaq Small Cap Market. The Corporation shall not be required
to issue
3
<PAGE>
fractional shares in connection with the conversion of any of
the 6% Series A Preferred Stock and shall, in lieu thereof,
pay to the holder requesting conversion, an amount equal to
the value (determined in accordance with the foregoing) of
such fractional share.
(b) Any holder of a share or shares of 6% Series A Preferred Stock
desiring to convert such 6% Series A Preferred Stock into
Common Stock, shall surrender the certificate or certificates
representing the share or shares of 6% Series A Preferred
Stock so to be converted, duly endorsed (if required by the
Corporation) to the Corporation or in blank, at the office of
any Transfer Agent for the 6% Series A Preferred Stock (or
such other place as may be designated by the Corporation), and
shall give written notice to the Corporation at said office
that he elects to convert the same as provided above, and
setting forth the name or names (with the address or
addresses) in which the shares of Common Stock are to be
issued.
(c) Conversion of 6% Series A Preferred Stock shall be subject to
the following additional terms and provisions:
(1) As promptly as practicable after the surrender for
conversion of any 6% Series A Preferred Stock, the
Corporation shall deliver or cause to be delivered at
the principal office of the Transfer Agent for the 6%
Series A Preferred Stock (or such other place as may
be designated by the Corporation), to or upon the
written order of the holder of such 6% Series A
Preferred Stock, certificates representing the shares
of Common Stock issuable upon such conversion issued
in such name or names as such holder may direct.
Shares of the 6% Series A Preferred Stock shall be
deemed to have been converted as of the close of
business on the date of the surrender of the 6%
Series A Preferred Stock for conversion, as provided
above, and the rights of the holders of such 6%
Series A Preferred Stock shall cease at such time,
and the person or persons in whose name or names the
certificates for such shares are to be issued shall
be treated for all purposes as having become the
record holder or holders of such Common Stock at such
time; provided, however, that any such surrender on
any date when the stock transfer books of the
Corporation shall be closed shall constitute the
person or persons in whose name or names the
certificate for such shares are to be issued as the
record holder or holders thereof for all purposes at
the close of business on the next succeeding day on
which such stock transfer books are open.
(2) The Corporation shall make no payment or adjustment
on account of any dividends accrued on the shares of
6% Series A Preferred Stock surrendered for
conversion.
4
<PAGE>
(3) The Corporation shall at all times reserve and keep
available solely for the purpose of issuance upon
conversion of 6% Series A Preferred Stock, as herein
provided, such number of shares of Common Stock as
shall be issuable upon the conversion of all
outstanding 6% Series A Preferred Stock.
(4) The holders of 6% Series A Preferred Stock shall not
be entitled to convert the 6% Series A Preferred
Stock held by such holder to the extent that such
conversion would result in such holder beneficially
owning (as determined in accordance with Section
13(d) of the Securities Exchange Act of 1934 and the
Rules thereunder) in excess of 4.999% of the then
issued and outstanding shares of the Corporation,
including shares issuable upon conversion of the 6%
Series A Preferred Stock held by such holder after
application of this paragraph 4(c)(4).
(d) The issuance of certificates for shares of Common Stock upon
conversion of the 6% Series A Preferred Stock shall be made
without charge for any tax in respect of such issuance.
However, if any certificate is to be issued in a name other
than that of the holder of record of the 6% Series A Preferred
Stock so converted, the person or persons requesting the
issuance thereof shall pay to the Corporation the amount of
any tax which may be payable in respect of any transfer
involved in such issuance, or shall establish to the
satisfaction of the Corporation that such tax has been paid or
is not due and payable.
5. General
(a) Conversion adjustment. In the event that the Corporation shall
at any time prior to conversion either (a) subdivide the
outstanding shares of Common Stock into a greater number of
shares, (b) combine the outstanding shares of Common Stock
into a smaller number of shares, (c) change the outstanding
shares of Common Stock into the same or a given number of
shares of any other class or classes of stock, (d) declare on
or in respect of the Common Stock a dividend payable in shares
or other securities of the Corporation, then the holders of
the 6% Series A Preferred Stock shall be entitled to receive
the same number of shares or other securities of the
Corporation, or shall be entitled to subscribe for and
purchase at the same price that the shares or securities are
offered to holders of Common Stock, the number of such shares
or the amount of such securities as will represent the same
proportion of the outstanding Common Stock prior to such
increase or decrease as they would have been entitled to
receive or subscribe for, as the case may be, had they been
holders of the number of shares of Common Stock into which
their shares of 6% Series A Preferred
5
<PAGE>
Stock were convertible on the record date for any such
dividend or subscription. The Board of Directors shall
determine what adjustments shall be made in the Stated Value
and in the market prices for the Corporation's Common Stock in
order to appropriately reflect and account for any such
change.
(b) Merger. In the event the Corporation at any time while any of
the shares of 6% Series A Preferred Stock are outstanding
shall be consolidated with or merged into any other
corporation or corporations, or shall sell or lease all or
substantially all of its property and business as an entirety,
lawful provision shall be made as part of the terms of such
consolidation, merger, sale, or lease so that the holder of
any shares of 6% Series A Preferred Stock may thereafter
receive in lieu of such shares of Common Stock otherwise
issuable to him upon conversion of his shares of 6% Series A
Preferred Stock, but at the conversion rate which would
otherwise be in effect at the time of conversion as
hereinbefore provided, the same kind and amount of securities
or assets as may be issuable, distributable, or payable upon
such consolidation, merger, sale, or lease, with respect to
shares of Common Stock of the Corporation. The Board of
Directors shall determine what adjustments shall be made in
the Stated Value and in the market prices for the
Corporation's Common Stock in order to appropriately reflect
and account for any such change.
(c) Nothing herein shall be deemed to require the Corporation in
the event of any such subdivision, combination,
reclassification, recapitalization, consolidation, merger or
sale of assets, or liquidation, dissolution or winding up, to
issue or distribute fractional interests in shares of capital
stock or any other security of the Corporation or another
issuer, and the Corporation may make such arrangements as the
Board of Directors of the Corporation shall approve with
respect to any such event for settlement in lieu of issuance
of a fractional interest in a share of capital stock or other
security of the Corporation or another issuer to any holder of
the 6% Series A Preferred Stock.
(d) The shares of 6% Series A Preferred Stock shall not be subject
to the operation of a purchase, retirement or sinking fund.
(e) The issuance of additional shares of 6% Series A Preferred
Stock shall not be subject to any restrictions as to issuance,
nor shall the holders of the 6% Series A Preferred Stock be
entitled to any restriction with respect to the issuance of
shares of any other series of the Corporation's Common Stock
or Preferred Stock, or as to the powers, preferences or rights
of any such other series; provided that no series of
additional shares of Preferred Stock shall have any
liquidation or other similar rights in preference to the 6%
Series A Preferred Stock."
6
<PAGE>
IN WITNESS WHEREOF, I have hereunto subscribed my hand this 9th day of
June, 1998.
HealthWatch, Inc.
By /s/ Daniel J. Kelly
-----------------------------------
Daniel J. Kelly
President
EXHIBIT 4.11
CERTIFICATE OF THE DESIGNATION,
PREFERENCES, RIGHTS AND LIMITATIONS OF THE
SERIES P PREFERRED STOCK OF
HEALTHWATCH, INC.
HealthWatch, Inc., hereinafter called the "Corporation", a corporation
organized and existing under the Minnesota Business Corporation Act does hereby
certify that, pursuant to authority conferred upon the Board of Directors by the
Articles of Incorporation, as amended, of the Corporation, said Board of
Directors at a meeting duly called and held on August 27, 1998, and at which a
quorum was at all times present, duly adopted a Resolution providing for the
issuance of a series of 400,000 shares of Series P Preferred Stock, which
Resolution is as follows:
"RESOLVED, that pursuant to the authority expressly granted to and
vested in the Board of Directors of this Corporation in accordance with the
provisions of its Articles of Incorporation, as amended, a series of Preferred
Stock of the Corporation be and it hereby is given the distinctive designation
of "Series P Preferred Stock" (hereinafter referred to as the "Series P
Preferred Stock"), said Series to consist of Four Hundred Thousand (400,000)
shares of the stated value of Ten Dollars ($10.00) per share ("Stated Value").
The preferences and relative, participating, optional or other special rights,
and the qualifications, limitations or restrictions thereof shall be as follows:
1. Dividends
(a) Subject to the following, the holders of shares of Series P
Preferred Stock shall be entitled to receive dividends at the
rate of 12% (as adjusted for any stock dividends, combinations
or splits with respect to such shares) per annum from the date
of issuance to January 31, 1999, payable out of funds legally
available therefor; provided, however, that such dividends
shall not be paid and the dividends on the Series P Preferred
Stock shall terminate and cease to accrue in the event that
the Series P Preferred Stock shall become convertible into
shares of the Corporation's Common Stock in accordance with
Section 4 hereof on or before January 31, 1999. In the event
that the Series P Preferred Stock has not become convertible
into shares of the Corporation's Common Stock in accordance
with Section 4 hereof prior to February 1, 1999, the dividends
accrued to that date shall be due and owing and the holders of
shares of Series P Preferred Stock shall be entitled to
receive dividends at the rate of 18% (as adjusted for any
stock dividends, combinations or splits with respect to such
shares) per annum from February 1, 1999 to August 1, 1999, or,
if earlier, the date upon which such shares shall become
convertible into shares of the Corporation's Common Stock,
payable out of funds legally available therefor. In the event
that the Series P Preferred Stock has not become convertible
into shares of the Corporation's Common Stock prior to
<PAGE>
August 1, 1999, the dividends accrued to that date shall be
due and owing and the holder of shares of Series P Preferred
Stock shall be entitled to receive dividends at the rate of
24% (as adjusted for any stock dividends, combinations or
splits with respect to such shares) per annum from August 1,
1999 until such date as the Series P Preferred Stock shall
become convertible into shares of the Corporation's Common
Stock, payable out of funds legally available therefor. Such
dividends shall commence upon issuance and shall be payable in
preference to any dividend to any shares of Common Stock, and
shall be cumulative. Dividends earned after February 1, 1999
shall be paid semi-annually on June 30 and December 31,
commencing June 30, 1999, and in every case shall be paid to
holders of record as of the close of business five business
days before the dividend payment date. Dividends shall be paid
in cash or, at the option of the holders of the shares of
Series P Preferred Stock, in shares of the Corporation's
Common Stock, the value of such stock for the purpose of any
such payment to be equal to the average five-day closing bid
price for the Common Stock for the five-day period immediately
preceding the record date for such payment.
(b) No dividends (other than those payable solely in the Common
Stock of the Corporation) shall be paid on any shares of
Common Stock of the Corporation during any fiscal year of the
Corporation until dividends, combinations or splits with
respect to such shares) on the Series P Preferred Stock shall
have been paid or declared and set apart during that fiscal
year and any prior year in which dividends accumulated but
remain unpaid. Following any such payment or declaration, the
holders of any shares of Common Stock shall be entitled to
receive dividends, payable out of funds legally available
therefor, when, as and if declared by the Board of Directors.
In the event the Corporation shall declare a distribution payable in
securities of other persons, evidences of indebtedness issued by the Corporation
or other persons, assets (excluding cash dividends) or options or rights to
purchase any such securities or evidences of indebtedness, then, in each such
case the holders of the Series P Preferred Stock shall be entitled to a
proportionate share of any such distribution as though the holders of the Series
P Preferred Stock were the holders of the number of shares of Common Stock of
the Corporation into which their shares of Series P Preferred Stock were then
convertible as of the record date (assuming for this provision that there was no
limitation on the right of conversion of the Series P Preferred Stock) fixed for
the determination of the holders of Common Stock of the Corporation entitled to
receive such distribution.
2
<PAGE>
2. Liquidation Preference
(a) In the event of any liquidation, dissolution or winding up of
the Corporation, whether voluntary or involuntary, the holders
of the Series P Preferred Stock shall be entitled to receive,
prior and in preference to any distribution of any of the
assets or surplus funds of the Corporation to the holders of
shares of Common Stock by reason of their ownership thereof,
the amount of $10.00 per share (as adjusted for any stock
dividends, combinations or splits with respect to such
shares), plus all accrued or declared but unpaid dividends on
such shares for each share of Series P Preferred Stock then
held by them. If upon the occurrence of such event, the assets
and funds thus distributed among the holders of the Series P
Preferred Stock shall be insufficient to permit the payment to
such holders of the full aforesaid preferential amount, then
the entire assets and funds of the Corporation legally
available for distribution shall be distributed ratably among
the holders of the Series P Preferred Stock and holders of any
other shares of Preferred Stock of the Corporation in
proportion to the preferential amount each such holder is
otherwise entitled to receive.
(b) After payment to the holders of the Series P Preferred Stock
of the amounts set forth in Section 2(a) above, and the
payment to the holders of any other series of Preferred Stock
of the Corporation of any liquidation preferences for such
additional series of Preferred Stock, the entire remaining
assets and funds of the Corporation legally available for
distribution, if any, shall be distributed among the holders
of the Common Stock in proportion to the shares of Common
Stock then held by them.
(c) Whenever the distribution provided for in this Section 2 shall
be payable in securities or property other than cash, the
value of such distribution shall be the fair market value of
such securities or other property as determined in good faith
by the Board of Directors.
3. Voting Rights
Unless and except to the extent otherwise required by law, the holders
of the Series P Preferred Stock shall have no voting power; provided that if any
dividends on the Series P Preferred Stock declared by the Board of Directors in
accordance with Section 1 hereof have not been paid for a period of one year or
more, the holders of Series P Preferred Stock shall, until such dividends have
been paid, be entitled, with the holders of the Common Stock, voting as a class,
to vote or act by written consent for the election of directors, with the number
of votes per share of Series P Preferred Stock in such election to be equal to
ten shares of Common Stock (as adjusted for any stock dividends, combinations or
splits with respect to such shares). Unless and except to the extent otherwise
required by law, the holders of the Series P Preferred Stock shall have no right
to vote as a class with respect to any matter. Should the Series P Preferred
Stock be
3
<PAGE>
entitled to vote on any matter pursuant to a requirement of law, each holder of
such stock shall be entitled to one vote in respect to each share of such stock
held of record in respect to such matter, unless some other vote is required by
law.
4. Conversion of Series P Preferred Stock into Common Stock
(a) Subject to the following conversion rights being approved by
the holders of a majority of a quorum of the shares of the
Corporation's Common Stock and the provisions of this Section
4, the holder of record of any share or shares of Series P
Preferred Stock and the Corporation shall have the right, at
his or its option, as the case may be, at any time after
issuance, to convert or to cause the conversion of each said
share or shares of Series P Preferred Stock into ten (10) (as
adjusted for any stock dividends, combinations or splits with
respect to such shares) fully-paid and non-assessable shares
of Common Stock, $.01 par value (herein referred to as "Common
Stock), of the Corporation. The Corporation shall not be
required to issue fractional shares in connection with the
conversion of any of the Series P Preferred Stock and shall,
in lieu thereof, pay to the holder requesting conversion, an
amount equal to the value (determined by the Corporation's
Board of Directors) of such fractional share.
(b) Any holder of a share or shares of Series P Preferred Stock
desiring to convert such Series P Preferred Stock into Common
Stock, shall surrender the certificate or certificates
representing the share or shares of Series P Preferred Stock
so to be converted, duly endorsed (if required by the
Corporation) to the Corporation or in blank, at the office of
any Transfer Agent for the Series P Preferred Stock (or such
other place as may be designated by the Corporation), and
shall give written notice to the Corporation at said office
that he elects to convert the same as provided above, and
setting forth the name or names (with the address or
addresses) in which the shares of Common Stock are to be
issued.
(c) Conversion of Series P Preferred Stock shall be subject to the
following additional terms and provisions:
(1) As promptly as practicable after the surrender for
conversion of any Series P Preferred Stock , the
Corporation shall deliver or cause to be delivered at
the principal office of the Transfer Agent for the
Series P Preferred Stock (or such other place as may
be designated by the Corporation), to or upon the
written order of the holder of such Series P
Preferred Stock , certificates representing the
shares of Common Stock issuable upon such conversion
issued in such name or names as such holder may
direct. Shares of the Series P Preferred Stock shall
be deemed to have been converted as of the close of
business on the date of the surrender of the Series P
4
<PAGE>
Preferred Stock for conversion, as provided above,
and the rights of the holders of such Series P
Preferred Stock shall cease at such time, and the
person or persons in whose name or names the
certificates for such shares are to be issued shall
be treated for all purposes as having become the
record holder or holders of such Common Stock at such
time; provided, however, that any such surrender on
any date when the stock transfer books of the
Corporation shall be closed shall constitute the
person or persons in whose name or names the
certificate for such shares are to be issued as the
record holder or holders thereof for all purposes at
the close of business on the next succeeding day on
which such stock transfer books are open.
(2) The Corporation shall pay all dividends accrued on
the shares of Series P Preferred Stock surrendered
for conversion, such payment to be made in cash or at
the option of the Corporation, in shares of the
Corporation's Common Stock, the value of such stock
to be determined as set forth in Section 1(a) hereof.
(3) The Corporation shall at all times reserve and keep
available solely for the purpose of issuance upon
conversion of Series P Preferred Stock , as herein
provided, such number of shares of Common Stock as
shall be issuable upon the conversion of all
outstanding Series P Preferred Stock.
(4) Prior to March 31, 2000, the holders of Series P
Preferred Stock shall not be entitled to convert nor
shall the Corporation have the right to require
conversion of the Series P Preferred Stock held by
such holders to the extent that such conversion would
result in such holders beneficially owning (as
determined in accordance with Section 13(d) of the
Securities Exchange Act of 1934 and the Rules
thereunder) in the aggregate in excess of forty-five
percent (45%) of the then issued and outstanding
shares of the Corporation's Common Stock.
(d) The issuance of certificates for shares of Common Stock upon
conversion of the Series P Preferred Stock shall be made
without charge for any tax in respect of such issuance.
However, if any certificate is to be issued in a name other
than that of the holder of record of the Series P Preferred
Stock so converted, the person or persons requesting the
issuance thereof shall pay to the Corporation the amount of
any tax which may be payable in respect of any transfer
involved in such issuance, or shall establish to the
satisfaction of the Corporation that such tax has been paid or
is not due and payable.
5
<PAGE>
5. General
(a) In the event that the Corporation shall at any time prior to
conversion either (a) subdivide the outstanding shares of
Common Stock into a greater number of shares, (b) combine the
outstanding shares of Common Stock into a smaller number of
shares, (c) change the outstanding shares of Common Stock into
the same or a given number of shares of any other class or
classes of stock, (d) declare on or in respect of the Common
Stock a dividend payable in shares or other securities of the
Corporation, then the holders of the Series P Preferred Stock
shall be entitled to receive the same number of shares or
other securities of the Corporation, or shall be entitled to
subscribe for and purchase at the same price that the shares
or securities are offered to holders of Common Stock, the
number of such shares or the amount of such securities as will
represent the same proportion of the outstanding Common Stock
prior to such increase or decrease as they would have been
entitled to receive or subscribe for, as the case may be, had
they been holders of the number of shares of Common Stock into
which their shares of Series P Preferred Stock were
convertible on the record date (assuming for the purposes of
this provision that there was no limitation on the right of
conversion of the Series P Preferred Stock) for any such
dividend or subscription. The Board of Directors shall
determine what adjustments shall be made in the Stated Value
in order to appropriately reflect and account for any such
change.
(b) In the event the Corporation at any time while any of the
shares of Series P Preferred Stock are outstanding shall be
consolidated with or merged into any other corporation or
corporations, or shall sell or lease all or substantially all
of its property and business as an entirety, lawful provision
shall be made as part of the terms of such consolidation,
merger, sale, or lease so that the holder of any shares of
Series P Preferred Stock may thereafter receive in lieu of
such shares of Common Stock otherwise issuable to him upon
conversion of his shares of Series P Preferred Stock (assuming
for the purpose of this provision that there was no limitation
on the right of conversion of the Series P Preferred Stock),
but at the conversion rate which would otherwise be in effect
at the time of conversion as hereinbefore provided, the same
kind and amount of securities or assets as may be issuable,
distributable, or payable upon such consolidation, merger,
sale, or lease, with respect to shares of Common Stock of the
Corporation. The Board of Directors shall determine what
adjustments shall be made in the Stated Value in order to
appropriately reflect and account for any such change.
(c) Nothing herein shall be deemed to require the Corporation in
the event of any such subdivision, combination,
reclassification, recapitalization, consolidation, merger or
sale of assets, or liquidation, dissolution or
6
<PAGE>
winding up, to issue or distribute fractional interests in
shares of capital stock or any other security of the
Corporation or another issuer, and the Corporation may make
such arrangements as the Board of Directors of the Corporation
shall approve with respect to any such event for settlement in
lieu of issuance of a fractional interest in a share of
capital stock or other security of the Corporation or another
issuer to any holder of the Series P Preferred Stock.
(d) The shares of Series P Preferred Stock shall not be subject to
the operation of a purchase, retirement or sinking fund.
(e) The issuance of additional shares of Series P Preferred Stock
shall not be subject to any restrictions as to issuance, nor
shall the holders of the Series P Preferred Stock be entitled
to any restriction with respect to the issuance of shares of
any other series of the Corporation's Common Stock or
Preferred Stock, or as to the powers, preferences or rights of
any such other series; provided that no series of additional
shares of Preferred Stock shall have any liquidation or other
similar rights in preference to the Series P Preferred Stock."
7
<PAGE>
IN WITNESS WHEREOF, I have hereunto subscribed my hand this 30th day of
September, 1998.
HealthWatch, Inc.
By /s/ Paul Harrison
----------------------------------
Paul Harrison
Chairman of the Board of Directors
EXHIBIT 10.8
HEALTHWATCH, INC.
2445 CADES WAY
VISTA, CA 92083
July 14, 1998
Larry Fisher, Executive Vice President
HALIS, Inc.
9040 Roswell Road, Suite 470
Atlanta, GA 30350
Dear Larry:
HealthWatch is pleased to submit this letter of intent for the
acquisition of HALIS, Inc., ("HALIS") by HealthWatch, Inc. ("HealthWatch"),
pursuant to a merger of HALIS into a wholly-owned subsidiary of HealthWatch (the
"Merger"). The Merger will be made in accordance with the terms of a mutually
acceptable definitive merger agreement between HALIS and HealthWatch (the
"Merger Agreement").
1. MERGER CONSIDERATION. It is expected that at the closing, which is
anticipated to be within 120 days of the execution of this Agreement, or on an
alternative mutually agreeable date, HALIS will be merged into a subsidiary of
HealthWatch, and HealthWatch will issue sufficient shares of its common and
preferred stock to equal the "Fair Market Value" of 100% of HALIS' issued and
outstanding shares of common stock. Fair Market Value of both the HALIS and
HealthWatch stock shall be calculated by averaging the closing bid price of each
company's common stock for the period beginning May 26, 1998 and ending July 13,
1998.
The exact form of the transaction will be determined before closing based on
advice from the appropriate legal and financial parties of both HALIS and
HealthWatch, however it is anticipated that HealthWatch will issue a combination
of common and preferred shares to HALIS according to the following formula:
(a) Based on the share prices above, the relative value of each
HealthWatch share to each HALIS share is calculated to be 3.4
to 1. Therefore, for every 3.4 shares of HALIS stock
exchanged, the HALIS shareholder will receive one share of
HealthWatch stock.
(b) 33 1/3 % of the total number of HealthWatch shares to be
issued will be issued as common shares and 66 2/3 % of the
total number of HealthWatch shares to be issued will be issued
as preferred shares. Said preferred shares shall be
convertible into common shares according to mutually agreed
terms and conditions.
2. CERTAIN CONDITIONS. The closing of the proposed transaction will be
conditioned upon:
(a) HealthWatch having the full authority to issue sufficient
shares of its common stock and preferred stock to meet its
obligations set forth in the Merger Agreement;
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(b) Paul W. Harrison, Chairman of the Board of Directors of
HealthWatch, being the Chairman of the Board of Directors and
CEO of HealthWatch following the Merger. The remaining
management of both companies will be determined by the Board
of Directors of HealthWatch following the Merger;
(c) key senior management, if requested, entering into two-year
employment contracts with appropriate non-competition,
non-solicitation and confidentiality provisions;
(d) the HealthWatch Board of Directors following the Merger being
the current HealthWatch board members plus one HALIS nominee;
(e) HALIS' revenues for the period January 1, 1998 through July 1,
1998 being approximately $4,000,000 or more;
(f) HALIS' EBITDA being in a positive trend for the period July
1,1 998 through December 31, 1998;
(g) HealthWatch being satisfied with the financial condition of
HALIS and upon there having been, from the date of this
Agreement until the date of closing, no material adverse
change in the condition, financial or otherwise of HealthWatch
and its business;
(h) HALIS being satisfied with the financial condition of
HealthWatch and upon there having been, from the date of this
Agreement until the date of closing, no material adverse
change in the condition, financial or otherwise of HealthWatch
and its business;
(i) HealthWatch being satisfied with the results of its due
diligence investigation of the business of HALIS;
(j) HALIS being satisfied with the result of its due diligence
investigation of the business of HealthWatch; and
(k) the approval of the Merger Agreement by the shareholders of
HealthWatch and HALIS.
3. INVESTMENT; BUSINESS COLLABORATION. So long as the parties are
working to complete the Merger, HealthWatch shall loan to HALIS up to a total of
$250,000, such loan to be pursuant to the form of Debenture attached hereto as
Exhibit A, $50,000 of such loan to be made upon HALIS' acceptance of this
proposal, with the balance to be made as mutually agreed, which is expected to
be at the rate of approximately $50,000 per month. Further, HALIS shall provide
services to HealthWatch to further develop the "integration engine" which
HealthWatch and PHE have under development and to provide an interface for
HealthWatch's Life Sciences products and HALIS' Healthcare Enterprise System
("HES") and to assist HealthWatch in marketing HALIS' HES product to
HealthWatch's customer base. For these services, HealthWatch shall pay HALIS
$25,000 per month. HALIS shall provide monthly invoices to HealthWatch
documenting the services provided.
4. INSPECTION PERIOD. After the acceptance of this proposal by HALIS,
each company will on request make available to the other and their respective
Representatives (as defined in paragraph 8 (d) below), and permit a physical
inspection by the other and their respective Representatives of, all aspects of
the other company's business, including the assets,
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agreements, financial condition and books and records which relate to its
business. Each company will initiate its due diligence investigation and audit
of the other within thirty (30) business days after HALIS' acceptance of this
proposal and, once initiated, will proceed diligently to complete the same as
soon as practicable.
5. OPERATION OF THE BUSINESS.It shall be a condition to HealthWatch's
obligation to close the Merger that HALIS operate its business in the normal
course from the date hereof through the earlier to occur of the termination of
the obligations under this proposal or the Merger Agreement, as the case may be,
or the date of closing, and not make any material change therein or enter into
any material agreements, incur any material liabilities, sell any material
assets other than inventory in the normal course of business, issue, redeem, or
otherwise sell or purchase any shares of its capital stock or options or rights
to purchase or acquire its capital stock, or distribute to its shareholders any
assets, including cash or cash equivalents, by dividend or otherwise, without
the prior written consent of HealthWatch, which consent shall not be
unreasonably withheld.
6. OTHER PROVISIONS. The Merger Agreement will contain usual and
customary representations, warranties, covenants and other agreements on behalf
of HealthWatch and HALIS and the closing will be subject to usual and customary
conditions, including:
(a) obtaining all necessary consents or approvals of governmental
bodies, lessors and other third parties;
(b) absence or disclosure of pending or threatened material
litigation; and
(c) delivery of customary legal opinions, closing certificates,
and other documentation.
7. COST AND EXPENSE. HealthWatch shall bear the costs and expenses
incurred by it and its shareholders in connection with the transactions
contemplated herein and HALIS shall bear the costs and expenses incurred by it
and its shareholders in connection with the transactions contemplated herein,
including any and all finder's fees, selling agent fees, etc.
8. CONFIDENTIALITY.
(a) Each company acknowledges that it and its Representatives
shall from time to time have access to and be provided with
confidential, secret and proprietary information regarding the
business of the other, which may include technical, financial,
and other information. Subject to the provisions of
subparagraph (c) below, any fact or information (whether
furnished or obtained orally or in writing) concerning any
aspect of the business of the other heretofore or hereafter
disclosed to the other or any of the other's directors,
officers, employees, attorneys, accountants, financial
advisors or other agents or obtained as a result of each
company's inspection of the other and its premises or records
shall be deemed to be and hereafter will be referred to as the
"Evaluation Material." The Evaluation Material shall be
contractually subject to protection pursuant to the provisions
of this Agreement, whether or not it would otherwise be
regarded or legally considered "confidential," and without
regard to whether such information constitutes a trade secret
and is also protectable at law or in equity as a trade secret.
(b) Each company is to (i) hold the Evaluation Material in strict
confidence and secrecy, (ii) limit access to the Evaluation
Material to those of its Representatives (as defined below)
who need to know the same for the sole purpose of evaluation
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<PAGE>
the Merger, and (iii) not use the Evaluation Material for any
purposes other than the discussions with the other regarding
the Merger, or disclose the Evaluation Material to any
individual, firm or entity (a "Person") other than as
expressly set forth below with respect to each company's
Representatives, without the prior written consent of the
other.
(c) Notwithstanding the provisions of (a) and (b) above, the
Evaluation Material does not include the following: (i) any
information that either company can demonstrate as being in
its possession prior to the time of disclosure by the other;
(ii) any information which was in the public domain prior to
disclosure to the other or that comes into the public domain
through no fault of the other; (iii) any information which is
disclosed on a non-confidential basis by a third party with
rightful possession of such information; and (iv) any
information, now or hereafter, independently developed without
any reliance on any information disclosed by the other or its
Representatives, or obtained as a result of inspection of the
premises or books and records of the other. Information that
does not constitute a trade secret under applicable law shall
not be considered Evaluation Material for purposes of this
Agreement after two (2) years from the date of this Agreement.
Each company agrees that the other will advise and cause its
employees, directors, officers, accountants, attorneys,
investment bankers, representatives and agents
("Representatives") who will have access to the Evaluation
Material not to use any Evaluation Material for any purposes
other than in connection with discussions regarding the Merger
or to disclose any Evaluation Material to any Person other
than to its other Representatives permitted to have access to
the Evaluation Material provided above, and any such use or
disclosure shall be at all times and in all events on the
terms of and in compliance with the restrictions of this
Agreement. Each company is responsible for the compliance by
its Representatives with this Agreement.
(d) Each company shall advise and cause its employees, directors,
officers, accountants, attorneys, investment bankers,
representatives and agents ("Representatives") who will have
access to the Evaluation Material not to use any Evaluation
Material for any purposes other than in connection with
discussions regarding the Merger or to disclose any Evaluation
Material to any Person other than to its other Representatives
permitted to have access to the Evaluation Material provided
above, and any such use or disclosure shall be at all times
and in all vents on the terms of and in compliance with the
restrictions of this Agreement. Each company agrees to be
responsible for the compliance by its Representatives with
this Agreement.
(e) Each company agrees that if for any reason the Merger is not
consummated, it will not for a period of one (1) year from the
date hereof directly or indirectly for its account or for the
account of any other Person hire any employee of the other
with whom it had contact or who was specifically identified as
part of the due diligence investigation of the other in
connection with the Merger, without the prior written consent
of the other.
9. EXCLUSIVITY. HALIS agrees that from the date of the acceptance of
this proposal until its termination in accordance herewith, neither it nor any
of its Representatives will hold or participate in any discussions with any
other person or entity concerning the direct or indirect sale of its stock or
assets, nor will HALIS or any of its Representatives entertain any offers with
respect thereto for a period of 120 days from the acceptance of this proposal.
Unless earlier terminated as hereinafter provided, this Agreement shall
terminate on the date which is 60 days after the last signature below is
obtained, should a Definitive Agreement not be entered into by
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<PAGE>
such date. Except with respect to the provisions of paragraphs 7 and 8, either
party hereto may terminate this letter by advising the other party in writing,
and thereafter this Agreement shall have no further force and effect.
10. PUBLICITY. Neither party shall publicly announce or disclose the
contents of this Agreement without the prior consent of the other party, which
consent shall not be unreasonably withheld.
11. BINDING EFFECT. This proposal, if accepted, shall be deemed only an
expression of interest and, except for the provisions of paragraphs 7,8, 9 and
10 above, it is meant only to address the intentions of the parties with respect
to the matters set forth herein. Although HALIS and HealthWatch intend to
proceed promptly and in good faith to achieve the consummation of the Merger,
this proposal does not constitute an offer by HALIS to sell, nor an offer by
HealthWatch to purchase, and is not a binding agreement, except for the
foregoing enumerated provisions, which shall be binding on the parties hereto
and their respective successors and assigns, notwithstanding the failure of the
parties to execute and deliver the Merger Agreement. Notwithstanding any of the
foregoing to the contrary, the provisions of paragraphs 7 and 8 shall survive
the termination of this letter of intent.
If HALIS accepts this proposal as a basis for negotiating a definitive
written agreement, please so indicate by signing the enclosed copy of this
letter and returning it no later than July 14, 1998. If HALIS accepts this
proposal, please be assured that HealthWatch will negotiate with HALIS in a
positive and constructive manner, with the objective of reaching a mutually
satisfactory definitive written agreement at the earliest possible date, and
then proceeding promptly with completion of the Merger.
Sincerely, Accepted By:
HEALTHWATCH, INC. HALIS
By /s/ Paul Harrison By /s/ Larry Fisher
---------------------------------- --------------------------------------
Paul Harrison, Chairman Larry Fisher, Executive Vice President
Date: July 14, 1998. Date: July 14, 1998
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<PAGE>
EXHIBIT A
DEBENTURE
THIS DEBENTURE AND THE COMMON STOCK ("SHARES") ISSUABLE UPON CONVERSION OF THIS
DEBENTURE (COLLECTIVELY THE "SECURITIES") HAVE NOT BEEN REGISTERED WITH THE
UNITED STATES SECURITIES AND EXCHANGE COMMISSION (THE "SEC") UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES COMMISSION OF
ANY STATE UNDER ANY STATE SECURITIES LAW. THE SECURITIES MAY ONLY BE OFFERED,
SOLD OR OTHERWISE TRANSFERRED IF THESE SECURITIES ARE REGISTERED UNDER THE ACT
AND APPLICABLE STATE SECURITIES LAWS, OR SUCH OFFERS, SALES AND TRANSFERS ARE
MADE PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF
THOSE LAWS.
Debenture Certificate No. M- U.S. $_______________
Date: _______________, 1998
HALIS, INC.
6% CONVERTIBLE DEBENTURE DUE FEBRUARY 25, 2000
FOR VALUE RECEIVED, HALIS, Inc., a Georgia corporation (the "Company"),
promises to pay HealthWatch, Inc. ("Purchaser"), or any subsequent registered
holder hereof (the "Holder"), the principal sum of ______________________ U.S.
Dollars (U.S. $______________), together with interest on the principal sum
outstanding at the rate of six (6%) percent per annum, payable in U.S. Dollars,
under the terms and conditions set forth below. Accrual of interest on this
Debenture shall commence on the date hereof and shall continue to accrue until
the Maturity Date or if earlier, the Conversion Date or Redemption Date, as the
case may be. This Debenture is being issued pursuant to the Letter of Intent
dated July ___, 1998, between the Purchaser and the Company ("Subscription
Agreement"), and this Debenture is subject to all of the terms and conditions
thereof, all of which are hereby incorporated by reference.
SECTION 1. PAYMENT OF DEBENTURE. Subject to all of the terms and conditions
hereof, the Company shall pay to the Holder the entire outstanding amount of
principal and interest hereof, on February 25, 2000 or such earlier date as the
Debenture shall become due and payable pursuant to Section 9 hereof (the
"Maturity Date"). All interest or principal shall be paid to the person and at
the address in whose name this Debenture is registered on the records of the
Company on the applicable payment date. As provided herein, the principal and
interest due hereunder may be converted into or redeemed for shares of Common
Stock, par value of $.01 per share, of the Company ("Shares"), and such Shares
shall be in the name of and forwarded to the person and at the address in whose
name this Debenture is registered on the issuance date.
SECTION 2. SALE, TRANSFER OR EXCHANGE. This Debenture may be transferred,
exchanged or converted only in compliance with the Act and any applicable state
securities laws. Any Holder of this Debenture, by acceptance hereof, agrees to
the representations, warranties and covenants herein and in the Subscription
Agreement. Prior to due
<PAGE>
presentment to the Company for transfer of this Debenture, the Company and any
agent of the Company may treat the person in whose name this Debenture is duly
recorded on the Company's records as the owner hereof for the purpose of
receiving payment as herein provided and for all other purposes.
SECTION 3. HOLDER CONVERSION.
A. Right to Convert; Conversion Rate. The Holder of this Debenture shall be
entitled to convert the entire principal amount and accrued but unpaid interest
of this Debenture at any time on or before the Maturity Date into that number of
Shares calculated in accordance with the following formula:
Number of Shares issued upon Conversion = Principal (+ Interest, if
applicable)/Conversion Price, where
Principal = The Principal amount of the Debenture,
Interest = accrued but unpaid interest hereunder
Conversion Price: the Conversion Price shall be the lesser of (i) $.156 per
share if the Merger described in the Subscription Agreement is not consummated
due to the Company's decision not to proceed, unless such decision was based on
the Purchaser's failure to comply with any of its obligations contained in
either the Subscription Agreement or the Merger Agreement referred to therein,
(the "Fixed Conversion Price"); or (ii) 65% of the average Closing Bid Price, as
that term is defined below, of the Shares for the ten (10) trading days
immediately preceding the day prior to the Conversion Date (the "Variable
Conversion Price"). In the event that provision (i) above is applicable,
Purchaser shall have the right to demand the immediate registration under the
Act of the shares of the Company's common stock issuable upon conversion of this
Debenture.
For purposes hereof, the term "Closing Bid Price" shall mean the closing bid
price on the market as reported by the OTC Bulletin Board or NASDAQ's National
Market System or Small Capitalization System ("NASDAQ") or American Exchange
Emerging Company Marketplace or if then traded on a different national
securities exchange, the closing sales price on the principal national
securities exchange on which it is so traded and, if not available, the mean of
the daily high and low sales prices on such securities exchange on which it is
traded.
B. Mechanics of Conversion. In order to convert the Debenture into Shares, the
Holder shall (i) fax a copy of an executed notice of conversion ("Notice of
Conversion") to the Company at the office of the Company, which notice shall
specify that the Debenture shall be converted and shall contain a calculation of
the number of Shares to be issued in connection with the conversion, and (ii)
surrender the original Debenture to a common courier for delivery to the office
of the Company within three (3) business days of the Notice of Conversion;
provided, however, that the Company shall not be obligated to issue certificates
evidencing the Shares issuable upon such conversion unless either the original
Debenture is delivered to the Company or the Holder notifies the Company that
such Debenture has been lost, stolen or destroyed and the Holder has complied
with Section 3.C. below. Upon receipt by the Company of a facsimile copy of a
Notice of Conversion, the Company shall immediately send, via facsimile,
confirmation of receipt of the Notice of Conversion to Holder which shall
specify that the Notice of Conversion has been received and the name of a
contact person at the Company whom the Holder should contact regarding
information related to the conversion. In the case of a dispute as to the
calculation of the Conversion Price or any other issues related thereto, the
Company shall promptly issue the number of Shares that are not disputed. The
Company shall submit the disputed calculations to its independent auditors
within two (2) business days of receipt of Holder's Notice of Conversion. The
Company shall cause the auditors to perform the calculations and notify the
Company and Holder of the results no later
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<PAGE>
than five (5) business days from the time such accountant receives the disputed
calculations. The auditor's calculation shall be deemed conclusive absent
manifest error.
C. Lost or Stolen Debentures. Upon receipt by the Company of evidence of the
loss, theft, destruction or mutilation of this Debenture, and (in case of loss,
theft or destruction) indemnity or security reasonably satisfactory to the
Company, and upon surrender and cancellation of the Debenture, if mutilated, the
Company shall execute and deliver a new Debenture of like tenor and date without
charge to Holder.
D. Delivery of Shares upon Conversion. The transfer agent or the Company (as
applicable) shall, no later than the close of business on the tenth (10th)
business day after delivery to the Company of the Debenture to be converted (or
after provision for security or indemnification, if required), issue a
certificate for the number of Shares to which the Holder shall be entitled as
aforesaid and surrender such original certificate to a common courier for
overnight delivery to the Holder at the address of the Holder on the books of
the Company.
E. No Fractional Shares. No fractional Shares shall be issued upon conversion of
this Debenture. If any conversion of the Debenture would create a fractional
share or a right to acquire a fractional share, such fractional shares, on an
aggregate basis, shall be disregarded and the number of Shares issuable upon
conversion shall be, on an aggregate basis, the next lower number of whole
shares.
F. Date of Conversion. The date on which conversion occurs (the "Conversion
Date") shall be deemed to be the date (utilizing Atlanta, Georgia time) the
Notice of Conversion is faxed to the Company, and, provided, that the original
Debenture is surrendered by depositing such Debenture with a common courier, as
provided above, and received by the Company within three (3) business days from
the Conversion Date. The person or persons entitled to receive the Shares
issuable upon such conversion shall be treated for all purposes as the record
holder or holders of such Shares on the Conversion Date. If the original
Debenture is not received by the Company within three (3) business days after
the Conversion Date, the Notice of Conversion, at the Company's option, may be
declared null and void.
SECTION 4. RESERVATION OF SHARES ISSUABLE UPON CONVERSION. The Company shall at
all times reserve and keep available out of its unissued Shares, solely for the
purpose of effecting the conversion or redemption of the entire principal amount
of this Debenture, such number of its Shares as shall from time to time be
sufficient to effect the conversion of this Debenture.
SECTION 5. ADJUSTMENT TO CONVERSION PRICE.
A. Adjustment to Conversion Price Due to Stock Split, Stock Dividend, Etc. If at
any time when the Debenture is issued and outstanding, the number of outstanding
Shares is increased by a stock split, stock dividend, or other similar event,
the Conversion Price shall be proportionately reduced, or if the number of
outstanding Shares is decreased by a combination or reclassification of shares,
or other similar event, the Conversion Price shall be proportionately increased.
B. Adjustment Due to Merger, Consolidation. Etc. If at any time when the
Debenture is issued, there shall be any merger, consolidation, exchange of
shares, recapitalization, reorganization, or other similar event, as a result of
which Shares shall be changed into the same or a different number of shares of
another class or classes of stock or securities of the Company or another entity
or there is a sale of all or substantially all the Company's assets, then the
Holder shall thereafter have the right to receive upon conversion or redemption
of the Debenture, upon the basis and upon the terms and conditions specified
herein and in lieu of the Shares immediately theretofore issuable upon
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conversion or redemption, such Common Stock, securities and/or other assets
which the Holder would have been entitled to receive in such transaction had the
Debenture been converted and redeemed immediately prior to such transaction, and
in such case appropriate provisions shall be made with respect to the rights and
interests of the Holders to the end that the provisions hereof (including,
without limitation provisions for adjustment of the Conversion Price and of the
number of Shares issuable upon conversion of the Debenture) shall thereafter be
applicable, as nearly as may be practicable in relation to any securities
thereafter deliverable upon the exercise hereof. The Company shall not effect
any transaction described in this subsection 5.B unless it first gives not less
than fifteen (15) days prior notice of such merger, consolidation, exchange of
shares, recapitalization, reorganization, or other similar event (during which
time the Holder shall be entitled to convert its Debentures into Shares).
SECTION 6. EXERCISE. The Holder hereof acknowledges that neither the Debenture
nor the Shares have been registered under the Act or under any state securities
law. In addition, the certificates representing the Shares shall contain such
legends, or restrictive legends, or be subject to such stop transfer
instructions, as shall be required by applicable Federal or state securities
laws, or as shall be reasonably required by the Company or its transfer agent.
SECTION 7. NO VOTING RIGHTS. Except as specifically provided herein, this
Debenture shall not entitle the Holder hereof to any of the rights of a
stockholder of the Company, including without limitation, the right to vote, to
receive dividends and other distributions, or to receive any notice of, or to
attend, meetings of stockholders or any other proceedings of the Company.
SECTION 8. STATUS OF CONVERTED DEBENTURES. Upon the Conversion Date, this
Debenture shall no longer be deemed to be outstanding and all rights hereof,
shall forthwith terminate as of such date except only the right of the Holder
hereof to receive Shares in exchange for such Debenture and, if applicable, a
cash payment of any accrued interest.
SECTION 9. EVENTS OF DEFAULT. Upon the occurrence of and during the continuation
of an Event of Default (as defined below), the Company shall, at Holder's
request, pay to the Holder an amount equal to the sum of (x) the unpaid
principal amount of this Debenture plus (y) the accrued and unpaid interest on
the unpaid principal amount of this Debenture to the date of payment, and such
amounts shall immediately become due and payable, all without demand,
presentment or notice, all of which hereby are expressly waived, together with
all costs, including, without limitation, reasonable legal fees and expenses of
collection, and the Holder shall be entitled to exercise all other rights and
remedies available at law or equity.
The Company shall be required promptly upon its knowledge of an Event of Default
hereunder to give notice of such Event of Default to the Holder hereof.
An "Event of Default" shall mean the following:
A. Conversion. If the Company fails to issue Shares to Holder upon conversion of
this Debenture by the Holder in accordance with the terms of this Debenture,
fails to transfer any certificate for Shares issued to the Holder upon
conversion of this Debenture and when required by this Debenture, or fails to
remove any restrictive legend on any certificate or any stop transfer order on
any Shares issued to the Holder upon conversion of this Debenture as and when
required in accordance with applicable law and by this Debenture or any
Subscription Agreement by and between Company and Holder, and any such failure
shall continue uncured for five (5) business days;
-4-
<PAGE>
B. Breach of Covenant. If the Company fails to pay when due amounts owed
hereunder (including principal and interest) or breaches any material term or
condition of this Debenture (other than as specifically provided in subsection
9A. hereof), or any Subscription Agreement by and between Company and Holder
(including, subject to Section 4 hereof, the failure to have enough Shares
available for issuance upon conversion), the breach of which would have a
material adverse effect on the Company or the prospects of the Company or a
material adverse effect on the Holder or the rights of the Holder with respect
to this Debenture or the Shares issuable upon conversion of this Debenture, and
such breach continues for a period of five (5) business days after written
notice thereof to the Company from the Holder;
C. Breach of Representation. Any representation or warranty of the Company made
herein or in any agreement, statement or certificate given in writing pursuant
hereto or in connection herewith (including, without limitation, any
Subscription Agreement by and between Company and Holder), shall be false or
misleading in any material respect when made and the breach of which would have
a material adverse effect on the Company or the prospects of the Company or a
material adverse effect on the Holder or the rights of the Holder with respect
to this Debenture or the Shares issuable upon conversion of this Debenture;
D. Failure to Pay Obligations. In the event that (i) a garnishment, summons or
writ of attachment is issued against or served upon any of the Company's lenders
for the attachment of any property of the Company or any indebtedness owing to
the Company and such garnishment, summons, or writ of attachment has not been
released within 30 days, (ii) the Company shall (a) be or become insolvent
(however defined under applicable law), (b) voluntarily file or have filed
against it involuntarily, a petition under the United States Bankruptcy Code, or
(c) suffer the appointment of a receiver, custodian, trustee, or liquidator,
voluntarily or involuntarily, for all or any portion of its assets or property,
(iii) the Company shall suffer the appointment of a receiver, custodian,
trustee, or liquidator, voluntarily or involuntarily, for the Company or be
dissolved or liquidated, (iv) a judgment, decree or order for the payment of
money is outstanding against the Company and has been outstanding for more than
30 days from the date of its entry and has not been discharged in full or
stayed, or (v) the Company at any time suffers a material adverse change in its
financial, operating or business condition, properties or assets.
SECTION 10. GOVERNING LAW. This Debenture shall be governed by and construed in
accordance with the laws of the United States and the State of Georgia without
giving effect to the principles of conflicts of laws.
SECTION 11. BUSINESS DAY DEFINITION. For purposes hereof, the term "business
day" shall mean any day on which banks are generally open for business in the
State of Georgia, USA excluding any Saturday and Sunday.
SECTION 12. NOTICES. Any notices or other communication required or permitted to
be given hereunder shall be given as provided herein or delivered against
receipt, if to (i) the Company at 9040 Roswell Road, Suite 470, Atlanta, Georgia
30350, Attn.: Paul W. Harrison, Chief Executive Officer, Telephone No. (770)
641-5555, Telecopy No. (770) 641-5558; or (ii) the Holder of this Debenture, to
such holder at 2445 Cades Way, Vista, California 92083 (or to such at other
address as the party shall have furnished in writing as its new address in
accordance with the provisions of this Section 12). Any notice or other
communication may be made by facsimile and delivery shall be deemed given,
except as otherwise required herein, at the time of transmission of said
facsimile. Any notice given on a day that is not a business day shall be
effective upon the next business day.
SECTION 13. WAIVER OF ANY BREACH TO BE IN WRITING. Any waiver by the Company or
the Holder hereof of a breach of any provision of the Debenture shall not
operate as, or be construed to be, a waiver of any breach of such
-5-
<PAGE>
provision or any breach of any other provision of the Debenture. The failure of
the Company or the Holder hereof to insist upon strict adherence to any term of
the Debenture on one or more occasions shall not be considered a waiver or
deprive that party of the right thereafter to insist upon strict adherence to
that term or any term of the Debenture. Any waiver must be in writing.
SECTION 14. UNENFORCEABLE PROVISIONS. If any provision of this Debenture is
invalid, illegal or unenforceable, the balance of this Debenture shall remain in
effect, and if any provision is applicable to any person or circumstance, it
shall nevertheless remain applicable to all other persons and circumstances.
SECTION 15. INCIDENTAL REGISTRATION.
If, at any time after July 1, 1998 the Company proposes to register any of its
equity securities under the Act, whether or not for sale for its own account, on
a form and in a manner which would permit registration of the Common Shares for
sale to the public under the Act, it will give prompt written notice to Holder
of its intention to do so, describing such securities and specifying the form
and manner and the other relevant facts involved in such proposed registration
(including the date by which Holder must give notice hereunder of your intention
to exercise your right to include Shares in any such registration), and upon the
written request of Holder delivered to the Company within five business days
after the giving of any such notice (which request shall specify the Shares
intended to be disposed of by Holder and the intended method or methods of
disposition thereof), the Company will use its reasonable efforts to effect the
registration under the Act of all Shares which Holder has so requested to be
registered to the extent requisite to permit the disposition (in accordance with
the intended methods thereof as aforesaid) of the Shares so to be registered,
provided that:
(i) if, at any time after giving such written notice of Holder's intention to
register any of Holder's securities and prior to the effective date of the
registration statement filed in connection with such registration, the Company
shall determine for any reason not to register such securities, the Company may,
at its election, give written notice of such determination to Holder and
thereupon shall be relieved of its obligation to register any Shares in
connection with such registration; provided, to the extent Holder has exercised
its conversion rights hereunder in response to notice of the Company's proposal
to register equity securities under the 1933 Act and the Company later
determines that no such registration shall not occur, Holder may rescind such
exercise, return the shares received upon such conversion, and regain its rights
under this Debenture as if no such conversion had taken place; provided further,
that Holder gives the Company written notice within five business days of
Holder's receipt of notice from the Company that no such registration will
occur.
(ii) if (A) the registration so proposed by the Company involves an underwritten
offering of the securities so being registered, whether or not for sale for the
account of the Company, to be distributed by or through one or more underwriters
of recognized standing under underwriting terms appropriate for such a
transaction (to which Holder will also be bound), (B) the Company proposes that
the securities to be registered in such underwritten offering will include all
of the Shares requested to be so included, and (C) the managing underwriter of
such underwritten offering shall advise the Company in writing that, in its
opinion, the distribution of all or a specified portion of such Shares
concurrently with the securities being distributed by such underwriters will
materially and adversely affect the distribution of such securities by such
underwriters (such opinion to state the reasons therefor), then the Company will
promptly furnish Holder with a copy of such opinion and may require, by written
notice to Holder accompanying such opinion, that all or a specified portion of
such Shares be excluded from such distribution, provided that no other shares
-6-
<PAGE>
of the Company's Common Stock shall be included in such registration for the
benefit of any person other than the Company; and
(iii) The Company shall not be obligated to effect any registration of Shares
under this Section 15 incidental to the registration of any of its securities in
connection with mergers, acquisitions, exchange offers, dividend reinvestment
plans or stock option or other employee benefit plans or incidental to the
registration of any non-equity securities convertible into equity securities.
IN WITNESS WHEREOF, the Company has caused this Debenture to be duly
executed by an officer hereunto duly authorized.
HALIS, INC.
By:
------------------------------
Title:
---------------------------
Dated:
--------------------------
-7-
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We hereby consent to the use of our report, which contains an explanatory
paragraph with respect to the substantial doubt about the Company's ability to
continue as a going concern, dated August 14, 1998, except Notes 10 and 17 which
are dated September 30, 1998, accompanying the consolidated financial statements
of HealthWatch, Inc. as of June 30, 1998 and 1997, included in the Company's
Annual Report on Form 10-KSB and to the incorporation by reference of the
aforementioned financial statements in the Registration Statements on Form S-8
for the 1983 Incentive Stock Option Plan, Employee Stock Purchase Plan of 1987,
Stock Option Plan of 1989 and Stock Option Plan of 1993, Registration Statement
nos. 33-36833, 33-22729, 33-36832 and 33-75470, respectively, Registration
Statements on Form S-8 for the 1995 Stock Option Plan and 1995 Stock Grant and
Salary Deferral Plan Registration Statement nos. 033-65151 and 333-35297 and S-3
Registration Statements for Selling Shareholders nos. 33-88032, 333-19393,
333-21929 and 333-26913.
SILVERMAN OLSON THORVILSON & KAUFMANN LTD
CERTIFIED PUBLIC ACCOUNTANTS
Minneapolis, Minnesota
October 14, 1998
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