<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________________
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) March 21, 2000
HEALTHWATCH, INC.
(Exact Name of Registrant as specified in its charter)
Minnesota 000-11476 84-0916792
(State or other jurisdiction (Commission (I.R.S. Employer
of Incorporation) File Number) Identification No.)
3525 Piedmont Road
7 Piedmont Center, Suite 300
Atlanta, Georgia 30305
(Address of principal executive offices including Zip Code)
404-262-0181
(Registrants telephone number, including area code)
Not Applicable
(Former name or former address, if changed since last report.)
Exhibit Index on Page 3
<PAGE>
Item 5. Other Events
On March 21, 2000, the Company raised net proceeds of approximately
$4,800,000 from the sale of its securities, as described in Exhibit 99.1
attached to this Form 8-K. In addition, during the first quarter of calendar
year 2000, the Company issued shares of common stock to debenture holders,
directors and consultants. The debenture holders have converted $455,000 in face
value of their debentures and related accrued interest of $139,357 into 316,990
shares of common stock of the Company. Directors and consultants converted fees
for services totaling $132,300 into 70,560 shares of common stock of the
Company. Finally, the Company closed on the sale of 500 shares of its Series C
8% Convertible Preferred Stock. Total shareholders' equity has increased from
$1,861,564 at December 31, 1999 to approximately 7,100,000 on a pro forma basis
as of February 29, 2000. The following pro forma balance sheet as of February
29, 2000, which includes the effect of the transactions named above, is included
herein pursuant to an agreement with The Nasdaq Stock Market related to the
continued listing of the Company's common stock on the Nasdaq SmallCap Market.
<TABLE>
<CAPTION>
Unaudited
----------------------------------------
Historical Pro forma Pro forma
2/29/00(a) Adjustments 2/29/00
<S> <C> <C> <C>
Current Assets 278,545 4,818,015 (b) 5,096,560
Marketable Equity Securities - Related Party 1,449,067 0 1,449,067
Property and Equipment, net 10,927 0 10,927
Intangible Assets, net 1,173,233 0 1,173,233
Other Assets 30,610 0 30,610
--------- --------- ---------
Total Assets 2,942,382 4,818,015 7,760,397
Current Liabilities 660,269 (37,500)(c) 622,769
Debentures Payable 25,000 0 25,000
--------- --------- ---------
Total Liabilities 685,269 (37,500) 647,769
Shareholders' Equity 2,257,113 4,855,515 7,112,628
--------- --------- ---------
Total Liabilities and Shareholders Equity 2,942,382 4,818,015 7,760,397
</TABLE>
- ---------------
(a) Historical 2/29/00 balances reflect an estimated net loss of approximately
$344,000 from operations for the two months ended February 29, 2000.
(b) Issuance of Series D 8% Convertible Preferred Stock with net proceeds of
$4,803,200 and proceeds from the exercise of stock warrants in the amount of
$14,815.
(c) Issuance of common stock for services totaling $37,500.
On February 16, 2000, the Company sold 500 shares of the Company's Series C 8%
Convertible Preferred Stock (the preferences and rights of which are described
in the attached Exhibit 99.2), which shares are initially convertible into
26,667 shares of the Company's common stock, with five-year warrants to purchase
83,334 shares of the Company's common stock at an exercise price of $1.875 per
share. In a separate placement which closed on March 21, 2000, the Company
received gross proceeds of $5,408,000 from the sale of its Series D Preferred
Units. The Company issued 54,080 shares of its Series D 8% Convertible Preferred
Stock, which are initially convertible into approximately 1.55 million shares of
the Company's common stock (the preferences and rights of which are described in
the attached Exhibit 99.3), and warrants to purchase that number of shares of
common stock equal to 25% of the shares of common stock initially issuable upon
conversion of the Series D 8% Convertible Preferred Stock at an exercise price
of $3.50 per share.
Director Resignations
- ---------------------
On March 21, 2000, Richard T. Case and Sanford L. Schwartz tendered their
resignations as directors of HealthWatch, Inc. effective immediately. Such
resignations were not the result of disagreements with the Company on matters
relating to the Company's operations, policies or practices. Pursuant to the
Certificate of Designation, Preferences and Rights for each of the Series C and
Series D Convertible Preferred Stock, it is expected that two independent
directors will be designated by the holders of such securities in the near
future (see Exhibit 99.2 and Exhibit 99.3 attached hereto).
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(c) Exhibits
Exhibit
Number Description
------- --------------------------------------------
99.1 Press Release dated March 23, 2000.
99.2 Certificate of Designation, Preferences and Rights of Series C 8%
Convertible Preferred Stock.
99.3 Certificate of Designation, Preferences and Rights of Series D 8%
Convertible Preferred Stock.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
HEALTHWATCH, INC.
By: /s/ Paul W. Harrison
--------------------------------------
Paul W. Harrison
Date: March 24, 2000
------------------------------------
Name and Title: Paul W. Harrison
Chief Executive Officer
<PAGE>
EXHIBIT 99.1
HEALTHWATCH, INC. ANNOUNCES PRIVATE PLACEMENT
OF SECURITIES
ATLANTA, GEORGIA, MARCH 23, 2000 - FOR IMMEDIATE RELEASE
HealthWatch, Inc. (NASDAQ SmallCap Symbol:HEAL) announced today that it has
raised gross proceeds of $5,408,000 from the sale of Series D Preferred Units.
The Company issued 54,080 shares of the Series D 8% Convertible Preferred Stock,
which is initially convertible into approximately 1.55 million shares of common
stock, and warrants to purchase that number of shares of common stock equal to
25% of the shares of common stock initially issuable upon conversion of the
Series D 8% Convertible Preferred Stock at an exercise price of $3.50 per share.
Paul Harrison, the Company's CEO stated, "this financing alleviates the severe
capital constraints under which the Company had been operating and enables us
to aggressively pursue our business plan."
Such securities, including those which have been sold and those which are
proposed to be sold, will not be, and have not been, registered under the
Securities Act of 1933 and may not be and have not been offered or sold in the
United States absent registration or an applicable exemption from registration
requirements.
On March 21, 2000, Richard T. Case and Stanford L. Schwartz tendered their
resignations as directors of HealthWatch, Inc. effective immediately. The
Company is currently seeking two new independent directors to fill the vacant
positions on its board of directors created by the resignation of Messrs. Case
and Schwartz.
This release contains certain "forward-looking" statements, including statements
regarding, among other items, the Company's growth strategy, industry and
demographic trends, the Company's ability to generate additional sales of its
products and anticipated trends in its business. Actual results could differ
materially from these forward-looking statements as a result of a number of
factors, including the Company's need for additional financing, intense
competition in various aspects of the Company's business, the risks of rapid
growth, dependence on key personnel, product obsolescence, and/or lack of market
acceptance and other related factors.
For more information about HealthWatch, contact Marilyn May, Vice President
at (404) 262-0181.
<PAGE>
Exhibit 99.2
CERTIFICATE OF DESIGNATION, PREFERENCES
AND RIGHTS OF SERIES C 8% CONVERTIBLE
PREFERRED STOCK
-OF-
HEALTHWATCH, INC.
HealthWatch, Inc., a corporation organized and existing under the laws of
the State of Minnesota (the "Company"), by its President and Secretary, does
hereby certify that, pursuant to authority conferred upon the Board of Directors
by Article III of the Articles of Incorporation, as amended, of the Company,
authorizing a class of 1,000,000 shares of preferred stock of the Company, the
Board of Directors of the Company, by unanimous written consent dated December
23, 1999, has duly adopted resolutions providing for the issuance out of such
class of a series of up to 4,500 shares of Series C 8% Convertible Preferred
Stock at an issuance price of $100.00 per share (the "Original Purchase Price")
and setting forth the voting powers, designation, preferences and relative,
participating, optional and other special rights, and the qualifications,
limitations and restrictions thereof, which resolution is as follows:
RESOLVED, that pursuant to the authority vested in the Board of Directors
of the Company in accordance with the provisions of its Articles of
Incorporation, as amended, there be, and hereby is, created out of the class of
1,000,000 shares of preferred stock of the Company authorized in Article III of
its Articles of Incorporation, as amended, a series of preferred stock of the
Company with the following voting powers, designation, preferences and relative,
participating, optional and other special rights, and qualifications,
limitations and restrictions:
1. Designation and Number of Shares. 4,500 shares of preferred stock (the
--------------------------------
"Shares") are hereby designated as Series C 8% Convertible Preferred Stock (the
"Series C Preferred Stock").
2. Liquidation. Upon any liquidation, dissolution or winding up of the
-----------
Company, whether voluntary or involuntary ("Liquidation"), the holders of record
of the shares of the Series C Preferred Stock shall be entitled to receive,
before and in preference to any distribution or payment of assets of the Company
or the proceeds thereof may be made or set apart for the holders of Common Stock
of the Company, par value $.05 per share (the "Common Stock") or any other
security junior to the Series C Preferred Stock in respect of distributions upon
Liquidation out of the assets of the Company legally available for distribution
to its stockholders, an amount in cash equal to the Original Purchase Price per
share (subject to adjustment if the Series C Preferred Stock has been adjusted
pursuant to Paragraph 6 hereof) plus an amount equal to accrued and unpaid
dividends on each share of Series C Preferred Stock on the date fixed for the
distribution of assets of the Company (the "Liquidation Preference").
<PAGE>
3. Dividends. Commencing on the date of issuance (the "Issuance Date")
---------
until conversion, each issued and outstanding share of Series C Preferred Stock
shall entitle the holder of record thereof to receive, when, as and if declared
by the Board of Directors, out of any funds legally available therefor,
dividends at the rate of $8.00 per annum per share of Series C Preferred Stock
(the "Dividend Rate"), subject to adjustment as hereinafter set forth, payable
upon liquidation or conversion. Dividends per share shall be payable, at the
Company's option, either (i) in cash or (ii) in shares of Series C Preferred
Stock, subject to an in increase in the number of authorized shares of Series C
Preferred Stock by the Company's Board of Directors. In the event of a split or
subdivision of the outstanding shares of Series C Preferred Stock, or the
combination or the outstanding shares of Series C Preferred Stock, as the case
may be, the dividends provided for in this Section 3 shall automatically and
without any further action be decreased, in the case of a split or subdivision,
or increased, in the case of a combination, in proportion to the increase or
decrease in the number of shares of Series C Preferred Stock outstanding
immediately before such split, subdivision or combination.
4. Conversion Rights Each holder of record of shares of the Series C
-----------------
Preferred Stock shall have the right to convert all or any part of such holder's
share of Series C Preferred Stock into Common Stock as follows:
(A) Optional Conversion. Subject to and upon compliance with the
-------------------
provisions of this Section 4, the holder of any shares of Series C Preferred
Stock shall have the right at such holder's option, at any time or from time to
time, to convert any of such shares of Series C Preferred Stock into fully paid
and nonassessable shares of Common Stock at the Conversion Price (as defined in
Section (4)(c) below) in effect on the Conversion Date (as defined in Section
4(d) below) upon the terms hereinafter set forth.
(B) Automatic Conversion. Each outstanding share of Series C Preferred
--------------------
Stock shall automatically be converted, without any further act of the
Corporation or its stockholders, into fully paid and nonassessable shares of
Common Stock at the Conversion Price then in effect upon: (i) the closing of a
public offering or private placement of the Company's securities raising gross
proceeds in excess of $25 million at a per share price of more than $5.00 (a
"Qualified Offering"); or (ii) at such time as the closing bid price for the
Common Stock of the Company has equaled at least twice the Conversion Price for
a period of 20 consecutive trading days, provided that the Common Stock of the
Company is trading on a national securities exchange or the Nasdaq Small Cap or
National Market System, and the Conversion Shares are fully registered for
resale and not subject to any lock-up provisions.
(C) Conversion Price. Each share of the Series C Preferred Stock shall be
----------------
convertible into that number of fully paid and non-assessable shares of Common
Stock of the Company equal to the Original Purchase Price divided by the
conversion price in effect at the time of conversion (the "Conversion Price"),
determined as hereinafter provided. The Conversion Price shall initially be
$1.875 per share. The number of shares of Common Stock into which each share of
Preferred Stock is convertible is herein referred to as the "Conversion Rate."
The Conversion Price shall be subject to adjustment as set forth in Section 6
hereof.
<PAGE>
(D) Mechanics of Conversion. Before any holder of Series C Preferred Stock
-----------------------
shall be entitled to convert the same into shares of Common Stock, such holder
shall surrender the certificate or certificates therefor, duly endorsed, at the
office of the Company or of any transfer agent for the Series C Preferred Stock,
and shall give written notice to the Company at its principal corporate office,
of the election to convert the same and shall state therein the name or names in
which the certificate or certificates for shares of Common Stock are to be
issued. The Company shall, as soon as practicable thereafter, issue and deliver
at such office to such holder of Series C Preferred Stock, or to the nominee or
nominees of such holder, a certificate or certificates for the number of shares
of Common Stock to which such holder shall be entitled as aforesaid. Conversion
shall be deemed to have been effected on the date when delivery of notice of an
election to convert and certificates for shares is made or on the date of the
occurrence of the event specified in Section 5(B), as the case may be, and such
date is referred to herein as the "Conversion Date." All Common Stock which may
be issued upon conversion of the Series C Preferred Stock will, upon issuance,
be duly issued, fully paid and non-assessable and free from all taxes, liens,
and charges with respect to the issuance thereof. At all times that any shares
of Series C Preferred Stock are outstanding, the Company shall have authorized
and shall have reserved for the purpose of issuance upon such conversion into
Common Stock of all Series C Preferred Stock, a sufficient number of shares of
Common Stock to provide for the conversion of all outstanding shares of Series C
Preferred Stock at the then effective Conversion Rate. Without limiting the
generality of the foregoing, if, at any time, the Conversion Price is decreased,
the number of shares of Common Stock authorized and reserved for issuance upon
the conversion of the Series C Preferred Stock shall be proportionately
increased.
(E) Conversion Price Adjustments. The Conversion Price shall be subject to
----------------------------
adjustment provisions of Section 6 below.
5. Priority.
--------
(A) The Series C Preferred Stock shall rank senior to the Company's Series
A Preferred Stock and Series P Preferred Stock with respect to dividend and/or
liquidation rights. The Company shall not create or authorize any other stock
ranking senior to, or pari passu with, the Series C Preferred Stock. So long as
any shares of Series C Preferred Stock shall be outstanding, no dividends,
whether in cash or property, shall be paid or declared, nor shall any other
distribution be made, on the Common Stock of the Company or any other security
junior to the Series C Preferred Stock as to dividend rights, unless all
dividends on the Series C Preferred Stock for all past quarterly dividend
periods and the full dividends for the then current semi-annual period shall
have been paid or declared and duly provided for. The provisions of this
Section 5 shall not, however, apply to a dividend payable in Common Stock or any
other security of the Company junior to the Series C Preferred Stock. If any
dividend previously due on the Series C Preferred Stock has not been paid in
full, then no dividends shall be paid or declared upon any shares of any class
or series of stock of the Company ranking on a parity with the Series C
Preferred Stock in the payment of dividends for any period unless a like
proportionate dividend for the current period, ratably in proportion to the
respective annual dividend rates fixed thereupon, shall be paid upon or declared
for the Series C Preferred Stock then issued and
<PAGE>
outstanding.
(B) The Company may issue, in the future, without the consent of holders of
the Series C Preferred Stock, other series of preferred stock which rank junior
to the Series C Preferred Stock as to dividend and/or liquidation rights. In
accordance with Paragraph 7(C) hereof, the consent of the holders of two-thirds
of the outstanding shares of the Series C Preferred Stock is required for the
issuance of any series of preferred stock which is senior as to dividend and/or
liquidation rights to the Series C Preferred Stock.
6. Anti-Dilution Provisions. Subject to the provisions of Section l
------------------------
hereof, the Conversion Price in effect at any time and the number and kind of
securities issuable upon the conversion of the Series C Preferred Stock shall be
subject to adjustment from time to time upon the happening of certain events as
follows:
(A) In case the Company shall hereafter (i) declare a dividend or make a
distribution on its outstanding shares of Common Stock in shares of Common
Stock, (ii) subdivide or reclassify its outstanding shares of Common Stock into
a greater number of shares, or (iii) combine or reclassify its outstanding
shares of Common Stock into a smaller number of shares, the Conversion Price in
effect at the time of the record date for such dividend or distribution or of
the effective date of such subdivision, combination or reclassification shall be
adjusted so that it shall equal the price determined by multiplying the
Conversion Price by a fraction, the denominator of which shall be the number of
shares of Common Stock outstanding after giving effect to such action, and the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such action. Such adjustment shall be made successively
whenever any event listed above shall occur.
(B) In case the Company shall fix a record date for the issuance of rights
or warrants to all holders of its Common Stock entitling them to subscribe for
or purchase shares of Common Stock (or securities convertible into Common Stock)
at a price (the "Subscription Price") (or having a conversion price per share)
less than the current market price on such record date, the Conversion Price
shall be adjusted so that the same shall equal the price determined by
multiplying the Conversion Price in effect immediately prior to the date of such
issuance by a fraction, the numerator of which shall be the sum of the number of
shares of Common Stock outstanding on the record date mentioned below and the
number of additional shares of Common Stock which the aggregate offering price
of the total number of shares of Common Stock so offered (or the aggregate
conversion price of the convertible securities so offered) would purchase at
such current market price per share of the Common Stock, and the denominator of
which shall be the sum of the number of shares of Common Stock outstanding on
such record date and the number of additional shares of Common Stock offered for
subscription or purchase (or into which the convertible securities so offered
are convertible). Such adjustment shall be made successively whenever such
rights or warrants are issued and shall become effective immediately after the
record date for the determination of shareholders entitled to receive such
rights or warrants; and to the extent that shares of Common Stock are not
delivered (or securities convertible into Common Stock are not delivered) after
the expiration of such rights or warrants the Conversion Price shall be
readjusted to the Conversion Price which would then be in effect
<PAGE>
had the adjustments made upon the issuance of such rights or warrants been made
upon the basis of delivery of only the number of shares of Common Stock (or
securities convertible into Common Stock) actually delivered.
(C) In case the Company shall hereafter distribute to the holders of its
Common Stock evidences of its indebtedness or assets (excluding cash dividends
or distributions and dividends or distributions referred to in Subsection (A)
above) or subscription rights or warrants (excluding those referred to in
Subsection (B) above), then in each such case the Conversion Price in effect
thereafter shall be determined by multiplying the Conversion Price in effect
immediately prior thereto by a fraction, the numerator of which shall be the
total number of shares of Common Stock outstanding multiplied by the current
market price per share of Common Stock, less the fair market value (as
determined by the Company's Board of Directors) of said assets or evidences of
indebtedness so distributed or of such rights or warrants, and the denominator
of which shall be the total number of shares of Common Stock outstanding
multiplied by such current market price per share of Common Stock. Such
adjustment shall be made successively whenever such a record date is fixed.
Such adjustment shall be made whenever any such distribution is made and shall
become effective immediately after the record date for the determination of
shareholders entitled to receive such distribution.
(D) In case the Company shall hereafter issue shares of its Common Stock
(excluding shares issued (i) in any of the transactions described in Subsection
(A) above, (ii) upon exercise of options granted to the Company's officers,
directors, employees and consultants under a plan or plans adopted by the
Company's Board of Directors and approved by its shareholders, if such shares
would otherwise be included in this Subsection (D), (but only to the extent that
the aggregate number of shares excluded hereby and issued after the date hereof,
shall not exceed 15% of the Company's Common Stock outstanding, on a fully
diluted basis, at the time of any issuance), (iii) upon exercise of options,
warrants, convertible securities and convertible debentures outstanding as of
the final closing of the Private Placement, a Qualified Offering, or conversion
of the Shares, (iv) to shareholders of any corporation which merges into the
Company in proportion to their stock holdings of such corporation immediately
prior to such merger, upon such merger, (v) issued in a private placement
through Commonwealth Associates, L.P., as placement agent, or upon exercise or
conversion of any securities issued in or in connection with such a private
placement (including agent, consulting or advisory warrants), (vi) issued in a
private placement where the Offering Price (as defined below) is at least 90% of
the current market price, (vii) issued in a bona fide public offering pursuant
to a firm commitment underwriting, or (viii) issued in connection with an
acquisition of a business or technology which has been approved by a majority of
the Company's outside directors but only if no adjustment is required pursuant
to any other specific subsection of this Section 6 (without regard to Subsection
(I) below) with respect to the transaction giving rise to such rights) for a
consideration per share (the "Offering Price") less than the current market
price, the Conversion Price shall be adjusted immediately thereafter so that it
shall equal the price determined by multiplying the Conversion Price in effect
immediately prior thereto by a fraction, the numerator of which shall be the sum
of the number of shares of Common Stock outstanding immediately prior to the
issuance of such additional shares and the number of shares of Common Stock
which the aggregate consideration received for the issuance of such additional
shares would purchase at
<PAGE>
such current market price per share of Common Stock, and the denominator of
which shall be the number of shares of Common Stock outstanding immediately
after the issuance of such additional shares. Such adjustment shall be made
successively whenever such an issuance is made.
(E) In case the Company shall hereafter issue any securities convertible
into or exchangeable for its Common Stock (excluding securities issued in
transactions described in Subsections (B), (C) and (D)(i) through (viii) above)
for a consideration per share of Common Stock (the "Exchange Price") initially
deliverable upon conversion or exchange of such securities (determined as
provided in Subsection (G) below) less than the current market price, the
Conversion Price shall be adjusted immediately thereafter so that it shall equal
the price determined by multiplying the Conversion Price in effect immediately
prior thereto by a fraction, the numerator of which shall be the sum of the
number of shares of Common Stock outstanding immediately prior to the issuance
of such securities and the number of shares of Common Stock which the aggregate
consideration received for such securities would purchase at such current market
price per share of Common Stock, and the denominator of which shall be the sum
of the number of shares of Common Stock outstanding immediately prior to such
issuance and the maximum number of shares of Common Stock of the Company
deliverable upon conversion of or in exchange for such securities at the initial
conversion or exchange price or rate. Such adjustment shall be made
successively whenever such an issuance is made.
(F) Whenever the Conversion Price is adjusted pursuant to Subsections (A),
(B), (C), (D) and (E) above and (J) below or pursuant to Section 1(D) hereof,
the number of Conversion Shares issuable upon conversion of the Series C
Preferred Stock shall simultaneously be adjusted by multiplying the number of
Conversion Shares initially issuable upon conversion of the Series C Preferred
Stock by the Conversion Price in effect on the date hereof and dividing the
product so obtained by the Conversion Price, as adjusted.
(G) For purposes of any computation respecting consideration received
pursuant to Subsections (D) and (E) above and (J) below, the following shall
apply:
(a) in the case of the issuance of shares of Common Stock for cash, the
consideration shall be the amount of such cash, provided that in no case
shall any deduction be made for any commissions, discounts or other
expenses incurred by the Company for any underwriting of the issue or
otherwise in connection therewith;
(b) in the case of the issuance of shares of Common Stock for a
consideration in whole or in part other than cash, the consideration other
than cash shall be deemed to be the fair market value thereof as determined
in good faith by the Board of Directors of the Company (irrespective of the
accounting treatment thereof), whose determination shall be conclusive; and
(c) in the case of the issuance of securities convertible into or
exchangeable for shares of Common Stock, the aggregate consideration
received therefor shall be deemed to be the consideration received by the
Company for the issuance of such securities plus the additional minimum
consideration, if any, to be received by the
<PAGE>
Company upon the conversion or exchange thereof (the consideration in each
case to be determined in the same manner as provided in clauses (A) and (B)
of this Subsection (G)).
(H) For the purpose of any computation under Subsections (B), (C), (D) and
(E) above and (K) below, the current market price per share of Common Stock at
any date shall be determined in the manner set forth in Section 11 hereof except
that the current market price per share shall be deemed to be the higher of (i)
the average of the prices for 30 consecutive business days before such date or
(ii) the price on the business day immediately preceding such date.
(I) No adjustment in the Conversion Price shall be required unless such
adjustment would require an increase or decrease of at least five cents ($0.05)
in such price; provided, however, that any adjustments which by reason of this
Subsection (I) are not required to be made shall be carried forward and taken
into account in any subsequent adjustment required to be made hereunder. All
calculations under this Section 6 shall be made to the nearest cent or to the
nearest one-hundredth of a share, as the case may be. Anything in this Section
6 to the contrary notwithstanding, the Company shall be entitled, but shall not
be required, to make such changes in the Conversion Price, in addition to those
required by this Section 6, as it shall determine, in its sole discretion, to be
advisable in order that any dividend or distribution in shares of Common Stock,
or any subdivision, reclassification or combination of Common Stock, hereafter
made by the Company shall not result in any Federal income tax liability to the
holders of Common Stock or securities convertible into Common Stock.
(J) Notwithstanding the provisions of this Section 6, in the event that the
Company shall at any time issue securities under Subsections (B), (D) or (E)
having an Offering Price, Subscription Price or Exchange Price less than the
Conversion Price, then the Conversion Price shall be immediately reset to equal
such lower Offering Price, Subscription Price or Exchange Price. Furthermore, in
the event that the average closing bid price of the Common Stock for the 20
consecutive trading days prior to the first anniversary of the final closing of
the Private Placement is less than the Conversion Price, the Conversion Price
shall be immediately reset to equal such average closing bid price.
(K) No adjustment under Subsections (B), (C), (D) or (E) shall be required
for issuances below the current market price if either (i) the current market
price is at least 300% of the Conversion Price then in effect and (ii) a
registration statement covering the Warrant Shares is in effect and remains in
effect for the 90 days after such issuance or Rule 144(k) under the Securities
Act of 1933, as amended (the "Act") is available for resale of all of the
Conversion Shares or the Company at the time of such issuance has less than
$100,000 in cash. Furthermore, no adjustment under Subsections (B), (C), (D),
(E) or (J) shall be required unless either (i) shareholders of the Company have
approved the terms of this Designation or (ii) such adjustments will not result
in a violation of any qualitative listing criteria of The Nasdaq Stock Market,
Inc.
(L) Whenever the Conversion Price is adjusted, as herein provided, the
Company shall promptly but no later than 10 days after any request for such an
adjustment by the Holder,
<PAGE>
cause a notice setting forth the adjusted Conversion Price and adjusted number
of Conversion Shares issuable upon exercise of each share of Series C Preferred
Stock, and, if requested, information describing the transactions giving rise to
such adjustments, to be mailed to the Holders at their last addresses appearing
in the Share Register, and shall cause a certified copy thereof to be mailed to
its transfer agent, if any. The Company may retain a firm of independent
certified public accountants selected by the Board of Directors (who may be the
regular accountants employed by the Company) to make any computation required by
this Section 6, and a certificate signed by such firm shall be conclusive
evidence of the correctness of such adjustment.
(M) In the event that at any time, as a result of an adjustment made
pursuant to Subsection (A) above, the Holders of the Series C Preferred Stock
thereafter shall become entitled to receive any shares of the Company, other
than Common Stock, thereafter the number of such other shares so receivable upon
conversion of the Series C Preferred Stock shall be subject to adjustment from
time to time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Common Stock contained in Subsections (A) to (J),
inclusive above.
7. Voting Rights.
-------------
(A) In addition to any other rights provided for herein or by law, the
holders of Series C Preferred Stock shall be entitled to vote, together with the
holders of Common Stock as one class, on all matters as to which holders of
Common Stock shall be entitled to vote, in the same manner and with the same
effect as such Common Stock holders. In any such vote each share of Series C
Preferred Stock shall entitle the holder thereof to the number of votes per
share that equals the number of whole shares of Common Stock into which each
such share of Series C Preferred Stock is then convertible.
(B) In the event that the holders of the Series C Preferred Stock are
required to vote as a class, the affirmative vote of holders of not less than
two-thirds of the outstanding shares of Series C Preferred Stock shall be
required to approve each such matter to be voted upon and if any matter is
approved by such requisite percentage of holders of Series C Preferred Stock,
such matter shall bind all holders of Series C Preferred Stock.
(C) In addition to the other voting rights provided, so long as at least
20% of the Shares outstanding on the final closing of the Private Placement
remain outstanding, at each annual meeting of the stockholders of the Company,
the holders of the Series C Preferred Stock, voting as a single class, shall be
entitled to elect one (1) director.
(D) So long as at least 20% of the Shares outstanding on the final closing
of the Private Placement remain outstanding, the consent of the holders of a
two-thirds of the then outstanding Series C Preferred Stock, voting as one
class, together with any other series of preferred stock then entitled to vote
on such matter, regardless of series, either expressed in writing or at a
meeting called for that purpose, shall be necessary to permit, effect or
validate the creation and issuance of any series of preferred stock of the
Company which is senior as to liquidation and/or dividend rights to the Series C
Preferred Stock.
<PAGE>
(E) So long as at least 20% of the Shares outstanding on the final closing
of the Private Placement remain outstanding, the consent of two-thirds of the
holders of the then outstanding Series C Preferred Stock, voting as one class,
either expressed in writing or at a meeting called for that purpose, shall be
necessary to repeal, amend or otherwise change this Certificate of Designation,
Preferences and Rights or the Articles of Incorporation of the Company, as
amended, in a manner which would alter or change the powers, preferences, rights
privileges, restrictions and conditions of the Series C Preferred Stock so as to
adversely affect the Preferred Stock.
(F) Each share of the Series C Preferred Stock shall entitle the holder
thereof to one vote on all matters to be voted on by the holders of the Series C
Preferred Stock, as set forth above.
8. Covenants of Company The Company covenants and agrees that, so long
--------------------
as the Shares are outstanding, it will perform the obligations set forth in this
Section 8:
(A) Taxes and Levies. The Company will promptly pay and discharge all
--- ----------------
taxes, assessments, and governmental charges or levies imposed upon the Company
or upon its income and profits, or upon any of its property, before the same
shall become delinquent, as well as all claims for labor, materials and supplies
which, if unpaid, might become a lien or charge upon such properties or any part
thereof; provided, however, that the Company shall not be required to pay and
-------- -------
discharge any such tax, assessment, charge, levy or claim so long as the
validity thereof shall be contested in good faith by appropriate proceedings and
the Company shall set aside on its books adequate reserves in accordance with
generally accepted accounting principles ("GAAP") with respect to any such tax,
----
assessment, charge, levy or claim so contested;
(B) Maintenance of Existence. The Company will do or cause to be done
--- ------------------------
all things reasonably necessary to preserve and keep in full force and effect
its corporate existence, rights and franchises and comply with all laws
applicable to the Company, except where the failure to comply would not have a
material adverse effect on the Company;
(C) Maintenance of Property. The Company will at all times maintain,
--- -----------------------
preserve, protect and keep its property used or useful in the conduct of its
business in good repair, working order and condition, and from time to time make
all needful and proper repairs, renewals, replacements and improvements thereto
as shall be reasonably required in the conduct of its business;
(D) Insurance. The Company will, to the extent necessary for the
--- ---------
operation of its business, keep adequately insured by financially sound
reputable insurers, all property of a character usually insured by similar
corporations and carry such other insurance as is usually carried by similar
corporations;
(E) Books and Records. The Company will at all times keep true and
--- -----------------
correct books, records and accounts reflecting all of its business affairs and
transactions in accordance with GAAP; and
<PAGE>
(F) Notice of Certain Events. The Company will give prompt written
--- ------------------------
notice (with a description in reasonable detail) to Commonwealth Associates,
L.P. in the event the Company shall:
(a) become insolvent or generally fail or be unable to pay, or admit
in writing its inability to pay, its debts as they become due;
(b) apply for, consent to, or acquiesce in, the appointment of a
trustee, receiver, sequestrator or other custodian for the Company or any of its
property, or make a general assignment for the benefit of creditors;
(iii) in the absence of such application, consent or acquiesce in,
permit or suffer to exist the appointment of a trustee, receiver, sequestrator
or other custodian for the Company or for any part of its property;
(iv) permit or suffer to exist the commencement of any bankruptcy,
reorganization, debt arrangement or other case or proceeding under any
bankruptcy or insolvency law, or any dissolution, winding up or liquidation
proceeding, in respect of the Company, and, if such case or proceeding is not
commenced by the Company or converted to a voluntary case, such case or
proceeding shall be consented to or acquiesced in by the Company or shall result
in the entry of an order for relief; or
8. Miscellaneous.
-------------
(A) There is no sinking fund with respect to the Series C Preferred
Stock.
(B) The shares of the Series C Preferred Stock shall not have any
preferences, voting powers or relative, participating, optional, preemptive or
other special rights except as set forth above in this Certificate of
Designation, Preferences and Rights and in the Articles of Incorporation of the
Company.
(C) The holders of the Series C Preferred Stock shall be entitled to
receive all communications sent by the Company to the holders of the Common
Stock.
IN WITNESS WHEREOF, HealthWatch, Inc. has caused this Certificate to be
signed by its Chief Executive Officer, on this ____ day of March, 2000, and such
person hereby affirms under penalty of perjury that this Certificate is the act
and deed of HealthWatch, Inc. and that the facts stated herein are true and
correct.
HEALTHWATCH, INC.
By:__________________________________
Paul W. Harrison, Chairman, President
and Chief Executive Officer
<PAGE>
Attest:
____________________, Secretary
<PAGE>
Exhibit 99.3
CERTIFICATE OF DESIGNATION, PREFERENCES
AND RIGHTS OF SERIES D 8% CONVERTIBLE
PREFERRED STOCK
-OF-
HEALTHWATCH, INC.
HealthWatch, Inc., a corporation organized and existing under the laws of
the State of Minnesota (the "Company"), by its President and Secretary, does
hereby certify that, pursuant to authority conferred upon the Board of Directors
by Article III of the Articles of Incorporation, as amended, of the Company,
authorizing a class of 1,000,000 shares of preferred stock of the Company, the
Board of Directors of the Company, by unanimous written consent dated February
7, 2000, has duly adopted resolutions providing for the issuance out of such
class of a series of up to 300,000 Series D 8% Convertible Preferred Stock at an
issuance price of $100.00 per share (the "Original Purchase Price") and setting
forth the voting powers, designation, preferences and relative, participating,
optional and other special rights, and the qualifications, limitations and
restrictions thereof, which resolution is as follows:
RESOLVED, that pursuant to the authority vested in the Board of Directors
of the Company in accordance with the provisions of its Articles of
Incorporation, as amended, there be, and hereby is, created out of the class of
1,000,000 shares of preferred stock of the Company authorized in Article III of
its Articles of Incorporation, as amended, a series of preferred stock of the
Company with the following voting powers, designation, preferences and relative,
participating, optional and other special rights, and qualifications,
limitations and restrictions:
1. Designation and Number of Shares. 300,000 shares of preferred stock
--------------------------------
(the "Shares") are hereby designated as Series D 8% Convertible Preferred Stock
(the "Series D Preferred Stock").
2. Liquidation. Upon any liquidation, dissolution or winding up of the
-----------
Company, whether voluntary or involuntary ("Liquidation"), the holders of record
of the shares of the Series D Preferred Stock shall be entitled to receive,
before and in preference to any distribution or payment of assets of the Company
or the proceeds thereof may be made or set apart for the holders of Common Stock
of the Company, par value $.05 per share (the "Common Stock") or any other
security junior to the Series D Preferred Stock in respect of distributions upon
Liquidation out of the assets of the Company legally available for distribution
to its stockholders, an amount in cash equal to the Original Purchase Price per
share (subject to adjustment if the Series D Preferred Stock has been adjusted
pursuant to Paragraph 6 hereof) plus an amount equal to accrued and unpaid
dividends on each share of Series D Preferred Stock on the date fixed for the
distribution of assets of the Company (the "Liquidation Preference").
<PAGE>
3. Dividends. Commencing on the date of issuance (the "Issuance Date")
---------
until conversion, each issued and outstanding share of Series D Preferred Stock
shall entitle the holder of record thereof to receive, when, as and if declared
by the Board of Directors, out of any funds legally available therefor,
dividends at the rate of $8.00 per annum per share of Series D Preferred Stock
(the "Dividend Rate"), subject to adjustment as hereinafter set forth, payable
upon liquidation or conversion. Dividends per share shall be payable semi-
annually on 6/30 and 12/31 of each year, and shall be payable, at the Company's
option, either (i) in cash or (ii) in shares of Series D Preferred Stock,
subject to an in increase in the number of authorized shares of Series D
Preferred Stock by the Company's Board of Directors. In the event of a split
or subdivision of the outstanding shares of Series D Preferred Stock, or the
combination of the outstanding shares of Series D Preferred Stock, as the case
may be, the dividends provided for in this Section 3 shall automatically and
without any further action be decreased, in the case of a split or subdivision,
or increased, in the case of a combination, in proportion to the increase or
decrease in the number of shares of Series D Preferred Stock outstanding
immediately before such split, subdivision or combination.
4. Conversion Rights Each holder of record of shares of the Series D
-----------------
Preferred Stock shall have the right to convert all or any part of such holder's
share of Series D Preferred Stock into Common Stock as follows:
(A) Optional Conversion. Subject to and upon compliance with the
-------------------
provisions of this Section 4, the holder of any shares of Series D Preferred
Stock shall have the right at such holder's option, at any time or from time to
time, to convert any of such shares of Series D Preferred Stock into fully paid
and nonassessable shares of Common Stock at the Conversion Price (as defined in
Section (4)(c) below) in effect on the Conversion Date (as defined in Section
4(d) below) upon the terms hereinafter set forth.
(B) Automatic Conversion. Each outstanding share of Series D Preferred
--------------------
Stock shall automatically be converted, without any further act of the
Corporation or its stockholders, into fully paid and nonassessable shares of
Common Stock at the Conversion Price then in effect upon: (i) the closing of a
public offering or private placement of the Company's securities raising gross
proceeds in excess of $25 million at a per share price of more than $10.50 (a
"Qualified Offering"); or (ii) at such time as the closing bid price for the
Common Stock of the Company has equaled at least twice the Conversion Price for
a period of 20 consecutive trading days, provided that the Common Stock of the
Company is trading on a national securities exchange or the Nasdaq Small Cap
Market or National Market System, and the Conversion Shares are covered by an
effective registration statement relating to the resale of such securities and
not subject to any lock-up provisions.
(C) Conversion Price. Each share of the Series D Preferred Stock shall be
----------------
convertible
<PAGE>
into that number of fully paid and non-assessable shares of Common Stock of the
Company equal to the Original Purchase Price divided by the conversion price in
effect at the time of conversion (the "Conversion Price"), determined as
hereinafter provided. The Conversion Price shall initially be $3.50 per share.
The number of shares of Common Stock into which each share of Series D Preferred
Stock is convertible is herein referred to as the "Conversion Rate." The
Conversion Price shall be subject to adjustment as set forth in Section 6
hereof.
(D) Mechanics of Conversion. Before any holder of Series D Preferred Stock
-----------------------
shall be entitled to convert the same into shares of Common Stock, such holder
shall surrender the certificate or certificates therefor, duly endorsed, at the
office of the Company or of any transfer agent for the Series D Preferred Stock,
and shall give written notice to the Company at its principal corporate office,
of the election to convert the same and shall state therein the name or names in
which the certificate or certificates for shares of Common Stock are to be
issued. The Company shall, as soon as practicable thereafter, issue and deliver
at such office to such holder of Series D Preferred Stock, or to the nominee or
nominees of such holder, a certificate or certificates for the number of shares
of Common Stock to which such holder shall be entitled as aforesaid. Conversion
shall be deemed to have been effected on the date when delivery of notice of an
election to convert and certificates for shares is made or on the date of the
occurrence of the event specified in Section 5(B), as the case may be, and such
date is referred to herein as the "Conversion Date." All Common Stock which may
be issued upon conversion of the Series D Preferred Stock will, upon issuance,
be duly issued, fully paid and non-assessable and free from all taxes, liens,
and charges with respect to the issuance thereof. At all times that any shares
of Series D Preferred Stock are outstanding, the Company shall have authorized
and shall have reserved for the purpose of issuance upon such conversion into
Common Stock of all Series D Preferred Stock, a sufficient number of shares of
Common Stock to provide for the conversion of all outstanding shares of Series D
Preferred Stock at the then effective Conversion Rate. Without limiting the
generality of the foregoing, if, at any time, the Conversion Price is decreased,
the number of shares of Common Stock authorized and reserved for issuance upon
the conversion of the Series D Preferred Stock shall be proportionately
increased.
(E) Conversion Price Adjustments. The Conversion Price shall be subject to
----------------------------
adjustment provisions of Section 6 below.
5. Priority.
--------
(A) The Series D Preferred Stock shall rank senior to the Company's Series
A Preferred Stock and Series P Preferred Stock and shall rank pari passu with
the Company's Series C Preferred Stock with respect to dividend and/or
liquidation rights. The Company shall not create or authorize any other stock
ranking senior to, or pari passu with, the Series D Preferred Stock. So long as
any shares of Series D Preferred Stock shall be outstanding, no dividends,
whether in cash or property, shall be paid or declared, nor shall any other
distribution
<PAGE>
be made, on the Common Stock of the Company or any other security junior to the
Series D Preferred Stock as to dividend rights, unless all dividends on the
Series D Preferred Stock for all past dividend periods and the full dividends
for the then current semi-annual period shall have been paid or declared and
duly provided for. The provisions of this Section 5 shall not, however, apply to
a dividend payable in Common Stock or any other security of the Company junior
to the Series D Preferred Stock. If any dividend previously due on the Series D
Preferred Stock has not been paid in full, then no dividends shall be paid or
declared upon any shares of any class or series of stock of the Company ranking
on a parity with the Series D Preferred Stock in the payment of dividends for
any period unless a like proportionate dividend for the current period, ratably
in proportion to the respective annual dividend rates fixed thereupon, shall be
paid upon or declared for the Series D Preferred Stock then issued and
outstanding.
(B) The Company may issue, in the future, without the consent of holders of
the Series D Preferred Stock, other series of preferred stock which rank junior
to the Series D Preferred Stock as to dividend and/or liquidation rights. In
accordance with Paragraph 7(C) hereof, the consent of the holders of two-thirds
of the outstanding shares of the Series D Preferred Stock is required for the
issuance of any series of preferred stock which is senior as to dividend and/or
liquidation rights to the Series D Preferred Stock.
6. Anti-Dilution Provisions. The Conversion Price in effect at any time
------------------------
and the number and kind of securities issuable upon the conversion of the Series
D Preferred Stock shall be subject to adjustment from time to time upon the
happening of certain events as follows:
(A) In case the Company shall hereafter (i) declare a dividend or make a
distribution on its outstanding shares of Common Stock in shares of Common
Stock, (ii) subdivide or reclassify its outstanding shares of Common Stock into
a greater number of shares, or (iii) combine or reclassify its outstanding
shares of Common Stock into a smaller number of shares, the Conversion Price in
effect at the time of the record date for such dividend or distribution or of
the effective date of such subdivision, combination or reclassification shall be
adjusted so that it shall equal the price determined by multiplying the
Conversion Price by a fraction, the denominator of which shall be the number of
shares of Common Stock outstanding after giving effect to such action, and the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such action. Such adjustment shall be made successively
whenever any event listed above shall occur.
(B) In case the Company shall fix a record date for the issuance of rights
or warrants to all holders of its Common Stock entitling them to subscribe for
or purchase shares of Common Stock (or securities convertible into Common Stock)
at a price (the "Subscription Price") (or having a conversion price per share)
less than the current market price on such record date, the Conversion Price
shall be adjusted so that the same shall equal the price determined by
multiplying the Conversion Price in effect immediately prior to the date of such
issuance by a
<PAGE>
fraction, the numerator of which shall be the sum of the number of shares of
Common Stock outstanding on the record date mentioned below and the number of
additional shares of Common Stock which the aggregate offering price of the
total number of shares of Common Stock so offered (or the aggregate conversion
price of the convertible securities so offered) would purchase at such current
market price per share of the Common Stock, and the denominator of which shall
be the sum of the number of shares of Common Stock outstanding on such record
date and the number of additional shares of Common Stock offered for
subscription or purchase (or into which the convertible securities so offered
are convertible). Such adjustment shall be made successively whenever such
rights or warrants are issued and shall become effective immediately after the
record date for the determination of shareholders entitled to receive such
rights or warrants; and to the extent that shares of Common Stock are not
delivered (or securities convertible into Common Stock are not delivered) after
the expiration of such rights or warrants the Conversion Price shall be
readjusted to the Conversion Price which would then be in effect had the
adjustments made upon the issuance of such rights or warrants been made upon the
basis of delivery of only the number of shares of Common Stock (or securities
convertible into Common Stock) actually delivered.
(C) In case the Company shall hereafter distribute to the holders of its
Common Stock evidences of its indebtedness or assets (excluding cash dividends
or distributions and dividends or distributions referred to in Subsection (A)
above) or subscription rights or warrants (excluding those referred to in
Subsection (B) above), then in each such case the Conversion Price in effect
thereafter shall be determined by multiplying the Conversion Price in effect
immediately prior thereto by a fraction, the numerator of which shall be the
total number of shares of Common Stock outstanding multiplied by the current
market price per share of Common Stock, less the fair market value (as
determined by the Company's Board of Directors) of said assets or evidences of
indebtedness so distributed or of such rights or warrants, and the denominator
of which shall be the total number of shares of Common Stock outstanding
multiplied by such current market price per share of Common Stock. Such
adjustment shall be made successively whenever such a record date is fixed.
Such adjustment shall be made whenever any such distribution is made and shall
become effective immediately after the record date for the determination of
shareholders entitled to receive such distribution.
(D) In case the Company shall hereafter issue shares of its Common Stock
(excluding shares issued (i) in any of the transactions described in Subsection
(A) above, (ii) upon exercise of options granted to the Company's officers,
directors, employees and consultants under a plan or plans adopted by the
Company's Board of Directors and approved by its shareholders, if such shares
would otherwise be included in this Subsection (D), (but only to the extent that
the aggregate number of shares excluded hereby and issued after the date hereof,
shall not exceed 15% of the Company's Common Stock outstanding, on a fully
diluted basis, at the time of any issuance), (iii) upon exercise of options,
warrants, convertible securities, including the shares,
<PAGE>
and convertible debentures outstanding as of the first date upon which a share
of Series D Preferred Stock is issued or conversion of the Shares, (iv) to
shareholders of any corporation which merges into the Company in proportion to
their stock holdings of such corporation immediately prior to such merger, upon
such merger, (v) issued in a private placement through Commonwealth Associates,
L.P., as placement agent, or upon exercise or conversion of any securities
issued in or in connection with such a private placement (including agent,
consulting or advisory warrants), (vi) issued in a private placement where the
Offering Price (as defined below) is at least 90% of the current market price,
(vii) issued in a bona fide public offering pursuant to a firm commitment
underwriting, or (viii) issued in connection with an acquisition of a business
or technology which has been approved by a majority of the Company's outside
directors but only if no adjustment is required pursuant to any other specific
subsection of this Section 6 (without regard to Subsection (I) below) with
respect to the transaction giving rise to such rights) for a consideration per
share (the "Offering Price") less than the current market price, the Conversion
Price shall be adjusted immediately thereafter so that it shall equal the price
determined by multiplying the Conversion Price in effect immediately prior
thereto by a fraction, the numerator of which shall be the sum of the number of
shares of Common Stock outstanding immediately prior to the issuance of such
additional shares and the number of shares of Common Stock which the aggregate
consideration received for the issuance of such additional shares would purchase
at such current market price per share of Common Stock, and the denominator of
which shall be the number of shares of Common Stock outstanding immediately
after the issuance of such additional shares. Such adjustment shall be made
successively whenever such an issuance is made.
(E) In case the Company shall hereafter issue any securities convertible
into or exchangeable for its Common Stock (excluding securities issued in
transactions described in Subsections (B), (C) and (D)(i) through (viii) above)
where the consideration per share of Common Stock (the "Exchange Price")
initially deliverable upon conversion or exchange of such securities (determined
as provided in Subsection (G) below) plus any consideration received for any
such securities divided by the number of shares of Common Stock issuable upon
exercise or conversion thereof is less than the current market price, the
Conversion Price shall be adjusted immediately thereafter so that it shall equal
the price determined by multiplying the Conversion Price in effect immediately
prior thereto by a fraction, the numerator of which shall be the sum of the
number of shares of Common Stock outstanding immediately prior to the issuance
of such securities and the number of shares of Common Stock which the aggregate
consideration received for such securities would purchase at such current market
price per share of Common Stock, and the denominator of which shall be the sum
of the number of shares of Common Stock outstanding immediately prior to such
issuance and the maximum number of shares of Common Stock of the Company
deliverable upon conversion of or in exchange for such securities at the initial
conversion or exchange price or rate. Such adjustment shall be made
successively whenever such an issuance is made.
<PAGE>
(F) Whenever the Conversion Price is adjusted pursuant to Subsections (A),
(B), (C), (D) and (E) above and (J) below or pursuant to Section 1(D) hereof,
the number of Conversion Shares issuable upon conversion of the Series D
Preferred Stock shall simultaneously be adjusted by multiplying the number of
Conversion Shares initially issuable upon conversion of the Series D Preferred
Stock by the Conversion Price in effect on the date hereof and dividing the
product so obtained by the Conversion Price, as adjusted.
(G) For purposes of any computation respecting consideration received
pursuant to Subsections (D) and (E) above and (J) below, the following shall
apply:
(a) in the case of the issuance of shares of Common Stock for cash, the
consideration shall be the amount of such cash, provided that in no case shall
any deduction be made for any commissions, discounts or other expenses incurred
by the Company for any underwriting of the issue or otherwise in connection
therewith;
(b) in the case of the issuance of shares of Common Stock for a
consideration in whole or in part other than cash, the consideration other than
cash shall be deemed to be the fair market value thereof as determined in good
faith by the Board of Directors of the Company (irrespective of the accounting
treatment thereof), whose determination shall be conclusive; and
(c) in the case of the issuance of securities convertible into or
exchangeable for shares of Common Stock, the aggregate consideration received
therefor shall be deemed to be the consideration received by the Company for the
issuance of such securities plus the additional minimum consideration, if any,
to be received by the Company upon the conversion or exchange thereof (the
consideration in each case to be determined in the same manner as provided in
clauses (a) and (b) of this Subsection (G)).
(H) For the purpose of any computation under Subsections (B), (C), (D) and
(E) above and (J) below, the current market price per share of Common Stock at
any date shall be determined in the manner set forth in Section 9 hereof except
that the current market price per share shall be deemed to be the higher of (i)
the average of the prices for 30 consecutive business days before such date or
(ii) the price on the business day immediately preceding such date.
(I) No adjustment in the Conversion Price shall be required unless such
adjustment would require an increase or decrease of at least five cents ($0.05)
in such price; provided, however, that any adjustments which by reason of this
Subsection (I) are not required to be made shall be carried forward and taken
into account in any subsequent adjustment required to be made hereunder. All
calculations under this Section 6 shall be made to the nearest cent or to the
nearest one-hundredth of a share, as the case may be. Anything in this Section
6 to the contrary
<PAGE>
notwithstanding, the Company shall be entitled, but shall not be required, to
make such changes in the Conversion Price, in addition to those required by this
Section 6, as it shall determine, in its sole discretion, to be advisable in
order that any dividend or distribution in shares of Common Stock, or any
subdivision, reclassification or combination of Common Stock, hereafter made by
the Company shall not result in any Federal income tax liability to the holders
of Common Stock or securities convertible into Common Stock.
(J) In addition to and in lieu of the other provisions of this Section 6,
in the event that the Company shall at any time issue securities under
Subsections (B), (D) or (E) having an Offering Price, Subscription Price or
Exchange Price less than the Conversion Price (whether initially or due to
provisions in such securities requiring price reductions as a result of anti-
dilution, adjustments, the passage of time, "discount to market" or similar
provisions), then the Conversion Price shall be immediately reset to equal such
lower Offering Price, Subscription Price or Exchange Price.
(K) No adjustment under Subsections (B), (C), (D) or (E) shall be required
for issuances below the current market price if either (A) the current market
price is at least 300% of the Conversion Price then in effect and (B) a
registration statement covering the Conversion Shares is in effect and remains
in effect for the 90 days after such issuance or Rule 144(k) under the
Securities Act of 1933, as amended (the "Act") is available for resale of all of
the Conversion Shares or (ii) the Company at the time of such issuance has less
than $100,000 in cash. Furthermore, no adjustment under Subsections (B), (C),
(D), (E) or (J) shall be required unless either (x) shareholders of the Company
have approved the terms of this Designation or (y) such adjustments will not
result in a violation of any qualitative listing criteria of The Nasdaq Stock
Market, Inc.
(L) Whenever the Conversion Price is adjusted, as herein provided, the
Company shall promptly but no later than 10 days after any request for such an
adjustment by the Holder, cause a notice setting forth the adjusted Conversion
Price and adjusted number of Conversion Shares issuable upon exercise of each
share of Series D Preferred Stock, and, if requested, information describing the
transactions giving rise to such adjustments, to be mailed to the Series D
Preferred Stock holders at their last addresses appearing in the Share Register,
and shall cause a certified copy thereof to be mailed to its transfer agent, if
any. The Company may retain a firm of independent certified public accountants
selected by the Board of Directors (who may be the regular accountants employed
by the Company) to make any computation required by this Section 6, and a
certificate signed by such firm shall be conclusive evidence of the correctness
of such adjustment.
(M) In the event that at any time, as a result of an adjustment made
pursuant to Subsection (A) above, the holders of the Series D Preferred Stock
thereafter shall become entitled to receive any shares of the Company, other
than Common Stock, thereafter the number
<PAGE>
of such other shares so receivable upon conversion of the Series D Preferred
Stock shall be subject to adjustment from time to time in a manner and on terms
as nearly equivalent as practicable to the provisions with respect to the Common
Stock contained in Subsections (A) to (J), inclusive above.
7. Voting Rights.
-------------
(A) In addition to any other rights provided for herein or by law, the
holders of Series D Preferred Stock shall be entitled to vote, together with the
holders of Common Stock as one class, on all matters as to which holders of
Common Stock shall be entitled to vote, in the same manner and with the same
effect as such Common Stock holders. In any such vote each share of Series D
Preferred Stock shall entitle the holder thereof to the number of votes per
share that equals the number of whole shares of Common Stock into which each
such share of Series D Preferred Stock is then convertible.
(B) In the event that the holders of the Series D Preferred Stock are
required to vote as a class, the affirmative vote of holders of not less than
two-thirds of the outstanding shares of Series D Preferred Stock shall be
required to approve each such matter to be voted upon and if any matter is
approved by such requisite percentage of holders of Series D Preferred Stock,
such matter shall bind all holders of Series D Preferred Stock.
(C) In addition to the other voting rights provided, so long as at least
20% of the Shares outstanding on the final closing of the offering of Series D
Preferred Stock remain outstanding, at each annual meeting of the stockholders
of the Company, the holders of the Series D Preferred Stock, voting as a single
class, shall be entitled to elect one (1) director.
(D) So long as at least 20% of the Shares outstanding on the final closing
of the offering of Series D Preferred Stock remain outstanding, the consent of
the holders of a two-thirds of the then outstanding Series D Preferred Stock,
voting as one class, together with any other series of preferred stock then
entitled to vote on such matter, regardless of series, either expressed in
writing or at a meeting called for that purpose, shall be necessary to permit,
effect or validate the creation and issuance of any series of preferred stock of
the Company which is senior as to liquidation and/or dividend rights to the
Series D Preferred Stock.
(E) So long as at least 20% of the Shares outstanding on the final closing
of the offering of Series D Preferred Stock remain outstanding, the consent of
the holders of two-thirds of the then outstanding Series D Preferred Stock,
voting as one class, either expressed in writing or at a meeting called for that
purpose, shall be necessary to repeal, amend or otherwise change this
Certificate of Designation, Preferences and Rights or the Articles of
Incorporation of the Company, as amended, in a manner which would alter or
change the powers, preferences, rights privileges, restrictions and conditions
of the Series D Preferred Stock so as to adversely affect the
<PAGE>
Series D Preferred Stock.
(F) Each share of the Series D Preferred Stock shall entitle the holder
thereof to one vote on all matters to be voted on by the holders of the Series D
Preferred Stock, as set forth above.
8. Covenants of Company The Company covenants and agrees that, so long
--------------------
as the Shares are outstanding, it will perform the obligations set forth in this
Section 8:
(A) Taxes and Levies. The Company will promptly pay and discharge all
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taxes, assessments, and governmental charges or levies imposed upon the Company
or upon its income and profits, or upon any of its property, before the same
shall become delinquent, as well as all claims for labor, materials and supplies
which, if unpaid, might become a lien or charge upon such properties or any part
thereof; provided, however, that the Company shall not be required to pay and
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discharge any such tax, assessment, charge, levy or claim so long as the
validity thereof shall be contested in good faith by appropriate proceedings and
the Company shall set aside on its books adequate reserves in accordance with
generally accepted accounting principles ("GAAP") with respect to any such tax,
----
assessment, charge, levy or claim so contested;
(B) Maintenance of Existence. The Company will do or cause to be done
--- ------------------------
all things reasonably necessary to preserve and keep in full force and effect
its corporate existence, rights and franchises and comply with all laws
applicable to the Company, except where the failure to comply would not have a
material adverse effect on the Company;
(C) Maintenance of Property. The Company will at all times maintain,
--- -----------------------
preserve, protect and keep its property used or useful in the conduct of its
business in good repair, working order and condition, and from time to time make
all needful and proper repairs, renewals, replacements and improvements thereto
as shall be reasonably required in the conduct of its business;
(D) Insurance. The Company will, to the extent necessary for the
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operation of its business, keep adequately insured by financially sound
reputable insurers, all property of a character usually insured by similar
corporations and carry such other insurance as is usually carried by similar
corporations;
(E) Books and Records. The Company will at all times keep true and
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correct books, records and accounts reflecting all of its business affairs and
transactions in accordance with GAAP; and
(F) Notice of Certain Events. The Company will give prompt written
--- ------------------------
notice (with a description in reasonable detail) to Commonwealth Associates,
L.P. in the event the Company
<PAGE>
shall:
(a) become insolvent or generally fail or be unable to pay, or admit in
writing its inability to pay, its debts as they become due;
(b) apply for, consent to, or acquiesce in, the appointment of a trustee,
receiver, sequestrator or other custodian for the Company or any of its
property, or make a general assignment for the benefit of creditors;
(c) in the absence of such application, consent or acquiesce in, permit or
suffer to exist the appointment of a trustee, receiver, sequestrator or
other custodian for the Company or for any part of its property;
(d) permit or suffer to exist the commencement of any bankruptcy,
reorganization, debt arrangement or other case or proceeding under any
bankruptcy or insolvency law, or any dissolution, winding up or liquidation
proceeding, in respect of the Company, and, if such case or proceeding is
not commenced by the Company or converted to a voluntary case, such case or
proceeding shall be consented to or acquiesced in by the Company or shall
result in the entry of an order for relief.
9. Fractional Shares. No fractional shares or scrips representing
-----------------
fractional shares shall be issued upon the conversion of the Series D Preferred
Stock. With respect to any fraction of a share called for upon any conversion
hereof, the Company shall pay to the Holder an amount in cash equal to such
fraction multiplied by the current market value of a share, determined as
follows:
(A) If the Common Stock is listed on a national securities exchange or
admitted to unlisted trading privileges on such exchange or listed for trading
on the Nasdaq National Market, the current market value shall be the last
reported sale price of the Common Stock on such exchange or market on the last
business day prior to the date of the conversion of the Series D Preferred Stock
or if no such sale is made on such day, the average of the closing bid and asked
prices for such day on such exchange or market; or
(B) If the Common Stock is not so listed or admitted to unlisted trading
privileges, but is traded on the Nasdaq Smallcap Market, the current market
value shall be the average of the closing bid and asked prices for such day on
such market and if the Common Stock is not so traded, the current market value
shall be the mean of the last reported bid and asked prices by the NASD
Electronic Bulletin Board on the last business day prior to the date of the
conversion of the Series D Preferred Stock; or
(C) If the Common Stock is not so listed or admitted to unlisted trading
privileges and
<PAGE>
bid and asked prices are not so reported, the current market value shall be an
amount, not less than book value thereof as at the end of the most recent fiscal
year of the Company ending prior to the date of the conversion of the Series D
Preferred Stock, determined in such reasonable manner as may be prescribed by
the Board of Directors if the Company.
10. Miscellaneous.
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(A) There is no sinking fund with respect to the Series D Preferred Stock.
(B) The shares of the Series D Preferred Stock shall not have any
preferences, voting powers or relative, participating, optional, preemptive or
other special rights except as set forth above in this Certificate of
Designation, Preferences and Rights and in the Articles of Incorporation of the
Company.
(C) The holders of the Series D Preferred Stock shall be entitled to
receive all communications sent by the Company to the holders of the Common
Stock.
IN WITNESS WHEREOF, HealthWatch, Inc. has caused this Certificate to be
signed by its Chief Executive Officer, on this ____ day of March, 2000, and such
person hereby affirms under penalty of perjury that this Certificate is the act
and deed of HealthWatch, Inc. and that the facts stated herein are true and
correct.
HEALTHWATCH, INC.
By:________________________________
Paul W. Harrison, Chairman, President and
Chief Executive Officer
Attest:
_________________, Secretary
