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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
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, 2000 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.)
3525 Piedmont Road
Building Seven, Suite 300
Atlanta, Georgia 30305
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (404) 262-0181
Securities registered pursuant to section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $.05 par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained herein, and no disclosure will be
contained, to the best of Registrant's knowledge, in a definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
Revenues for the fiscal year ended June 30, 2000: $551,682.
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The aggregate market value of the Common Stock of the Registrant held by
non-affiliates of the Registrant (approximately 1,982,000 shares, excluding
shares of convertible preferred stock, options and warrants) on August 31, 2000
was approximately $3,964,000. The aggregate market value was computed by
reference to the closing price on the Nasdaq SmallCap Market on August 31, 2000.
For the purposes of this response, officers, directors and holders of 5% or more
of the Registrant's Common Stock are considered to be affiliates of the
Registrant on that date.
The number of shares outstanding of the Registrant's Common Stock as of
August 31, 2000 was 2,142,751 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
None
Transitional Small Business Disclosure Format (check one):
Yes No X
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EXPLANATORY NOTE:
This amended annual report on Form 10-KSB for the year ended June 30, 2000
(1) includes changes to Directors and Executive Officers, Promoters and Control
Persons (Item 9) and Security Ownership of Certain Beneficial Owners and
Management (Item 11), to appropriately reflect the resignation of two directors
and the appointment of two new directors on September 28, 2000 (as of the date
of this filing, the Company has not received any written communication from
either of the two resigning directors with regard to any disagreements with the
Company relating to the Company's operations, policies or practices); (2)
corrects the signature page to the Form 10-KSB which inadvertently included the
signature and names of the two directors who had resigned on the date the Form
10-KSB was filed and prior to its filing; and (3) corrects typographical errors
contained in the Notes to the Consolidated Financial Statements (Note B and Note
J).
We have made no further changes to the previously filed Form 10-KSB. All
information in this Form 10-KSB/A is as of June 30, 2000 and does not reflect
any subsequent information or events other than the aforementioned changes.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
In addition to the historical information contained herein, the discussion
in this Form 10-KSB contains certain forward-looking statements, within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, that involve risks and uncertainties, such as
statements concerning: growth and future operating results; future customer
benefits attributable to the Company's products; developments in the Company's
markets and strategic focus; new products and product enhancements; potential
acquisitions and the integration of acquired businesses, products and
technologies; strategic relationships; and future economic, business and
regulatory conditions. The cautionary statements made in this Form 10-KSB should
be read as being applicable to all related forward-looking statements whenever
they appear in this Form 10-KSB. The Company's actual results could differ
materially from the results discussed in the forward-looking statements.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed under the section captioned "Risk Factors" in Item 1
of this Form 10-KSB as well as the cautionary statements and other factors set
forth elsewhere herein.
General Background
References herein to "HealthWatch" or the "Company" include HealthWatch,
Inc. and its consolidated subsidiaries and their predecessors unless the context
indicates otherwise.
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HealthWatch was incorporated in the state of Minnesota in 1983. HealthWatch is a
healthcare information technology company operating as an Enterprise
Applications Provider ("EAP") and an Application Service Provider ("ASP") for a
variety of healthcare businesses. We offer and market an enterprise software
solution, known as the Healthcare Enterprise System (the "HES System"), which is
owned by Halis, Inc.("Halis"), an affiliated information technology company that
is approximately twenty-five percent (25%) owned by HealthWatch. The HES System
which uses proprietary technology to distribute, in a compressed digital format,
one system that includes over 30 integrated applications for the management of a
healthcare enterprise's resources, patient data, clinical data and finances. The
HES System is capable of processing and tracking information for the entire
healthcare cycle from the doctor visit, specialty clinic or hospital stay, to
the laboratory tests, pharmacy prescriptions, home care, insurance payments and
more. In both the EAP and ASP model, we expect to market, deliver and maintain
the HES System primarily over the Internet. The HES System can be used by
physician practices, outpatient clinics, hospitals, long-term care facilities,
home health providers, health insurance payors and other healthcare entities.
HealthWatch has been in business since 1983, but its information technology
business is still relatively new. Prior to 1998, HealthWatch was primarily in
the business of manufacturing and selling medical devices and related supplies.
In 1998, it began to phase out the medical device business and focus its
energies on developing an information technology business. HealthWatch still,
however, continues to provide maintenance support to a number of customers who
purchased medical devices in the past.
HealthWatch 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 HealthWatch's ownership of
Halis from approximately 5% to 18% of Halis' common stock. Subsequent
acquisitions of additional Halis common stock through various private placements
have increased HealthWatch's ownership interest to approximately 25%, thereby
allowing HealthWatch to account for Halis using the equity method of accounting,
which means that HealthWatch records its share of Halis' income or loss in
period incurred.
Prior to the PHE acquisition, HealthWatch was primarily in the medical
products business. However, some of its products contained both hardware and
software components. While the hardware components are classified more as a
device, the completed medical equipment included an information technology
component needed to analyze information and reports diagnostic results to users.
This information technology software ran on device-oriented hardware
regulated by the Federal Food and Drug Administration ("FDA"), whereas the
Company's new software runs on computer-oriented hardware that does not fall
under FDA regulations.
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During fiscal 1997, HealthWatch decided to expand its business to include
healthcare information software products and services. The decision was based
on HealthWatch's desire to improve margins for its medical products and to
expand its product and service offerings in order to increase revenues and to
return HealthWatch to profitability. In this regard, HealthWatch entered into
a business collaboration agreement with Halis during fiscal year 1998, pursuant
to which HealthWatch and Halis agreed to share sales prospects and HealthWatch
was to develop a technology utility using MERAD that was designed to monitor,
capture and manage medical information at the point of care.
The Technology
MERAD is an Internet software application utility that uses artificial
intelligence and a database approach to specify, store, process and manage
software applications as flexible database programs rather than hard coded rigid
programming code. This improved approach allows programs to be compressed at up
to a 100:1 efficiency, which requires far less Internet bandwidth or computing
power to process the program instructions. In addition to the additional
processing speed, a program utilizing the MERAD technology will be easier to
maintain and support because changes are made to a database table verses parsing
through millions of lines of rigid computer code. HealthWatch believes that
MERAD's ability to efficiently replace applications program code with end-user
database applications represents a significant competitive advantage for the
Company's products. The HES System was designed and built using the MERAD
technology.
The HES System incorporates advanced architecture and intelligent
information processing algorithms that allow the healthcare industry's
information processes (e.g., patient scheduling, medical billing, etc.) to be
integrated into one program, eliminating the need for multiple and disparate
systems by the various participants and facilities. The HES System is
integrated-by-design and not "interfaced," thereby avoiding the need for outside
enterprise application integration technology that is often invasive, time-
consuming and requires custom coding which restricts flexibility and
scalability. The HES Systems' technology solution addresses the need to
eliminate fragmented and duplicate applications, which often cause information
sharing and data integrity problems. The HES System also has the ability to
coexist with legacy systems to share information.
The HES System efficiently downloads applications over the Internet to a
customer managed and operated environment or runs applications efficiently on
the Internet for an outsourced solution. This technology also permits
maintenance of the applications over the Internet, whether in a customer
managed and operated environment or in an outsourced environment.
HealthWatch's technology uses a special process to substantially compress
and reuse functional logic to replace the need for numerous duplicate software
programs. The HES System's intelligent algorithms send and receive data
patterns as 5K application packets tuned for
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the Internet to represent processing instructions for one or more applications.
HealthWatch believes its technology is the first to be used for building
commercially available applications in a digital (compressed data) format for
the Internet.
HealthWatch's new generation of applications and services for storing,
managing and processing information will be offered under two models: a
customer-installed and customer-managed model and a "through the Internet"
outsourced model. HealthWatch can provide both models because it can download
the actual operating applications over the Internet, for customer-driven
internal management of processing, and it can outsource the solution by
providing the applications and services through a shared center and private
Internet channel.
In addition, HealthWatch software utilizes an integrated approach where a
customer uses one program with integrated applications to process information.
This approach is a shift from the traditional layered approach, which involves
the inefficiencies of multiple separate programs with limited applications that
inherently lead to duplicate information processing. If applications are
designed and built separately, the information used (e.g., patient demographics)
is also partially or completely duplicated for each application. Therefore, if
applications are acquired or are built using different sources, the duplicated,
layered effect applies both to the applications as well as to the information
used. Conversely, if applications are designed and built together in an
integrated manner, the information used, such as patient demographics, is only
required once for all integrated applications.
HealthWatch's Growth Strategy
HealthWatch's objective is to become a leading provider of web based
applications to process and manage transactions for physician offices,
hospitals, outpatient clinics and other healthcare providers. HealthWatch also
intends to assist these entities in adapting to evolving communications and
interactive technologies. HealthWatch's immediate growth strategy contemplates:
. Marketing its already existing 50 applications via sales of customer-
installed models and outsourced models, for periodic recurring revenue streams;
. Developing and cross-selling additional applications to increase recurring
revenue streams;
. Establishing revenue sharing partnerships with companies that are operating
successfully in the healthcare industry to co-brand and sell HealthWatch's
products and services; and
. Acquiring complementary healthcare information system companies and
converting the customers of these acquired companies to the HES System.
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While HealthWatch would like to grow rapidly through internally generated
revenues from its business model, HealthWatch realizes that it must also be
prepared to selectively acquire complementary companies in order to more quickly
gain market share and generate revenue growth.
In implementing these strategies, HealthWatch can take advantage of its
digital technology architecture that allows its applications to be easily
downloaded and operated by customers. By using electronic sales and support
instead of relying solely on the traditional direct salesperson and on site
installation approach, HealthWatch can market, install and service its products
at a lower cost with fewer resources.
HealthWatch will operate as a centralized data center, with decentralized
business sales and customer service units. The data center initially will be in
Atlanta, with regional sales and customer service unit centers initially in
Atlanta, Chicago and San Diego. Additional centers may be added to provide
superior response times and backup capabilities for its mission-critical
applications.
Certain corporate functions such as research and development, marketing and
finance will be handled at the centralized data center. HealthWatch believes
that by combining a regional, decentralized sales and customer service approach
with a centralized data center, it will better serve the needs and demands of
its customers. In addition, the power of the Internet will support its goal to
achieve economies of scale while performing nationwide, and perhaps, global
mission-critical information transactions.
Marketing
HealthWatch intends to market its products through use of a Web site,
selected magazine advertising and high-profile trade shows to build brand
awareness. HealthWatch makes an actual operating version of its products
available to customers through an Internet download for use on a trial or pilot
basis, which HealthWatch believes will provide a significant advantage in
marketing its products. In addition, the integrated single system architecture
of its products allows for efficient building, distributing and supporting
numerous integrated applications.
HealthWatch's EAP marketing strategy is to:
. meet or exceed existing system requirements for availability,
scalability, security and flexibility;
. accommodate data interfaces and integration;
. support transactional integration, minimizing the need for custom
coding; and
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. reduce reliance on proprietary, hard-coded business rules and
workflows usually found in other systems.
HealthWatch's ASP marketing strategy is to:
. rapidly penetrate markets by offering access to and use of the HES
System from a centralized offsite location via the Internet;
. reduce up-front capital expenditures by employing a subscription based
billing model (monthly fee based on number of users and number of
applications accessible);
. decrease the complexity and lengthy implementation usually involved with
new application purchases; and
. offer a low and predictable cost solution that is easy to use in terms
of expenditures and information technology personnel.
HealthWatch will focus its marketing efforts initially on the physician
practice market and the outpatient clinic market. HealthWatch believes that
these segments of the healthcare information system market have spent
comparatively much less than hospitals and healthcare insurance payors on
information technology. HealthWatch believes that recent movement toward the
adoption of information systems in physician practices will accelerate with
solutions now available, such as the HES System, that are accessible over the
Internet and paid for in periodic payments, rather than requiring up-front
capital expenditure or up-front license fees.
Once HealthWatch makes progress in these two markets, one or more of the
other healthcare market segments (hospitals, long term care facilities, home
healthcare and healthcare insurance payors) will be targeted. According to
research by the healthcare group at Frost & Sullivan entitled, "U.S. Physicians
Practice Management System Markets," total market revenue for companies offering
physician practice management systems have risen from $2.36 billion in 1998 to
$2.66 billion 1999. This upward trend is projected to continue through 2005.
Sales
HealthWatch will use the power of the Internet and its web site to create
sales. It will offer actual operating (versus mock-up) trial versions of our
solutions through the Internet. HealthWatch believes that access to the
operating solutions will accelerate the required comfort levels of a larger
audience (e.g. actual users in the target entity), who in turn will influence
the decision makers to buy. In addition to using the Internet as a distribution
strategy and channel, HealthWatch will also provide knowledgeable applications
and services experts by phone to qualified prospects that need further
information to make a decision. HealthWatch will also provide industry level
experts and consultants to large accounts who need a face-to-face encounter in
order to make final decisions.
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HealthWatch will also seek to establish revenue-sharing partnerships with
other companies to co-brand and cross-sell HealthWatch's products and services.
Because many of the potential partners will have already established a presence
in the healthcare industry, HealthWatch believes that this could serve as a
potentially strong distribution channel for its products and services.
Another important channel that may be used for distribution is the
acquisition of complementary companies and cross selling HealthWatch's
applications and services to any acquired customers. In addition to helping
increase top-line growth more rapidly, we believe that acquired customers are
more likely to try an enhanced offering to what they already use rather than to
switch to another company's products. HealthWatch's solutions can be more
easily interfaced with existing applications of another vendor because it has an
integrated data base, so a common interface is used to access multiple
applications and because its database is independent of its applications, rather
than embedded in applications, providing a simpler interface design.
HealthWatch's sales will be driven by a recurring revenue formula that is
based on periodic fees or per transaction fees. These recurring periodic fees
will be charged and paid based on the usage of its applications. HealthWatch
will also offer additional services, such as online billing, using the power of
the Internet.
HealthWatch has tested the sales channel of downloading its actual
operating applications, to prospective customers. The results reflect typical
buying trends, with the risk-takers being very receptive and the mainstream and
late adopters somewhat reluctant to respond. HealthWatch believes that this
sales channel will evolve and become effective as its products and services
become more well-known as "mainstream" solutions.
Customer Services
HealthWatch will provide customer service at three levels. The first level
is through our Web site, the second level connects by e-mail or telephone to a
general representative to answer basic questions and the third level schedules
time with a specialist by e-mail, telephone or on site visit, if necessary, for
a consultation. HealthWatch's Web site will use multimedia presentations to
explain all aspects of our applications and services, including answers to
commonly asked questions. HealthWatch expects the Web site to serve as a
valuable front-line support and training tool to reduce the need for human
intervention to answer repetitive questions that can easily be resolved with
some minimal research and interaction with its Web site.
As a second level of support, general customer service representatives will
be available to answer common and recurring questions that require human
intervention. These representatives will direct and guide customers to resolve
their issues and educate them on how to resolve these issues in the future.
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The third level of support will be a personal consultation by a systems
specialist. A specialist will be used to resolve unique technical issues for
the customer or to escalate high priority issues which were not resolved by the
general customer service representatives.
Due to the high quality of HealthWatch's product and the ability to
integrate its technology and application services into its customer's
operations, HealthWatch's online support and planned on-line interactive multi-
media training, management believes that HealthWatch will experience lower
customer service and operating costs than normally experienced in the industry.
These lower costs should result in a positive effect on profitability.
Competition
HealthWatch's products target physicians, hospitals, clinics, pharmacies,
laboratories, long-term care facilities, home health organizations, health
insurance companies and other healthcare entities. These markets are intensely
competitive and characterized by rapid technological change. Its competitors
are diverse and offer a variety of solutions directed at various segments of the
healthcare industry. HealthWatch believes there are hundreds of application
software vendors that provide products that compete with the HES System.
HealthWatch believes the top ten competitors include Healtheon/Web MD
Corporation, McKesson HBOC, Synetic Corporation/Medical Manager/CareInsite,
Cerner Corporation, Shared Medical Systems, Eclipsys Corporation, MedicaLogic,
E-MedSoft and Avio. In addition, its products face competition from:
. internal development efforts by a prospective customer's information
technology departments;
. independent healthcare application companies which have developed or are
attempting to develop software that competes with HealthWatch software
solutions; and
. other business application software vendors which may broaden their
product offerings by internally developing, or by acquiring or partnering with
independent developers of healthcare applications software.
HealthWatch believes it can quickly distinguish itself from the viable
competitors in the healthcare information systems industry. Currently, its
competitors are focused on particular segments of the market, with particular
types of technology and, often with specific applications or a variety of
interfaced applications. The three main traditional market focuses are listed
below:
. Market segments, which include physician practices, clinics, pharmacies,
laboratories, home healthcare, long-term care, hospitals, payors and consumers
(patients) and sub-categories of these segments (e.g. inpatient radiology);
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. Technology types, which can be categorized as either traditional customer
managed/operated or as outsourced; and
. Specific applications or functionality, including scheduling,
registration, billing, medical records, etc.
HealthWatch believes it has a dynamic and comprehensive solution that can
handle all participants and market segments and can be offered in either an
outsourced or a customer managed and operated model. HealthWatch believes its
competition has not embraced a comprehensive, standardized approach and has
remained with fragmented, duplicative information solutions. It expects that
technology competitors will eventually offer Internet solutions. However,
HealthWatch believes that these competitors will add front web layers (web
pages) to their current information systems until they can build and deliver new
Internet technology. If true, this should allow HealthWatch's comprehensive web
designed solution to retain its first to market advantage.
HealthWatch plans to distinguish itself from competitors by focusing on the
HES System's unique architecture process to integrate-by-design all of the
applications needed in a market segment (i.e., physician practices) into one
complete application. The HES System was designed with ease of use in mind,
keeping a particular focus on the speed of the processing and the costs to
produce, update and support one Internet based application, as opposed to
several.
To the extent competitors develop or acquire systems with functionality
comparable or superior to HealthWatch's products, if they have a significant
installed customer base, long-standing customer relationships and an ability to
offer a broad solution, they could have a significant competitive advantage over
HealthWatch. Increased competition could result in price reductions, fewer
customer orders, reduced gross margins and loss of market share, any one of
which could materially adversely affect our business, results of operations and
financial condition. Many of HealthWatch's competitors and potential
competitors have longer operating histories, significantly greater financial,
technical, marketing and other resources, greater name recognition and a larger
installed customer base than it does. In order to be successful in the future,
HealthWatch must continue to respond promptly and effectively to technological
change and competitors' innovations. HealthWatch's competitors may be able to
respond more quickly to new or emerging technologies and changes in customer
requirements or devote greater resources to the development, promotion and sale
of their products than HealthWatch.
The principal competitive factors affecting the market for HealthWatch's
products include vendor and product reputation, product architecture,
functionality and features, costs, ease and speed of implementation, return on
investment, product quality, price, performance and level of support. There can
be no assurance that HealthWatch will be able to compete successfully against
current and future competitors, and the failure to do so could have a material
adverse effect upon HealthWatch's business, results of operation and financial
condition.
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Proprietary Rights and Licenses
HealthWatch's success and ability to compete is dependent in part upon its
proprietary technology. To protect its proprietary technology, HealthWatch
relies on a combination of copyright and trade secret laws, confidentiality
procedures and contractual provisions, which may afford only limited protection.
In addition, effective copyright and trade secret protection may be unavailable
or limited in certain foreign countries. HealthWatch presently has no patents
or patent applications pending. The source code for HealthWatch's proprietary
software is protected both as a trade secret and as a copyrighted work.
HealthWatch generally enters into confidentiality or license agreements with its
employees, consultants and customers, and generally controls access to and
distribution of its software, documentation and other proprietary information.
HealthWatch provides its software products to customers under non-exclusive
license agreements. As is customary in the software industry, in order to
protect its intellectual property rights, HealthWatch does not sell or transfer
title to its products to its customers. Although its license agreements place
restrictions on the use by the customer of HealthWatch's products, there can be
no assurance that unauthorized use of HealthWatch's products will not occur. In
addition, HealthWatch has licensed its MERAD software to Halis under a perpetual
license agreement and HealthWatch and Halis operate under a business
collaboration agreement which provides, among other things, a license for
HealthWatch and Halis to use the other company's technology in exchange for a
60/40 percent sharing of revenues (i.e., the selling company receives 60% and
the company owning the technology receives 40%) from sales of products or
services incorporating the other company's technology.
Despite the measures taken by HealthWatch to protect its proprietary
rights, unauthorized parties may attempt to reverse engineer or copy aspects of
HealthWatch's products or to obtain and use information that HealthWatch regards
as proprietary. Policing unauthorized use of the Company's products is
difficult. In addition, litigation may be necessary in the future to enforce
the Company's intellectual property rights, to protect the Company's trade
secrets, to determine the validity and scope of the proprietary rights of others
or to defend against claims of infringement or invalidity. Such litigation could
result in substantial costs and diversion of resources and could have a material
adverse effect on the Company's business, operating results and financial
condition.
In the future, HealthWatch may be subject to claims of intellectual
property infringement as the number of products and competitors in HealthWatch's
industry segment grows and the functionality of products in different industry
segments overlap. Although HealthWatch is not aware that any of its products
infringes upon the proprietary rights of third parties, there can be no
assurance that third parties will not claim infringement by HealthWatch with
respect to current or future products. In addition, HealthWatch may initiate
claims or litigation against third parties for infringement of the Company's
proprietary rights or to establish the validity of HealthWatch's proprietary
rights. Any such claims against HealthWatch, with or without merit,
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as well as claims initiated by HealthWatch against third parties, can be time
consuming and expensive to defend, prosecute or resolve. Moreover, an adverse
outcome in litigation or similar adversarial proceedings could subject
HealthWatch to significant liabilities to third parties, require the expenditure
of significant resources to develop non-infringing technology, require a
substantial amount of attention from management, require disputed rights to be
licensed from others or require HealthWatch to cease the marketing or use of
certain products, any of which would have a material adverse effect on
HealthWatch's business, operating results and financial condition. To the extent
HealthWatch desires or is required to obtain licenses to patents or proprietary
rights of others, there can be no assurance that any such licenses will be made
available on terms acceptable to HealthWatch, if at all.
Product Development
The Company spent approximately $354,500 in the year ended June 30, 2000
and $287,000 in the year ended June 30, 1999 for the research and development of
its products, including capitalized cost. To reduce product development time
and expense, when appropriate, the Company has incorporated into its products
certain software licensed to it by other software developers.
Employees
As of June 30, 2000, HealthWatch had 8 full-time employees. In addition,
HealthWatch shares a number of administrative and finance personnel with Halis.
None of HealthWatch's employees is represented by a labor union or is subject to
a collective bargaining agreement. HealthWatch believes its employee relations
are good.
Recent Developments
On June 29, 2000, the Company entered into an Agreement and Plan of Merger
with Halis, Inc., a Georgia corporation ("Halis"). Halis is engaged in the
business of providing information technology applications and services to the
healthcare industry. Halis is currently traded on the OTC Bulletin Board under
the trading symbol "HLIS.OB." HealthWatch is currently the single largest
shareholder of Halis, owning 15,763,655 shares (approximately 25%) of Halis'
issued and outstanding common stock, and has an option that expires on September
29, 2000 to purchase up to an additional 25,000,000 shares at $.20 per share.
As such, HealthWatch accounts for its investment in Halis under the equity
method, meaning it records its pro rata share of Halis' income or loss in the
current period. The merger agreement followed the execution by the Company and
Halis of a letter of intent, dated March 8, 2000. Under the merger agreement,
subject to a number of conditions described below, Halis will merge with and
into a wholly-owned subsidiary of the Company in a tax-free merger and
reorganization. At the time the merger is consummated:
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. The Company will issue approximately 2,300,000 registered shares of its
common stock in exchange for all of the outstanding shares of capital
stock of Halis (an exchange ratio of one share of HealthWatch common
stock for twenty shares of Halis common stock). The holders of other
convertible securities(i.e., warrants and options) of Halis, Inc. will
receive convertible securities of the Company having similar terms and
conditions.
. All of the directors and executive officers of the Company will continue
to serve in their current capacity until their resignation or removal in
accordance with the HealthWatch's By-laws and Articles of Incorporation.
. The merger cannot be consummated without the approval of the holders of
a majority of the outstanding voting stock of the Company and Halis. In
addition, there are several other conditions which must be fulfilled or
waived prior to the closing of the merger.
If either company terminates or withdraws from the merger agreement without
the consent of the other party, then under certain conditions, they may be
liable to the non-terminating party for $500,000 in liquidated damages. The
merger agreement will automatically terminate on September 30, 2000, if the
merger has not closed by that date. Based on the conditions required for
closing under the merger agreement, the parties will not be able to close on or
before September 30, 2000. HealthWatch and Halis are currently negotiating to
extend the termination date in the merger agreement to provide additional time
to close the transaction. HealthWatch expects the merger to close during the
last quarter of calendar year 2000. However, there can be no assurances that
the merger agreement will be amended to extend the termination date, and even if
the termination date is extended, there can be no assurances that the parties
will be able to satisfy the conditions to closing the merger.
Consolidated Financial Statements for Halis, Inc for the fiscal year ended
December 31, 1999 and the six months ended June 30, 2000 are included in Item 7
of this report. In addition, unaudited pro forma condensed consolidated
financial statements are also included in the HealthWatch financial statement
contained in Item 7 of this report. The unaudited pro forma condensed
consolidated financial statements assume that the merger took place on July 1,
1999.
Significant Changes in The Company's Capitalization
On December 8, 1999, the Company's Board of Directors authorized an
amendment to its articles of incorporation to effect a five-for-one reverse
stock split of the Company's capital stock. Pursuant to the reverse stock split,
each share of the Company's capital stock outstanding on December 21, 1999 was
converted into 0.20 of a share, rounded up or down to the nearest whole share.
Unless otherwise noted, all references to the Company's common stock contained
in this report give effect to the reverse stock split.
On December 23, 1999, the Company's Board of Directors authorized the
designation of 4,500 shares of its preferred stock as Series C 8% Convertible
Preferred Stock ("Series C Preferred Stock"). In connection therewith, the
Company filed with the Minnesota Secretary of State a Certificate of
Designation, Preferences and Rights of Series C 8% Convertible Preferred Stock
that sets forth the voting powers, designation, preferences, qualifications,
limitations and restrictions of the Series C Preferred Stock. As of June 30,
2000, there were 4,000 shares of the
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Series C Preferred Stock issued and outstanding.
On February 7, 2000, the Company's Board of Directors authorized the
designation of 300,000 shares of its preferred stock as Series D 8% Convertible
Preferred Stock ("Series D Preferred Stock"). In connection therewith, the
Company filed with the Minnesota Secretary of State a Certificate of
Designation, Preferences and Rights of Series D 8% Convertible Preferred Stock
that sets forth the voting powers, designation, preferences, qualifications,
limitations and restrictions of the Series D Preferred Stock. As of June 30,
2000, there were 74,130 shares of the Series D Preferred Stock issued and
outstanding.
RISK FACTORS
We have included certain forward-looking statements in the Management's
Discussion and Analysis of Financial Condition and Results of Operations and
elsewhere in this Form 10-KSB. We may also make oral forward-looking statements
from time to time. Actual results may differ materially from those projected in
any such forward-looking statements due to a number of factors, including those
set forth below and elsewhere in this Form 10-KSB.
We operate in a dynamic and rapidly changing environment that involves
numerous risks and uncertainties. The following sections list some, but not
all, of these risks and uncertainties that may have a material adverse effect on
our business, financial condition or results of operations. This section should
be read in conjunction with the audited Consolidated Financial Statements and
Notes thereto, and Management's Discussion and Analysis of Financial Condition
and Results of Operations for the years ended June 30, 2000 and 1999 contained
elsewhere in this Form 10-KSB.
We Rely on a Limited Number of Products and Are Dependent on Market Acceptance
of Such Products.
Our software utilizes a new technology. Achieving market acceptance for
our products will require substantial marketing efforts and expenditures to
inform potential customers of the distinctive characteristics and benefits of
these products. Since we have limited financial and other resources to
undertake extensive independent marketing activities, there can be no assurance
we will be able to successfully market our products.
In addition, we are planning for a large segment of our customers to
outsource our solutions by accessing the applications and services through a
shared data center and private Internet channel. We cannot guarantee that
participants in the healthcare industry will accept an Internet outsourced
solution as a replacement for traditional sources of these services. Market
acceptance of our outsourced solution will depend upon continued growth in the
use of the Internet generally and, in particular, as a source of services for
the healthcare industry. The acceptance of the Internet for storing, managing
and processing information by healthcare professionals will require a broad
acceptance of new methods of conducting business and
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exchanging information. Our future financial success will depend upon our
ability to attract and retain healthcare providers as customers. Our failure to
achieve market acceptance would have a material adverse effect on our business,
results of operations and financial condition.
We Have Only a Limited Operating History That You May Use to Assess Our Future
Prospects.
HealthWatch is still transitioning from being a medical device
manufacturing company to an information technology company. We have generated
extremely limited revenues with our information technology business. Our
revenue and income potential are unproven and our business model is constantly
evolving. We have limited experience addressing challenges frequently
encountered by early-stage companies in the software and related services
industry. You should evaluate our business in light of the risks and
difficulties frequently encountered by early stage companies engaged in such
commerce. These risks include:
. uncertain market acceptance of our products and services and our
dependence on interacting with our customers through a venue with only
limited market acceptance;
. lack of sufficient capital;
. our ability to develop and upgrade our infrastructure, including
internal controls, transaction processing capacity, data storage and
retrieval systems and web site;
. our dependence upon and need to hire key personnel;
. our ability to respond to competition;
. our need to manage changing operations;
. our reliance upon the Internet;
. our reliance upon general economic conditions;
. regulatory risks associated with our business;
. ability to convert customers of businesses we acquire to on-line
systems; and
. ability to consummate acquisitions;
We may not be successful in addressing these risks, and our business
strategy may not be successful. As a result of our limited operating history,
our plan for growth, in particular through sales partnerships and acquisitions,
and the competitive nature of the markets in which we compete, our historical
financial data is of limited value in anticipating future performance. We
cannot assure you that we will be able to expand our customer base through
acquisitions, or otherwise, and be able to attract customers.
We Have a History of Operating Losses and Expect Losses to Continue in the near
Future.
We have not achieved profitability and we cannot be certain that we will
realize sufficient revenue to achieve profitability. HealthWatch incurred a net
loss of $2,189,260 in the year ended June 30, 1997, a net loss of $4,084,474 in
the year ended June 30, 1998, a net loss of $1,748,931
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in the year ended June 30, 1999 and a net loss of $3,054,695 in the year ended
June 30, 2000. As of June 30, 2000, HealthWatch had an accumulated deficit of
$23,041,022. We plan to increase operating expenses to expand our sales and
marketing operations, broaden our customer support capabilities and continue to
build our operational infrastructure. If growth in our revenues does not outpace
the increase in these expenses, we may not achieve or sustain profitability. We
expect that we will continue to lose money in the near future. Obviously no
guaranty of success can be made and we may need an infusion of cash during
fiscal 2001 in order for us to make significant inroads in our business plan.
The Expected Fluctuations of Our Operating Results Could Cause Our Stock Price
to fluctuate.
We expect that our operating results may fluctuate significantly in the
future based upon a number of factors, many of which are not within our control.
We base our operating expenses on anticipated revenue growth and our operating
expenses are relatively fixed in the short term. The implementation and
utilization of our products involves a commitment of resources and recurring
expense by us and our customers. We may expend substantial funds and management
resources during the sales cycle and fail to make sufficient sales. Accordingly,
our results of operations for a particular period may be adversely affected if
the sales forecasted for that period are delayed or do not occur. As a result,
if our revenues are lower than we expect in some future period, our operating
results may be below the expectations of market analysts or investors. If this
occurs, the price of our common stock would likely decrease.
Our operating results may also fluctuate in the future due to a variety of
other factors, including:
. the overall level of demand for Internet services by consumers and
businesses and the demand for our products, product enhancements and
services in particular;
. spending patterns and budgetary resources of the healthcare industry;
. technical difficulties, system downtime, system failures or reductions
in service levels;
. the timing of upgrades to our computer hardware infrastructure;
. increases in operating costs beyond anticipated levels;
. the timing of customer product implementations or our failure to timely
complete scheduled product implementations; and
. governmental actions affecting Internet operations or content.
Substantial Control Will Remain with Our Management and Major Stockholders and
this Could Delay or Prevent a Change of Control.
As of June 30, 2000, our executive officers, directors and 5% stockholders
together beneficially owned approximately 38.4% of HealthWatch's outstanding
common stock. These stockholders, if they vote together, will retain
substantial control over matters requiring approval
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by our stockholders, such as the election of directors and approval of
significant corporate transactions. In addition, our Series C and D 8%
Convertible Preferred Stock is held by a limited number of investors who have
the right to vote on all matters submitted to common stockholders. As of June
30, 2000, the holders of our Series C and D 8% Convertible Preferred Stock
controlled approximately 52% of the total voting power of the Company (excluding
any unexercised options of warrants). This concentration of ownership might also
have the effect of delaying or preventing a change in control.
Failure to Complete the Halis Merger Could Negatively Impact Our Stock Price,
Future Business and Operations.
As discussed elsewhere in this Form 10-KSB, we have entered into an
agreement to purchase Halis through a merger transaction. If the merger is not
completed for any reason, we may be subject to a number of material risks,
including the following:
. the price of our common stock may decline to the extent that the
relevant current market price reflects a market assumption that the
merger will be completed;
. costs related to the merger, such as legal, accounting and financial
advisor fees, must be paid even if the merger is not completed; and
. the companies are dependent on each others technology and potential
customers may resist using either or both companies' products due to
such reliance.
In addition, Halis' and/or HealthWatch's customers and strategic partners,
in response to the announcement of the merger, may delay or defer decisions
concerning the relevant company. Any delay or deferral in those decisions by
customers, strategic partners or suppliers could have a material adverse effect
on business of the relevant company, regardless of whether the merger is
ultimately completed. Similarly, current and prospective Halis and/or
HealthWatch employees may experience uncertainty about their future roles with
HealthWatch until HealthWatch's strategies with regard to Halis are announced or
executed. This may adversely affect Halis' and/or HealthWatch's ability to
attract and retain key management, sales, marketing and technical personnel.
We Hope to Grow Rapidly, and the Failure to Manage Our Growth Could Adversely
Affect Our Business.
As we continue to increase the scope of our operations, we may not have an
effective planning and management process in place to implement our business
plan successfully. This growth may strain our management systems and resources.
We anticipate the need to continue to improve our financial and managerial
controls and our reporting systems. In addition, we will need to expand, train
and manage our growing work force. Our business, results of operations
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and financial condition will be materially and adversely affected if we are
unable to manage and integrate our expanding operations effectively.
To Grow Our Business, We May Acquire Other Companies and Raise Capital by
Issuing Shares of Our Stock, Which May Subject Us to Additional Risks and Will
Dilute Your Ownership.
Our business plan contemplates that we may pursue strategic acquisitions
necessary to gain market share. The integration of acquired companies involves
a number of special risks. In addition, we may also sell additional shares of
our stock to raise money for expanding operations. We cannot guarantee that we
will be able to identify and acquire suitable candidates on acceptable terms.
We also cannot promise that we will be able to arrange adequate financing,
complete any transaction or successfully integrate the acquired business. In
addition, HealthWatch may incur debt to finance future acquisitions which would
result in additional interest expenses and decrease net income. Alternatively
or in addition to debt financing, HealthWatch may issue securities in connection
with future acquisitions which would dilute the ownership of the current
stockholders. To the extent HealthWatch is unable to successfully complete and
integrate strategic acquisitions in a timely manner, its growth strategies could
be adversely affected.
We Need to Expand our Sales and Customer Support Infrastructure.
Our ability to expand our business will depend in part on recruiting and
training additional sales and customer support personnel. Competition for
qualified personnel in these areas is intense. We may not be able to
successfully expand our sales force, which would limit our ability to expand our
customer base. We may be unable to hire highly trained customer support
personnel, which would make it difficult for us to meet customer demands. As a
result, any difficulties we may have in expanding our sales and marketing or
customer support organizations will have a negative impact on our ability to
successfully capitalize on any acquisitions we may complete.
Future Regulation of the Internet Could Affect our Operations.
Laws and regulations that apply to the Internet may become more prevalent
in the future. The laws governing the Internet remain largely unsettled. There
is no single governmental body overseeing our industry, and many state laws that
have been enacted in recent years have different and sometimes inconsistent
application to our business.
New laws could dampen the growth in use of the Internet generally and
decrease the acceptance of the Internet as a commercial medium. In addition,
existing laws such as those governing intellectual property and privacy may be
interpreted to apply to the Internet. The growth and development of the market
for on-line commerce may prompt calls for more stringent consumer protection
laws, especially as to privacy. The governments of foreign countries may
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also attempt to regulate electronic commerce. In the event that the federal
government, state governments, foreign governments or other governmental
authorities adopt or modify laws or regulations relating to the Internet, our
business, results of operations and financial condition could be materially and
adversely affected.
In 1998, the United States government enacted a three-year moratorium
prohibiting states and local governments from imposing new taxes on electronic
commerce transactions. Upon expiration of this moratorium, if it is not
extended, states or other governments might levy sales or use taxes on
electronic commerce transactions. An increase in the taxation of electronic
commerce transactions might also make the Internet less attractive for consumers
and businesses.
The United States Healthcare Environment Is Constantly Changing Which Could
Adversely Affect Our Business.
In recent years, the healthcare industry has changed significantly in an
effort to reduce costs. These changes include increased use of managed care,
cuts in Medicare, consolidation of pharmaceutical and medical/surgical supply
distributors and the development of large, sophisticated purchasing groups. We
expect the healthcare industry to continue to change significantly in the
future. Some of these changes may have a material adverse effect on the
combined company's results of operations, such as a reduction in governmental
support of healthcare services or adverse changes in legislation or regulations
governing the delivery or pricing of healthcare services or mandated benefits.
Governmental Regulation of Healthcare Privacy Issues May Result in Additional
Expenditures and Adversely Affect Our Business.
The Federal Trade Commission and state governmental bodies have been
investigating the confidentiality and privacy policies and practices of
healthcare Internet companies and Internet companies in general, and may impose
regulations. In addition, proposed privacy standards for the handling of
individually identifiable health information that is transmitted or stored
electronically were issued by the Department of Health and Human Services on
November 3, 1999 and it will be necessary for our platform and for the
applications that we provide to be in compliance with the final regulations.
Finally, industry groups are also proposing various privacy and ethics standards
in an effort to maintain self-regulation. We will likely incur additional
expenses regarding privacy practices and policies. Any such policies and
practices, whether self-imposed or imposed by government regulation could affect
the way in which we are allowed to conduct our business, especially those
aspects that involve the collection, use and access to personal information and
medical records, and could have a material adverse effect on our business,
results of operations and financial condition.
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The Health Care Industry Is Subject to Extensive Government Regulation.
Participants in the healthcare industry are subject to extensive and
frequently changing regulation at the federal, state and local levels. Some of
the laws and regulations relate to payment and other relationships with third
party billing and collection agents as well as regulating computer software
intended for use in the healthcare setting. The impact of regulatory
developments in the healthcare industry is complex and difficult to predict. We
cannot assure you that we will not be materially adversely affected by existing
or new regulatory requirements or interpretations. These requirements or
interpretations could also limit the effectiveness of the use of the Internet
for the methods of healthcare e-commerce we are developing or even prohibit the
sale of a subject product or service. Healthcare service providers, payors and
plans are also subject to a wide variety of laws and regulations that could
affect the nature and scope of their relationships with us. Laws regulating
health insurance, health maintenance organizations and similar organizations, as
well as employee benefit plans, cover a broad array of subjects, including
confidentiality, financial relationships with vendors, mandated benefits,
grievance and appeal procedures, and others. State and federal laws have also
implemented so-called "fraud and abuse" rules that specifically restrict or
prohibit certain types of financial relationships between us or our customers
and healthcare service providers, including physicians and pharmacies. Laws
governing healthcare providers, payors and plans are often not uniform between
states, and could require us to undertake the expense and difficulty of
tailoring our business procedures, information systems or financial
relationships in order for our customers to be in compliance with applicable
laws and regulations. Compliance with such laws could also interfere with the
scope of our services, or make them less cost-effective for our customers.
There Is No Assurance That a Public Market for Our Common Stock Will Continue to
Develop.
There has only been a limited public market for our common stock. We
cannot predict the extent to which investor interest in our common stock will
lead to the development of a trading market or how liquid that market might
become, especially if a large number of shares are introduced into the market
upon conversion of the shares of our existing preferred stock.
We Are Listed on the Nasdaq SmallCap Market Which Can Be a Volatile Market.
Our common stock is quoted on the Nasdaq SmallCap Market. You may expect
trading volume to be low in such a market. Consequently, the activity of only a
few shares may affect the market and may result in wide swings in price and
volume. The market price of our common stock could fluctuate widely in response
to the following particular factors:
. actual or anticipated variations in operating results;
. announcements by us or our competitors of new products, significant
contracts, acquisition or relationships;
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. additions or departures of key personnel;
. future equity or debt offerings or our announcements of these offerings;
and
. economic well being of the healthcare industry.
In addition, the stock market as a whole has experienced significant price
and volume fluctuations, and the market prices of technology companies,
particularly Internet-related companies, have been highly volatile. These
fluctuations have often been unrelated or disproportionate to the operating
performance of individual companies. These broad market fluctuations may
materially adversely affect our stock price, regardless of our operating
results. Our stockholders may not be able to sell their shares at or above the
current Nasdaq SmallCap Market price. Our results of operations during future
fiscal periods might fail to meet the expectations of stock market analysts and
investors. This failure could lead the market price of our common stock to
decline and cause us to become the subject of securities class action lawsuits.
We Have Been the Subject of Delisting Proceedings Relating to the Nasdaq
SmallCap Market in the Past and No Assurance Can Be Given That We Will Be Able
to Maintain Our Listing in the Future.
Our failure to continue to meet all of the Nasdaq's requirements for
continued listing, compliance with which will be in part reliant on our ability
to improve our business, increase revenues and improve our earnings, could
result in delisting. Delisting from the Nasdaq SmallCap Market could impact our
stock price as well as make the development of a public market for our common
stock less likely.
We Do Not Intend to Pay Future Cash Dividends.
We currently do not anticipate paying cash dividends on our common stock at
any time in the near future. Any decision to pay dividends will depend upon our
profitability at the time, cash available and other factors. We may never pay
cash dividends or distributions on our common stock.
We have Broad Discretion in the Issuance of Additional Preferred Stock.
We are authorized to issue additional preferred stock. Preferred stock may
be issued in one or more series, the terms of which may be determined at the
time of issuance by the board of directors, without further action by common
stockholders (although in certain instances, existing preferred stockholders
must consent to the issuance of new classes of preferred stock having rights
senior to those of existing preferred stockholders), and may include voting
rights (including
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the right to vote as a series on particular matters), preferences as to
dividends and liquidation, conversion and redemption rights and sinking fund
provisions. The issuance of any series of preferred stock could affect the
rights of the holders of common stock, and therefore, reduce the value of the
common stock and make it less likely that holders of common stock would receive
a premium for the sale of their common stock. Currently, our Articles of
Incorporation authorize the issuance of one million shares of Preferred Stock.
Presently there are 5,000 shares of 6% Series A Preferred Stock outstanding,
4,000 shares of Series C 8% Convertible Preferred Stock outstanding, 74,130
shares of Series D 8% Convertible Preferred Stock outstanding and 66,886 shares
of Series P Preferred Stock outstanding.
We Depend on the Efficient Operation of the Internet, Other Networks and Systems
of Third Parties; If They Do Not Operate Efficiently, We Will Not Be Able to
Effectively Provide Our Products and Services.
We depend on the efficient operation of network connections from our
customers and their data processing vendors to our systems. Further, portions of
our revenue are dependent on continued usage by end-users of Internet services
and their connections to the Internet. Each of these connections, in turn,
depends on the efficient operation of web browsers, Internet service providers
and Internet backbone service providers, all of which have had periodic
operational problems or have experienced outages. Any operational problems or
outages in these systems would cause us to be unable to provide a real time
connection to these systems and we would be unable to process transactions for
end-users, resulting in decreased revenues. In addition, any system delays,
failures or loss of data, whatever the cause, could reduce customer satisfaction
with our products and services and harm our sales.
Competition from Third Parties Could Reduce or Eliminate Demand for Our Products
and Services.
The market for Internet services is highly competitive, and we expect that
competition will intensify in the future. We may not be able to compete
successfully against our current or future competitors and, accordingly, we
cannot be certain that we will be able to expand the number of our customers and
end-users, or retain our current customers or third-party service providers.
Many of our current and potential competitors have longer operating histories
and may be in a better position to produce and market their services due to
their greater financial, technical, marketing and other resources, as well as
their significantly greater name recognition and larger installed bases of
customers.
Security Breaches Could Damage Our Reputation and Business.
Our networks may be vulnerable to unauthorized access, computer viruses and
other disruptive problems. We transmit confidential information in providing our
services. Users of
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Internet and other electronic commerce services are concerned about the security
of transmissions over public networks. Therefore, it is critical that our
facilities and infrastructure remain secure and that our facilities and
infrastructure are perceived by the marketplace to be secure. A material
security breach affecting us could damage our reputation, deter healthcare
providers from purchasing our products or result in liability to us. Further,
any material security breach affecting our competitors could affect perception
in the marketplace of Internet services in general and have the same effects.
Concerns over security and the privacy of users may inhibit the growth of
the Internet and other online services generally, especially as a means of
conducting commercial transactions. Any well-publicized compromise of security
could deter people from using the Internet or using us to conduct transactions
that involve transmitting confidential information. We may need to expend
significant capital or other resources protecting against the threat of security
breaches or alleviating problems caused by security breaches. Although we intend
to continue to implement security measures, persons may be able to circumvent
the measures that we implement in the future. Eliminating computer viruses and
alleviating other security problems may result in interruptions, delays or
cessation of service to users accessing web sites that deliver our services, any
of which could harm our business. Our failure to respond to rapid change in the
market for Internet services could cause us to lose revenue and harm our
business.
Newly Introduced Products May Contain Undetected or Unresolved Defects.
Any new or enhanced products we introduce may contain undetected or
unresolved software or hardware defects when they are first introduced or as new
versions are released. In the past, we have discovered errors in our products
and it is possible that design defects will occur in new products. These defects
could result in a loss of sales and additional costs, as well as damage to our
reputation and the loss of relationships with our customers.
The Demand for Our Products and Services Could Be Negatively Affected by Reduced
Growth of Commerce over the Internet or Delays in the Development of the
Internet Infrastructure
Our future success depends heavily on the Internet being accepted and
widely used for commerce. If Internet commerce does not continue to grow or
grows more slowly than expected, our business would suffer. There are a number
of reasons that consumers and businesses may reject the Internet as a viable
commercial medium in general, or as a suitable vehicle for healthcare
transactions in particular. These reasons include potentially inadequate network
infrastructure, security concerns, slow development of enabling technologies,
reliability and quality problems, and issues relating to ease and cost of
access. In particular, the Internet infrastructure may not be able to support
the demands placed on it by increased Internet usage and data transmission
capacity requirements. In addition, delays in the development or adoption of new
standards and protocols required to handle increased levels of Internet
activity, or increased
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government regulation could cause the Internet to lose its viability as a
commercial medium. Even if the required infrastructure, standards, protocols or
complementary products, services or facilities are developed, we may incur
substantial expenses adapting our solutions to changing or emerging
technologies.
Failure to Attract and Retain Experienced Personnel and Senior Management Could
Harm Our Ability to Grow.
We believe that our future success will depend in large part upon our
continued ability to identify, hire, retain and motivate highly skilled
employees, who are in great demand. In particular, we believe that we must
expand our research and development, marketing, sales and customer support
capabilities in order to effectively serve the evolving needs of our present and
future customers. Competition for these employees is intense and we may not be
able to hire additional qualified personnel in a timely manner and on reasonable
terms. In addition, our success depends on the continuing contributions of our
senior management and technical personnel, all of whom would be difficult to
replace. The loss of any one of them could adversely affect our ability to
execute our business strategy. Most of our employees, including Paul W.
Harrison, are not currently bound by an employment agreement and we do not yet
have "key person" life insurance policies covering any of our employees.
Our Limited Ability to Protect Our Proprietary Technology May Adversely Affect
Our Ability to Compete, and We May Be Found to Infringe on the Proprietary
Rights of Others, Which Could Harm Our Business.
Our future success and ability to compete depends in part upon our
proprietary technology. None of our technology is currently patented. Instead,
we rely on a combination of contractual rights and copyright, trademark and
trade secret laws to establish and protect our proprietary technology. We
generally enter into confidentiality agreements with our employees, consultants,
resellers, customers and potential customers, limit access to and distribution
of our source code, and further limit the disclosure and use of other
proprietary information. We cannot assure that the steps taken by us in this
regard will be adequate to prevent misappropriation of our technology or that
our competitors will not independently develop technologies that are
substantially equivalent or superior to our technology. Despite our efforts to
protect our proprietary rights, unauthorized parties may attempt to copy or
otherwise obtain or use our products or technology. Monitoring unauthorized use
of our products is difficult, and while we are unable to determine the extent to
which piracy of our software products exists, software piracy can be expected to
be a persistent problem. In addition, the laws of some foreign countries do not
protect our proprietary rights to the same extent as do the laws of the United
States.
We are also subject to the risk of claims and litigation alleging
infringement of the intellectual property rights of others. Third parties may
assert infringement claims in the future with respect to our current or future
products. Any assertion, regardless of its merit, could require
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us to pay damages or settlement amounts and could require us to develop non-
infringing technology or pay for a license for the technology that is the
subject of the asserted infringement. Any litigation or potential litigation
could result in product delays, increased costs or both. In addition, the cost
of litigation and the resulting distraction of our management resources could
adversely affect our results of operations. We also cannot assure that any
licenses for technology necessary for our business will be available or that, if
available, these licenses can be obtained on commercially reasonable terms.
ITEM 2. FACILITIES
HealthWatch's corporate offices are currently located at 3525 Piedmont
Road, Building Seven, Suite 300, Atlanta, Georgia 30305. Because HealthWatch
is considering relocating its corporate offices to other office space in
Atlanta, Georgia, this space is leased on month-to-month terms. A portion of
this space is used by Halis under a cost sharing arrangement. Additionally,
HealthWatch leases office and warehouse space in Vista, California, under a
lease that began in January 1999 and continues for a period three years. The
annual lease payments under this lease are $49,200 and escalate at a rate of 4%
each year.
ITEM 3. LEGAL PROCEEDINGS
HealthWatch is not a party to any material legal proceeding. From time to
time, HealthWatch is involved in various routine legal proceedings incidental to
the conduct of its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of stockholders during the forth
quarter of the Company's recently completed fiscal year.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The number of record holders of HealthWatch's common stock on August 31,
2000 was 469. The high and low sale prices as reported on the Nasdaq SmallCap
Market are shown in the table below (adjusted to reflect the one-for-five
reverse stock split effective December 1999). These quotations represent prices
between dealers, and do not include retail markups, markdowns or commissions.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
------------- ---- ---
<S> <C> <C>
1998
September 30 $ 6.60 $3.15
December 31 5.15 1.88
1999
March 31 10.90 1.70
June 30 11.10 4.05
September 30 5.15 1.88
December 31 5.90 1.55
2000
March 31 9.06 2.00
June 30 4.75 1.31
</TABLE>
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
outstanding preferred stock restrict the Company's ability to pay dividends on
the common stock until all dividends on the preferred stock have been paid.
Fiscal Year 2000 Stock Issuances
On September 30, 1999 Sanford Schwartz, a then director of the Company, was
issued 17,894 shares of common stock in lieu of consulting fees valued at
$50,326 owed to him or his affiliated company for services provided to the
Company. Also on September 30, 1999, 10,000 shares of common stock was issued to
Richard Case, a then director of the Company, in lieu of consulting fees valued
at $20,300 due to Mr. Case for consulting services provided to the Company.
In December 1999, HealthWatch retained Commonwealth Associates, LP, an
investment banking firm located in New York, to assist it in raising capital
needed for ongoing working capital and implementation of HealthWatch's business
plan.
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In December 1999 and February 2000, HealthWatch completed a $400,000 equity
bridge financing (the "Bridge Financing") pursuant to which affiliates of the
Commonwealth Associates purchased an aggregate of 4,000 shares of HealthWatch's
Series C Preferred Stock (convertible into HealthWatch common stock at a price
of $1.875 per share) and received five-year warrants (the "Bridge Warrants") to
purchase an aggregate of 666,669 shares of HealthWatch common stock at an
exercise price of $1.875 per share.
In February 2000, an affiliate of Commonwealth Associates agreed to make a
$2,000,000 line of credit available to HealthWatch through one of its affiliates
(the "Line of Credit"). The Line of Credit was secured by all assets of the
Company. Funds advanced pursuant to the Line of Credit carried an interest rate
of 8% per annum, payable at maturity. The maturity date was set at the earlier
of (i) 12 months from the date of issuance, (ii) upon the Company raising a
minimum of $5,000,000 from any debt or equity placement or (iii) upon a merger
or combination of the Company or the sale of all or substantially all of the
assets of the Company. In February 2000, HealthWatch received advances of
$500,000 under the Line of Credit which were repaid in full in May 2000.
HealthWatch issued the lender five-year warrants to purchase 1,000,000 shares of
HealthWatch common stock (the "Line of Credit Warrants") exercisable at $3.50
per share subject to adjustment upward under certain circumstances.
In March 2000, HealthWatch began an offering of its Series D 8% Convertible
Preferred Stock. The offering consisted of units comprised of (i) 1,000 shares
of its Series D 8% Convertible Preferred Stock (the "Series D Preferred Stock")
and (ii) five-year warrants to purchase an amount equal to 25% of the shares of
HealthWatch common stock into which the Series D Preferred Stock are initially
convertible (28,571 shares of common stock per unit). 50 units (the "Minimum
Offering") were offered on a "best efforts, all-or-none" basis and the remaining
50 units (a total of 100 units being the "Maximum Offering") were offered on a
"best efforts" basis. The Maximum Offering could be increased by up to 100
additional units at the discretion of Commonwealth Associates and HealthWatch,
for the purpose of covering over-subscriptions. The sale of units in excess of
the Maximum Offering was conditioned upon approval by HealthWatch stockholders
of an increase in its authorized capital stock at its next meeting of
stockholders.
In May 2000, HealthWatch completed the Series D Preferred Stock offering,
selling 74,130 shares of Series D Preferred Stock with related warrants for
approximately $7.4 million. In connection with the above transactions in which
Commonwealth Associates acted as placement agent, HealthWatch paid fees totaling
$722,300 to Commonwealth Associates and issued 529,500 five-year warrants for
the purchase of HealthWatch common stock at an exercise price of $3.50 per
share.
In addition to the above transactions, during fiscal year ending June 30,
2000, HealthWatch issued 28,572 shares common stock for cash proceeds totaling
$50,000; 311,491 shares of common stock for services and accrued liabilities
valued at $631,766 and 316,990 shares of common stock upon the conversion of
debentures and accrued interest totaling $594,356. HealthWatch also received
$26,178 upon the exercise of warrants for 65,761 shares of the Company's common
stock and issued 734,908 shares of the Company's common stock upon the
conversion of 224,000 shares of its Series A preferred stock.
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<PAGE>
Fiscal Year 1999 Stock Issuances
Pursuant to previously executed agreements, during the three-month period
ended December 31, 1998, the Company completed the acquisition of PHE. The
Shareholders of PHE received 334,443 shares (pre December 1999 Reverse Stock
Split) of the Company's Series P Preferred Stock, stated value $10.00 per share,
and other consideration in the merger. PHE was merged into MERAD Software, Inc.,
a Nevada corporation, and a wholly-owned subsidiary of the Company. At the time
of the merger, PHE held 6,177,010 shares of Halis common stock. As a result of
the acquisition of PHE, 888,400 shares of the Company's common stock were
cancelled and retired.
During the three-month period ended March 31, 1999, the Company issued a
total of 1,000,804 shares of common stock for an aggregate purchase price of
$425,000 pursuant to private placement of its securities, and an equal number of
warrants at exercise prices ranging from $0.49 to $0.86 per share expiring two
years after their issuance.
During the three-month period ended June 30, 1999, the Company issued a
total of 209,152 shares of common stock for an aggregate purchase price of
$200,000 pursuant to private placement of its securities, and 100,000 warrants
to purchase common stock at an exercise price of $1.59 per share expiring two
years after their issuance.
During the year ended June 30, 1999, options to purchase a total of 55,000
shares of the Company's common stock were exercised for a total of $36,300.
Fiscal Year 1998 Stock Issuances
During February 1998, the Company completed a stock exchange with PHE
whereby the Company issued 448,400 shares of common stock to PHE in exchange for
1,400,000 shares of Halis common stock.
During June 1998, the Company sold to a limited number of private investors
1,145,000 shares of its 6% Series A Preferred Stock, stated value $1.00 per
share (the "Series A Preferred"). The Series A 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 have not been registered under
the Securities Act of 1933. As of August 31, 2000, all but 5,000 shares of the
Series A Preferred Stock had been converted into shares of common stock.
The Company issued all of the securities noted above without registration
under the Securities Act of 1933, as amended, in reliance upon an exemption from
the registration
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requirements of such Act contained in Section 4(2) thereof.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with the
consolidated financial statements of the Company and its subsidiaries contained
elsewhere herein.
GENERAL
The Company entered into various agreements during fiscal 1998 with Halis,
Inc., a healthcare information technology company, and Paul Harrison
Enterprises, Inc. ("PHE"), an affiliate of Halis and the then 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.
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 1999 was increasingly on the development of
its IT business. During fiscal 1999, the Company continued to emphasize the IT
business and is attempting to grow this business through a combination of
licensing partners, selected strategic acquisitions and internal sales of its
software and services. 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. The Company has
subsequently increased its interest in Halis to approximately 25% of Halis'
outstanding common stock.
During fiscal 2000, the Company continued efforts to develop proprietary
technology utilizing MERAD and to market, as a reseller, Halis' Healthcare
Enterprise System to the Company's customers. The Company expects to continue to
expand its collaborative efforts with Halis and to expand its efforts to market
Halis' Healthcare Enterprise System. As such, on June 29, 2000, the board of
directors of HealthWatch and Halis executed an agreement and plan merger whereby
Halis would become a wholly owned subsidiary of HealthWatch. Management of both
companies believe that the combined company's breadth of technology, products,
management and operational experience and financial resources should enable it
to respond more quickly and effectively to technological change, intensifying
competition, increasing consolidation and evolving market demands. Moreover,
management of HealthWatch and Halis believe that the combined company could
achieve operating synergies through cross marketing of
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<PAGE>
each company's products and services, as well as possible cost savings related
to more efficient administrative and support functions of the combined
companies. See "Item 1 - Recent Developments" for more information about the
terms of the merger agreement.
HealthWatch has incurred significant operating losses during the past
several years and at June 30, 2000 had a retained earnings deficit of
$23,041,022. The Company has acquired additional equity capital to sustain
operations and to continue its business development efforts.
FINANCIAL CONDITION
Total assets at June 30, 2000 were $7,611,990, representing an increase of
$4,064,018 from June 30, 1999. Investment in marketable securities, other
current assets, and investments in and advances to Halis, Inc., and additional
capitalized intangible assets represented $3,935,500, $256,362, $291,452 and
$217,496, respectively, of the increase. The investment in marketable
securities is the result of additional equity capital raised by the Company
during fiscal 2000. The increase was offset by amortization of intangible assets
and decreases in accounts receivable and inventory of $536,782, $63,369 and
$48,387, respectively.
Current liabilities decreased by $1,103,335 from $1,643,869 at June 30,
1999 to $540,534 at June 30, 2000. The decrease is primarily attributable to
the conversion of accrued expenses and shareholder loans totaling $469,028 into
common stock of the Company, the conversion of debentures and related accrued
interest of $455,000 and $139,356 into common stock of the Company and a gain on
extinguishment of debt of $165,405. These decreases are offset by an increase in
accounts payable of $140,641.
Shareholders' equity increased from $1,904,103 at June 30, 1999 to
$7,071,456 at June 30, 2000, an increase of $5,167,353. This increase is
attributable to: (1) the issuance of 276,301 shares of common stock for services
valued at $584,109; (2) conversion of $65,000 in shareholder loans for the
issuance of 34,667 shares of common stock; (3) conversion of $53,283 of
additional consideration due to former PHE shareholders for 28,417 shares of
common stock; (4) conversion of debentures and accrued interest of $594,356 into
316,990 shares of common stock of the Company; (5) exercise of warrants for the
issuance of 65,761 shares of common stock for $26,178; and (6) net proceeds of
$50,000, $375,000 and $6,587,522 from the issuance of 28,572 shares of common
stock, 4,000 shares of Series C convertible preferred stock and 74,130 shares of
Series D convertible preferred stock, respectively. Offsetting decreases are
attributable to an unrealized holding loss on marketable securities of $113,400
and a net loss for the twelve month period of $3,054,695.
RESULTS OF OPERATIONS
2000 COMPARED TO 1999
---------------------
Revenues for the 2000 fiscal year decreased 54.81% compared to the similar
period in 1999. The decrease is the result of the Company's shift from a product
driven supply company to
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<PAGE>
a software information technology company. During fiscal 2000, product sales
were minimal and almost all of the revenues generated were the result of
supplies, service and repair work. The Company recognized income of $21,935 and
$66,087 for the twelve month periods ended June 30, 2000 and June 30, 1999,
respectively, under its business collaboration agreement with Halis for sales of
the HES System. Such amounts are included in product sales.
Cost of products sold were 79.4% lower in fiscal 2000, while the gross
margin was 64.8% in 2000 compared to 22.9% for 1999. The lower cost of products
sold and higher gross margins in 2000 were due primarily to greatly reduced
manufacturing overhead expenses, previous write-downs of slow moving inventory
to lower of cost or market and a general shift from product sales to service and
support.
Selling, general and administrative expenses as a percent of sales were
356% for fiscal 2000 compared to 108.2% for fiscal 1999. The increase in fiscal
2000 over 1999 is due primarily to increased consulting and professional fees
resulting from the Company's shift from a product supply company to a software
information technology company, the cost associated with implementing the
Company's business plan and SEC and Nasdaq compliance reporting.
Research and development expenses decreased 52.3% in 2000 due primarily to
the Company's shift from a product driven supply company to a software
information technology company and the capitalization of MERAD Technology costs
totaling $217,496 in fiscal 2000.
Depreciation and amortization increased 3.5% for fiscal 2000 compared to a
19.4% increase for fiscal 1999. The increase in 1999 was associated with the
Company's October 1, 1998 acquisition of the MERAD Technology and related
amortization.
Equity loss from investment in Halis increased from $23,702 during fiscal
1999 to $523,450 during fiscal 2000. The losses are a result of the Company
changing its method of accounting for its long-term investment in Halis to the
equity method during fiscal 1999, as required by generally accepted accounting
principles. The $523,450 and $23,702 represents the Company's pro-rata share of
Halis' net loss during the Company's fiscal years 2000 and 1999, respectively,
plus charges totaling $184,532 and $62,674, respectively, for the excess
carrying value of the Halis investment over its underlying net asset value. The
other-than temporary decline in investment in Halis of $472,810 in fiscal 2000
was a write down of the investment in Halis that was deemed to be other than
temporary.
Interest income of $110,606 in fiscal 2000 is related to the investment in
marketable securities. Gain on extinguishment of debt of $165,405 is
attributable to a liability from the early 1990's related to a previously
acquired, inactive subsidiary, that the Company determined was no longer
appropriate. The Company has received no communication from the creditor and
management believes that the Company never will. A loss from impairment of
intangible assets of $213,286 during fiscal 2000 relates to the write-off of an
intangible asset associated with the Life Sciences business. Interest expense
decreased to $36,324 in fiscal 2000 compared to $67,659 in fiscal 1999 due to
the conversion of interest bearing debentures into
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<PAGE>
common stock during fiscal 2000.
The Company has discontinued the sale of its medical products (i.e., the
MVL and Pacer products) and will continue to focus on its information technology
business, in addition to the supplies and technical support offered to it
customer base relating to its medical products still in service. As a result of
the restructuring during fiscal 1999 and 2000, the Company has improved its
financial condition and is now capable of devoting its resources to the
marketing and distribution of the HES product.
1999 COMPARED TO 1998
---------------------
Revenues for the 1999 fiscal year decreased 11.7% compared to the similar
period in 1998. The decrease is the result of a shift of the Company's revenues
from its Pacer product to its MVL product and a movement away from revenues
generated from a former subsidiary based in the United Kingdom (which was sold
in fiscal 1998). Additionally, during the fourth quarter of fiscal 1999, MVL
sales were minimal and almost all of the revenues generated were the result of
supplies, service and repair work.
Cost of products sold were 31% lower in fiscal 1999 due to operational
improvements and decreased equipment sales. The gross margin was 22.9% in fiscal
1999 compared to 1.8% for fiscal 1998. The higher gross margins in fiscal 1999
were due primarily to maturation of the MVL product and lower costs associated
with it, an increased percentage of revenues from supplies, service and repair
work, and the reduction of costs associated with downsizing the Company.
Selling, general and administrative expenses as a percent of sales were
108.3% for fiscal 1999 compared to 115.8% for fiscal 1998. The decrease in
fiscal 1999 was due primarily to the downsizing of the Company. Research and
development expenses increased 24.1% in fiscal 1999 due primarily to a change in
the business focus to service and providing technical support to Halis under the
business collaboration agreement.
Depreciation and amortization increased 19.4% for fiscal 1999 compared to a
3.7% decrease for fiscal 1998. The increase is almost entirely due to additional
amortization expense related to the Company's acquisition of PHE.
Equity loss of $23,702 during fiscal 1999 is the result of the Company
changing its method of accounting for its long-term investment in Halis to the
equity method during fiscal 1999, as required by generally accepted accounting
principles. The $23,702 represents the Company's pro-rata share of the income of
Halis for the Company's fiscal year less a $62,674 charge for the excess
carrying value of the investment over its underlying net asset value. The
unrealized loss on marketable equity securities - related party of $1,824,605 in
1998 was a write down of the investment in Halis that was deemed to be other
than temporary.
Primarily due to a shift in products from the Pacer to MVL, an increased
focus on service and repair work, and the downsizing of the Company, which
resulted in increased margins and
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<PAGE>
decreased overhead, the Company was able to reduce its net loss from $4,084,474,
or $2.45 per share, for fiscal 1998 to $1,748,931, or $0.65 per share, for
fiscal 1999. Not including the write down on marketable equity securities in
fiscal 1998, the net loss was reduced by $510,938, or 23%.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, the Company had $16,264 of cash and $3,935,500 of
investments in marketable securities. During the fiscal year ended June 30,
2000, operating activities consumed $1,523,796 of cash as compared to $1,074,541
for the same period in fiscal 1999. The increase in cash used in operations for
fiscal 2000 is primarily the result of increased consulting and professional
fees.
Investing activities used $5,520,386 and $319,303 of cash during fiscal
2000 and 1999, respectively. The increase is primarily attributable to the
capital raised through private placements that was subsequently invested in
$4,000,000 of marketable securities. Also during fiscal 2000 the Company
purchased 5,000,000 additional shares of Halis common stock for a total of
$1,000,000. Other investing activities during fiscal 2000, consisted of $217,496
and $287,712 of capitalized MERAD technology costs and an increase in "Due from
Halis," respectively.
Due to the Company's operating losses, it has been required to raise
additional equity capital to fund its operations. Since the beginning of fiscal
2000, the Company has raised $7,038,700 through the sale of 28,572 shares of
its common stock, 4,000 shares of its Series C Convertible Preferred Stock,
74,130 shares of its Series D Convertible Preferred Stock, and the exercise of
warrants for 65,761 shares of common stock. During fiscal 2000, the Company's
Series A preferred stockholders, converted 224,000 shares of Series A preferred
stock into 734,908 shares of common stock in accordance with the conversion
rights under the Series A Preferred Stock.
The Company's 10% Convertible Secured Debentures in the principal amount of
$480,000 were due and payable on March 1, 1998. During fiscal 2000, the
debenture holders converted $455,000 and $139,356 in related accrued interest
into 316,990 shares of the Company's common stock. At June 30, 2000, only
$25,000 of the debentures remained outstanding.
Due to the Company's success in raising additional capital through the
private placement of its securities, management has begun to implement its
business plan, which includes securing the additional personnel needed to manage
the marketing and advertising of its products, additional investment in research
and development and the acquisition of strategic partners needed to grow the
Company's revenues. During the quarter ended March 31, 2000, HealthWatch hired
a Chief Operating Officer with an expertise in the healthcare information
technology industry to assist the Company in marketing and developing its
products. The Company has also recently hired a Chief Financial Officer. In
addition, the Company entered into a merger agreement to acquire Halis, an
information technology company which has developed transaction processing
applications for the healthcare industry. HealthWatch and Halis
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have a long history with each other, as HealthWatch is the largest Halis
shareholder and Paul W. Harrison is the President, Chief Executive Officer and
Chairman of both companies. Management believes that securing the business
contacts and application products of Halis, specifically the HES System, will
provide HealthWatch with a key element needed to succeed in the development of
its information technology business.
ITEM 7. FINANCIAL STATEMENTS.
The following financial statements and reports of the Company's independent
auditors are at the end of this report beginning at Page F-1:
HealthWatch, Inc. and Subsidiaries
----------------------------------
(1) Report of Independent Public Accountants - Tauber & Balser, P.C.
(2) Consolidated Balance Sheet as of June 30, 2000 and 1999
(3) Consolidated Statements of Operations For The Years Ended June 30, 2000 and
1999
(4) Consolidated Statements of Cash Flows For The Years Ended June 30, 2000 and
1999
(5) Consolidated Statements of Stockholders' Equity (Deficit) For The Years
Ended June 30, 2000 and 1999
(6) Notes to Consolidated Financial Statements
Halis, Inc. and Subsidiaries
----------------------------
(1) Report of Independent Public Accountants - Tauber & Balser, P.C.
(2) Consolidated Balance Sheet as of December 31, 1999
(3) Consolidated Statements of Operations For The Years Ended December 31, 1999
and 1998
(4) Consolidated Statements of Cash Flows For The Years Ended December 31, 1999
and 1998
(5) Consolidated Statements of Stockholders' Equity (Deficit) For The Years
Ended December 31, 1999 and 1998
(6) Notes to Consolidated Financial Statements
(7) Unaudited Consolidated Balance Sheet as of June 30, 2000.
(8) Unaudited Consolidated Statement of Operations for the Three and Six Months
Ended June 30, 2000 and 1999
(9) Unaudited Consolidated Statement of Cash Flows for the Six Months Ended
June 30, 2000 and 1999
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On June 4, 1999, the Company dismissed its independent auditors, Silverman
Olson Thorvilson & Kaufman LTD, Minneapolis, Minnesota ("Silverman Olson"), and
on the same date authorized the engagement of Tauber & Balser, P.C., Atlanta,
Georgia ("Tauber & Balser") as its independent auditors for the fiscal year
ended June 30, 1999. The Company formally engaged Tauber & Balser on June 4,
1999. The Board of Directors of the Company approved each of these actions.
Because the Company recently relocated its corporate headquarters to Atlanta,
Georgia,
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the Board of Directors concluded that it would be more economical to use a
regional firm based in Atlanta to perform its audit for the current fiscal year.
Tauber & Balser also acts as independent auditors for Halis, Inc., an affiliate
of the Company, and in which the Company owns in excess of 25 percent of its
outstanding common stock.
Silverman Olson audited the financial statements for the Company for the
fiscal year ended June 30, 1998. The report of Silverman Olson on the financial
statements of the Company for the fiscal years ended June 30, 1998 contained an
additional paragraph which modified each of the reports to emphasize that
Silverman Olson believed there was substantial doubt about the Company's ability
to continue as a going concern. Except as set forth in the preceding sentence,
the reports on those audits did not contain any adverse opinions or a disclaimer
of opinions, nor was it qualified as to uncertainty, audit scope and accounting
principles.
In connection with the audit of the fiscal year ended June 30, 1998 and
through the period ended June 4, 1999 there were no disagreements with Silverman
Olson on any matter of accounting principle or practice, financial statement
disclosure or audit procedure or scope. Additionally, Silverman Olson did not
advise the Company that (i) the internal controls necessary for the Company to
develop reliable financial statements did not exist; (ii) information had come
to its attention that led it to no longer be able to rely on management's
representations, or that made it unwilling to be associated with the financial
statements prepared by management; (iii) there existed a need to expand
significantly the scope of its audit, or that information had come to the
attention of Silverman Olson during the fiscal periods, which, if further
investigated, may (a) materially impact the fairness or reliability of either: a
previously issued audit report or the underlying financial statements or the
financial statements issued or to be issued covering the fiscal period
subsequent to the date of the most recent financial statements covered by an
audit report (including information that may prevent it from rendering an
unqualified audit report on those financial statements) or (b) cause Silverman
Olson to be unwilling to rely on management's representations or be associated
with the Company's financial statements, and due to the dismissal of Silverman
Olsen, did not so expand the scope of its audit or conduct such further
investigation; or (iv) information had come to the attention of Silverman Olson
that it concluded materially impacts the fairness or reliability of either (a) a
previously issued audit report or the underlying financial statements or (b) the
financial statements issued or to be issued covering the fiscal period
subsequent to the date of the most recent financial statements covered by an
audit report (including information that, unless resolved to the satisfaction of
Silverman Olson would prevent it from rendering an unqualified audit report on
those financial statements), and due to the dismissal of Silverman Olson, the
issue has not been resolved to the satisfaction of Silverman Olson prior to its
dismissal.
Further, during the fiscal year ended June 30, 1999, neither the Company or
any of its representatives sought the advice of Tauber & Balser, P.C. regarding
the application of accounting principles to a specific completed or contemplated
transaction or the type of audit opinion that might be rendered on the Company's
financial statements, which advice was an important factor considered by the
Company in reaching a decision as to the accounting, auditing or financial
reporting issue.
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PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
Executive Officers and Directors
The following table sets forth information regarding current executive
officers and directors of HealthWatch:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Paul W. Harrison 45 Chairman of the Board of Directors, President
and Chief Executive Officer
David M. Engert 49 Chief Operating Officer and Director
Marilyn May 37 Vice President - Business Development
A. E. Harrison 40 Vice President - Research & Development
Thomas C. Ridenour 39 Chief Financial Officer
John Gruber 32 Director
Harold Blue 39 Director
Robert Tucker 66 Director
John R. Prufeta 39 Director
</TABLE>
Paul W. Harrison has served as Chairman of the board of directors since
October 1997 and has acted as CEO since October 1998. He is also Chairman and
CEO of Halis, which is approximately 25% owned by HealthWatch. Previously, Mr.
Harrison was the CEO of Paul Harrison Enterprises, Inc. ("PHE"), an information
technology management company, from February 1995 until it was merged into
HealthWatch in October 1998. Prior to PHE, Mr. Harrison was an executive with
HBO & Company, which is now McKesson HBOC (NYSE: MCK), from June 1993 until
December 1994 and was CEO of Biven Software, Inc. from April 1991 to June 1993
at which time Biven was acquired by HBOC. Prior to HBOC, Mr. Harrison served as
CEO of SOTRISS from 1981 to 1989. SOTRISS was an information technology company
that was sold to a publicly traded Fortune 500 company in 1989. Mr. Harrison's
education includes a Bachelors Degree from Georgia State University. He is a
Chartered Financial Consultant, a Chartered Life Underwriter and a Fellow of the
Life Management Institute.
David M. Engert has served as Chief Operating Officer on a limited basis
since February 2000 and on a full time basis since April 24, 2000. On June 1,
2000, Mr. Engert was appointed to the board of directors. Most recently, Mr.
Engert was a Senior Vice President and General Manager of the Managed Care Group
at McKesson HBOC, Inc. He founded that group in 1993
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after holding the President and Chief Operating Officer position at Biven
Software, Inc. Mr. Engert was also one of the first Directors of Sales at
Sybase, Inc. where he was employed from 1988 to 1992. He began his career at
companies such as Computer Corporation of America, Boeing Computer Services and
Xerox Computer Services. Mr Engert's education includes a B.S. in Industrial
Engineering from Louisiana State University.
Marilyn May is Vice President of Business Development and has served in
that capacity since January 2000. Ms. May joined HealthWatch in September 1996
and previously served as Director of Marketing for HealthWatch and Halis. Prior
to joining Halis, Ms. May was in marketing for Proctor and Gamble. She also
worked in operations management for Pepsico. Ms. May's education includes an
MBA from the University of Tennessee.
A. E. Harrison is Vice President of Research and Development. He has been
with the HealthWatch since April 1999. From 1995 to March 1999, Mr. Harrison
served as Vice President of R&D for Halis. Previously, Mr. Harrison was in
software development for HBO and Company, which is now McKesson HBOC (NYSE:
MCK). Prior to HBOC, he was in several information technology companies
including SOTRISS, Marcom, a publicly traded telecommunications company, and
ITT, a diversified Fortune 500 communications company.
Thomas C. Ridenour has served as Chief Financial Officer since August
2000. Prior to joining HealthWatch, Mr. Ridenour served as Senior Vice
President and Chief Financial Officer of Nationwide Credit, Inc. Prior to
Nationwide Credit, Mr. Ridenour served in financial management roles at American
Security Group, Primerica Financial Services, and Southmark Corporation. Mr.
Ridenour is a CPA and holds a B.S. Accounting degree from the University of
South Carolina.
John Gruber has served on the board of directors since September 28, 2000.
Mr. Gruber is currently a Senior Healthcare Research Analyst at Commonwealth
Associates, L.P. From 1997 to 1999, Mr. Gruber was a Management Consultant with
Ernst and Young, L.L.P. In addition, from 1990 to 1997, Mr. Gruber held several
executive positions at Mount Sinai Medical Center and St. Lukes/Rosevelt
Hospital Center in New York City. Mr. Gruber has an MBA in Healthcare
Administration from a joint program of Baruch College and the Mount Sinai School
of Medicine.
Harold Blue has served on the board of directors since September 28, 2000.
Mr. Blue is currently Vice Chairman of ProxyMed, Inc., a publicly-held company
providing physician office software products, Internet application services and
network services to the healthcare community. Most recently, Mr. Blue served as
Chairman of the Board and Chief Executive Officer of ProxyMed, Inc. from 1993 to
August 2000. Prior to ProxyMed, Inc., Mr. Blue founded Best Generics, Inc. which
was later sold to Ivax Corporation, a pharmaceutical manufacturer, where he
served as a member of Ivax's board of directors. From 1990 to 1994, Mr. Blue
served as President and Chief Executive Officer of a physician practice
management company which was acquired by InPhyNet Medical Management, Inc. Mr.
Blue has also served on numerous boards of directors of publicly-held companies.
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Robert Tucker has served on the board of directors since June 1, 2000. Mr.
Tucker has been president and chief executive officer of Specialty Surgicenters,
Inc. since 1997. From 1980 to 1995, he was chairman and chief executive officer
of Scherer Healthcare, Inc., a publicly traded healthcare products and services
company and was a member of the board of directors of Marquest Medical Products,
Inc. Mr. Tucker has been involved throughout his business career in the medical
industry, having held executive positions with Johnson and Johnson, Howmedica
and Story Instrument Company, among others. Mr. Tucker, a Korean war veteran,
is a graduate of Georgia State University and serves as an officer and director
of several closely held companies.
John R. Prufeta has served on the board of directors since July 14, 2000.
Mr. Prufeta currently serves as president and chief executive officer of Medix
Resources, Inc., a publicly held Internet-based healthcare communication, data
integration and transaction processing provider for the healthcare industry. He
has served in those capacities since October 1998. Mr. Prufeta is managing
general partner of TCG Developments, a leading healthcare incubator company and
is also chairman of the board of OnPoint Partners, a national technology and
services executive search firm. Mr. Prufeta serves as a trustee for Silvercrest
Services, a subsidiary of The New York Hospital of Queens. He is additionally
on the Advisory Board of The National Managed Care Congress. Mr. Prufeta's
education includes a B.S. in management from St. Johns University and the
Owner/President Management Program at Harvard University, Graduate School of
Business.
Recent Changes in Management
On September 28, 2000, Sheldon Misher and Robert Priddy resigned as
directors of the Company. Messrs. Misher and Priddy had served as directors of
the Company since April 5, 2000. At the time of their resignations, the Company
has not received any written communication from either Mr. Misher or Mr. Priddy
with regard to any disagreements with the Company relating to its operations,
policies or practices.
In March 2000, Richard T. Case and Sanford L. Schwartz resigned as
directors of the Company. Mr. Case had served as a director of the Company from
1997 and had also served as a director during the period between 1990 and 1994.
Mr. Schwartz had served as a director of the Company since 1983. At the time of
their respective resignations, neither Mr. Case nor Mr. Schwartz had any
disagreements with the Company relating to its operations, policies or
practices.
Larry Fisher served as a director of the Company from 1997 until his
resignation effective June 1999. At the time of his resignation, Mr. Fisher and
the Company did not have any disagreements relating to the Company's operations,
policies or practices.
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ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth information concerning the compensation
earned during the fiscal year ended June 30, 2000 by HealthWatch's Chief
Executive Officer and other officers or directors who received compensation of
$100,000 or more in Fiscal 2000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Bonus or Compensation
Name and Fiscal Annual Other Annual Awards/Number of
Principal Position Year Salary Compensation Option
($) ($) Shares Granted
<S> <C> <C> <C> <C>
Paul W. Harrison (a) 2000 $176,000 (b) - 200,000
President and Chief 1999 75,000 (c) - 116,667
Executive Officer 1998 - (d) - 53,333
A. E. Harrison(f) 2000 $118,577 (e) - 50,000
Vice President 1999 25,000 - -
1998 - - -
</TABLE>
(a) Mr. Harrison became President and CEO of the HealthWatch effective October
1998.
(b) Includes 9,333 shares of the Company's common stock valued at $17,500 paid
in lieu of salary on December 14, 1999 and 20,000 shares of the Company's
common stock valued at $37,500 paid in lieu of salary on February 16, 2000.
(c) Mr. Harrison entered into a consulting agreement in February 1999 whereby
he was to receive a monthly fee of $12,500 effective as of January 1, 1999.
As of June 30, 1999, $75,000 of consulting fees had accrued although Mr.
Harrison received only $12,500 of this amount. The balance of $62,500 was
paid in fiscal 2000 on December 14, 1999 in the form of 33,334 shares of
the Company's common stock.
(d) During fiscal year 1998, HealthWatch was obligated under a consulting
agreement dated October 10, 1997 to pay consulting fees to PHE of $5,000
per month commencing on January 1, 1998.
(e) Includes 6,667 shares of the Company's common stock valued at $12,501 paid
in lieu of salary on December 14, 1999.
(f) A.E. Harrison joined HealthWatch effective April 1, 1999.
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Option Grants in Last Fiscal Year
The following table sets forth stock options and stock purchase rights
granted to each of the named executive officers during the fiscal year ended
June 30, 2000. A total of 580,000 options and stock purchase rights were
granted in fiscal 2000, all under the Company's stock option plans.
Options and stock purchase rights were granted at an exercise price equal
to the fair market value of HealthWatch's common stock, as determined by the
board of directors, on the date of grant based on its current stock price as
quoted on the Nasdaq SmallCap Market.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Name Number of Percent of Total Exercise or Expiration
Options Granted Options Granted to Base Price Date
Employees and (Per Share)
Directors in Fiscal
2000
<S> <C> <C> <C> <C>
Paul W. Harrison 200,000 34.48% $3.50 2/7/05
20,000 3.45% $2.25 1/21/05
A. E. Harrison 10,000 1.72% $2.188 12/2/04
10,000 1.72% $2.250 1/21/05
30,000 5.17% $3.50 2/7/05
</TABLE>
Option Exercises and Holdings
The following table sets forth for each of the named executive officers of
HealthWatch certain information concerning the number of shares subject to both
exercisable and unexercisable stock options at June 30, 2000. Also reported are
values realized in respect thereof, by the named executive officers and the
number stock options and the value of said stock options held by the named
executive officers as of June 30, 2000.
<TABLE>
<CAPTION>
Shares Acquired on Value Number of Unexercised Options
Name Exercise Realized at 6/30/00 Exercisable/
($) Unexercisable (a)
<S> <C> <C> <C>
Paul W. Harrison (b) None - 390,000/0
A. E. Harrison None - 50,000/0
</TABLE>
__________________
(a) The market price of the HealthWatch's common stock on June 30, 2000 was
$1.34 per share. None of these options were "in-the-money" at June 30, 2000.
(b) Mr. Harrison also holds 14,545 warrants exercisable at a price of $2.235
per share, 3,333
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warrants exercisable at a price of $8.60 per share and 15,094 warrants
exercisable at a price of $4.306 per share. All of these warrants are
immediately exercisable.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information with respect to beneficial
ownership of the HealthWatch common stock by each person who beneficially owns
more than 5% of the HealthWatch common stock, by each of its executive officers
named in the management section, by each of its directors, and by all executive
officers and directors as a group. The table shows the number of shares and the
percentage of the HealthWatch common stock owned as of June 30, 2000. Unless
otherwise indicated, HealthWatch believes all persons in the table have sole
voting and investment power for all shares beneficially owned by them.
<TABLE>
<CAPTION>
Number of Shares of
HealthWatch Common Percentage of
Stock Beneficially Outstanding Shares
Name of Beneficial Owner Owned Beneficially Owned
------------------------ -------------------- ----------------------
<S> <C> <C>
Paul W. Harrison (1) 561,170 21.9%
John Gruber - -
Harold Blue - -
David M. Engert (2) 139,216 6.1%
Robert Tucker - -
John R. Prufeta (3) 8,929 0.4%
All Directors & Executive Officers as a
Group (9 persons) (4) 816,003 29.16%
</TABLE>
----------------
(1) Includes 16,667 shares owned by Halis, of which Mr. Harrison is the
Chairman of the board of directors, President, and Chief Executive Officer
and a major stockholder and 422,972 shares subject to warrants and options
exercisable within 60 days. Does not include 25,080 shares of Series P
Preferred Stock which will be convertible into 250,800 shares of
HealthWatch common stock only after stockholder approval is obtained.
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<PAGE>
(2) Includes 123,333 shares subject to warrants and options exercisable within
60 days. Does not include 3,177 shares of Series P Preferred Stock which
will be convertible into 31,770 shares of HealthWatch common stock only
after stockholder approval is obtained.
(3) Includes 8,929 shares issuable upon conversion of Series D Preferred and
warrants exercisable within 60 days.
(4) Includes 655,244 shares subject to Series C Preferred, Series D
Preferred, warrants and options exercisable within 60 days.
Beneficial ownership is based on information provided to us, and the
beneficial owner has no obligation to inform us of or otherwise report any
changes in beneficial ownership. Except as indicated, and subject to community
property laws when applicable, the persons named in the table above have sole
voting and investment power with respect to all shares of HealthWatch common
stock shown as beneficially owned by them. Messrs. Paul W. Harrison's, A.E.
Harrison's and Engert's and Ms. May's address is 3525 Piedmont Road, Building
Seven, Suite 300, Atlanta, Georgia 30305. Mr. Gruber's address is 830 Third
Avenue, New York, New York 10022. Mr. Blue's address is 2555 Davie Road, Suite
110, Ft. Lauderdale, Florida 33317. Mr. Tucker's address is 555 Sun Valley
Drive, Suite P-1, Roswell, Georgia 30076. Mr. Prufeta's address is 305 Madison
Avenue, Suite 2033, New York, New York 10165.
The percentages shown are calculated based upon 2,142,751 shares of
HealthWatch common stock outstanding on June 30, 2000. In calculating the
percentage of ownership, all shares of HealthWatch common stock that the
identified person or group had the right to acquire within 60 days of June 30,
2000 upon the exercise of options and warrants are deemed to be outstanding for
the purpose of computing the percentage of shares of HealthWatch common stock
owned by such person or group, but are not deemed to be outstanding for the
purpose of computing the percentage of the shares of HealthWatch common stock
owned by any other person.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Halis, Inc.
Halis, based in Atlanta, Georgia, is a systems developer of information
technology and provider of related services, focusing on the healthcare
industry. Halis also provides third party administrative services for
healthcare plans of large and small companies throughout the United States. As
of June 30, 2000, HealthWatch owned approximately twenty-five percent of Halis'
outstanding capital stock and was Halis' single largest stockholder.
HealthWatch accounts for its investment in Halis under the equity method,
meaning that it records its pro rata portion of Halis'
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net income or loss in the period it is incurred.
Halis' system architects have years of experience building large advanced
software systems for the healthcare and other industries. In late 1996, Halis
acquired a core healthcare information system and went on to develop the HES
System, a comprehensive advanced integrated system capable of being used by all
the main participants in the healthcare process, including: consumers, payors,
physician practices, hospitals, laboratories, pharmacies, home health providers
and long-term care facilities. The HES System is capable of managing a
healthcare enterprise's resources, patients, finances and contracts all in one
program. This gives the HES System great flexibility in meeting the needs of
even the most complex healthcare delivery systems.
Halis' systems and services business is currently targeted to healthcare
industry participants such as physician practices, outpatient clinics and
hospitals that generally have 100 users or more. Halis expects to capitalize on
the healthcare industry's demand for more software variety, updates,
convenience, lower pricing and better support services. Halis' third party
administrator subsidiary, American Benefit Administrative Services, Inc.
("ABAS"), provides claims processing and other administrative services to major
payors and employers throughout the United States.
Halis's principal executive offices are located at 3525 Piedmont Road,
Seven Piedmont Center, Suite 300, Atlanta, Georgia 30305, and its telephone
number at that address is (404) 262-0181. Its ABAS subsidiary is located in
Chicago, Illinois.
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., 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.
Halis and PHE Transactions
Since August 1997, HealthWatch has entered into a number of transactions
with Halis, and a number of its affiliates and stockholders. As stated
earlier, the HES System was developed by Halis utilizing the MERAD technology.
The MERAD technology was developed by Paul W. Harrison and originally owned by
Paul Harrison Enterprises, Inc., ("PHE") (which was controlled by Paul W.
Harrison), prior to its acquisition by HealthWatch in October 1998. PHE
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<PAGE>
was also a significant stockholder of Halis, at the time of its acquisition by
HealthWatch, owning 6,177,010 shares (or approximately 11%) of Halis common
stock. An additional 990,849 shares (or 2%) of Halis common stock was owned by
Mr. Harrison individually at that time.
In October 1997, HealthWatch entered into a software license and
development agreement with MERAD Corporation ("MERAD"), a company then owned by
PHE. Pursuant to the agreement, HealthWatch was to license certain computer
architecture, concepts, algorithms and processes from MERAD which HealthWatch
originally planned to integrate into a line of noninvasive vascular diagnostic
equipment. In addition, MERAD was to develop healthcare software for
HealthWatch. In exchange for these licenses and services, HealthWatch agreed to
pay MERAD a development fee of $15,000 per month during the period January 1998
through June 1998. In addition, HealthWatch was to pay MERAD a fee based on a
variable rate of gross software revenues.
Although HealthWatch and Halis engaged in limited merger discussions during
September 1997, at that time it was determined that it would be preferable for
the two companies to adopt a shared business development strategy. To implement
this strategy, HealthWatch and Halis entered into a business collaboration
agreement whereby HealthWatch and Halis share sales prospects and HealthWatch
acts as a reseller of the HES System (See discussion below). Additionally,
HealthWatch obtained a non-exclusive license from PHE to the MERAD technology,
and retained PHE to develop proprietary software technology which originally was
contemplated to be used to expand HealthWatch's product offerings to include
products and services specifically focused on monitoring, capturing and managing
medical information at the point of care.
During the first quarter of fiscal year 1998, HealthWatch entered into an
agreement with Halis pursuant to which Halis acquired 83,333 shares of
HealthWatch common stock for a purchase price of $125,000. During the second
quarter of fiscal year 1998 and prior to its acquisition by HealthWatch, PHE
transferred 500,000 shares of Halis common stock to HealthWatch in exchange for
400,000 shares of HealthWatch common stock. During February 1998, PHE exchanged
an additional 1,400,000 shares of Halis common stock for 488,400 shares of
HealthWatch common stock. The exchange ratio was based upon the market value
for each company's common stock at the time that the transaction was negotiated.
For purposes of the above transactions, the fair market value of each company's
common stock was determined by reference to the then trading price of such
common stock on the over-the-counter market with respect to Halis and on the
Nasdaq SmallCap Market with respect to HealthWatch. Adjustments were then
negotiated to the exchange ratio to reflect that the transactions related to
blocks of Halis common stock larger than would be purchasable in a short period
of time over-the-counter. At that time, there was relatively active trading in
Halis common stock over-the-counter, but relatively low volume per day, making
the acquisition of a large block of stock more difficult in the open market. As
a result of these transactions, at September 30, 1998 PHE held 888,400 shares of
HealthWatch common stock. As a result of the acquisition of PHE by HealthWatch
on October 2, 1998, these shares became treasury shares and are deemed cancelled
and not outstanding. None of the references to the shares of HealthWatch common
stock held or
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<PAGE>
acquired by PHE above include shares owned directly by Mr. Paul W. Harrison nor
do they reflect the five-for-one reverse stock split effected by HealthWatch in
December 1999. At the time of the PHE acquisition, Mr. Paul W. Harrison owned
1,203,849 shares of PHE (approximately 37.5%) and 246,123 shares of HealthWatch
(approximately 10%).
During October 1998, HealthWatch agreed to acquire PHE and caused its newly
created wholly-owned subsidiary MERAD Software, Inc., a Nevada corporation, to
merge with PHE. In the merger, the 55 stockholders of PHE (including Mr.
Harrison) received 66,886 shares of HealthWatch's Series P Preferred Stock
(which reflects the December 1999 reverse stock split). Paul W. Harrison,
Chairman, President and Chief Executive Officer of HealthWatch, received 25,080
shares of the Series P Preferred in his capacity as a stockholder of PHE. David
M. Engert, Chief Operating Officer and a director of HealthWatch, received 3,177
shares of the Series P Preferred in his capacity as a stockholder of PHE.
Certain PHE stockholders also received options for approximately 125,000 shares
of HealthWatch common stock in exchange for previously outstanding options of
PHE. Of the outstanding options issued in the PHE acquisition, 116,667 were
issued to Paul W. Harrison. These options were granted with exercise prices
equal to the fair market value of HealthWatch common stock at that time.
If approved by HealthWatch's stockholders, the Series P Preferred will
become convertible into HealthWatch common stock at a ratio of ten shares of
HealthWatch common stock for each share of Series P Preferred, or an aggregate
of 668,860 shares, at each holder's option. The Certificate of Designation for
the Series P Preferred originally provided for dividends to be paid at a rate of
12% per annum from the date of issuance through January 31, 1999. If the
holders of the Series P Preferred were not granted the right to convert their
shares into shares of HealthWatch common stock prior to February 1, 1999, the
dividends were to accrue at the rate of 18% per annum from February 1 through
August 1, 1999. If the holders of the Series P Preferred were not granted the
right to convert their shares into shares of HealthWatch common stock prior to
August 1, 1999, the dividends were to accrue at the rate of 24% per annum from
August 1, 1999 and thereafter. In connection with a recent private placement,
the holders of the Series P Preferred agreed to make certain concessions with
regard to their shares including an agreement to a change in the dividend rate.
Thus, the Certificate of Designation for the Series P Preferred has been amended
to reflect a dividend rate of 8% per annum retroactive to the effective date of
issuance deleting the penalty provisions described above. If HealthWatch's
stockholders do not approve the conversion, the Series P Preferred will remain
outstanding as a nonconvertible security.
The purchase price in the PHE acquisition was negotiated by HealthWatch's
then outside directors (Messrs. Richard Case and Sanford Schwartz) after
receiving full disclosure of Mr. Harrison's conflict of interest created by his
ownership interest in, and officer position at, PHE. Given this conflict, Mr.
Harrison did not participate in discussions of HealthWatch's board with respect
to appropriate valuations and other terms of the transaction. Similarly, the
PHE board (comprised of other stockholders of PHE and Mr. Harrison) negotiated
with HealthWatch's outside directors with respect to such valuation and other
terms of the transaction. No independent appraisal of PHE was sought in order
to set the value. The initial purchase price of
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<PAGE>
$3.3 million paid by the issuance of Series P Preferred Stock was set based on
the market value of HealthWatch and Halis stock owned by PHE at the time of the
acquisition and the actual cash expended to date by PHE to develop the MERAD
technology. This benchmark was deemed appropriate because PHE had experienced
little or no revenue prior to the date of the acquisition, but had developed
technology believed to be of significant market value. At the time the Series P
Preferred Stock was issued in the PHE acquisition, HealthWatch common stock was
trading at a price of between $0.65 and $1.00 per share.
In addition to the issuance of the Series P Preferred, the PHE stockholders
are entitled be paid royalties based on revenues derived by HealthWatch from the
sale of software developed utilizing the MERAD technology. In connection with
HealthWatch's merger with PHE, each PHE stockholder entered into an Additional
Consideration Agreement with HealthWatch which provided that such PHE
stockholder would receive a pro-rata share of the total additional consideration
to be paid to all PHE stockholders (based on the stockholder's pro-rata
ownership of PHE at the time of the acquisition of PHE). The additional
consideration to be paid was a separate component of the purchase price paid in
the merger designed to protect the PHE stockholders from selling their company
at an artificially low valuation if the MERAD technology achieved the value the
parties believed it would at the time. Originally, the additional consideration
was to be paid in equal amounts of cash and HealthWatch common stock based on
sales of MERAD-related products equal to 5% of the first $1,000,000 of gross
revenues related to sales of the MERAD technology and 10% of revenues thereafter
in any fiscal year. The additional consideration was payable for a period of ten
years (on a quarterly basis) or until HealthWatch had paid in the aggregate
$7,000,000 in additional consideration. During fiscal 1999, the PHE
stockholders, as a group, earned $94,437 as additional consideration. During
fiscal year 2000, the PHE stockholders, as a group, earned $20,420 as additional
consideration. During fiscal 2000, HealthWatch paid $53,283 in common stock and
$55,334 in cash to PHE in additional consideration, and $6,241 is owed and
unpaid as of June 30, 2000.
In connection with the closing of a recently completed private placement,
Paul W. Harrison, HealthWatch's Chairman, Chief Executive Officer and President,
and David M. Engert, HealthWatch's Chief Operating Officer and a director (who
were both former PHE stockholders), waived any and all future payments of
additional consideration. The remaining PHE stockholders have been asked to
agree to the following amendments to their respective Additional Consideration
Agreements: First, the additional consideration is to be calculated based on a
fixed percentage (3%) of gross revenues each fiscal year from sales of the MERAD
technology. In addition, HealthWatch has the option to pay the additional
consideration in cash, or in a combination comprised of one-half cash and one-
half shares of HealthWatch common stock. Although the maximum aggregate payment
to be made under the Additional Consideration Agreements is still $7,000,000,
the payout period has been extended from ten years to fifteen years. As of June
30, 2000, all but three of the PHE stockholders have agreed to these amendments.
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At the time of the PHE acquisition, PHE held 6,177,010 shares of common
stock in Halis (which represented approximately 11% of the then outstanding
Halis common stock) and owned the MERAD technology. As a result of the merger,
HealthWatch increased its ownership interest in Halis to 8,939,010 shares of
Halis' common stock, representing approximately 19% of its outstanding shares.
In January 1999, HealthWatch converted outstanding debt owed by Halis to
HealthWatch into 1,824,645 additional shares of common stock of Halis, bringing
the number of Halis shares held by HealthWatch to 10,763,655, representing
approximately 21% of Halis' outstanding shares. On April 29, 2000, HealthWatch
exercised a financing option, as discussed below, for an additional 5,000,000
shares of Halis common stock. HealthWatch is now the single largest stockholder
of Halis (owning 15,763,655 shares, or approximately 25% of Halis' outstanding
common stock) and, due to the size of its holdings, accounts for its investment
in Halis under the equity method of accounting (i.e., it recognizes its
proportionate amount of Halis' income or loss).
Further, as a result of the merger of PHE into MERAD Software, Inc., the
MERAD technology is now owned by HealthWatch. Halis is obligated to pay
HealthWatch 10% of the gross revenues generated by Halis from products and
services utilizing the MERAD technology under a perpetual license agreement.
During fiscal 2000 and 1999, HealthWatch earned $21,935 and $66,087 in royalties
from Halis, respectively, none of which had been paid to HealthWatch as of year-
end. Additionally, HealthWatch and Halis currently share office space and have
a cost sharing arrangement relating to key personnel under an arrangement that
required HealthWatch to pay Halis a calculated amount each month based upon a
reasonable cost basis of services provided. Pursuant to this arrangement, until
the end of 1999, Halis maintained a principal office in Atlanta and HealthWatch
shared those facilities. Throughout that period, HealthWatch made payments to
Halis, calculated based on the percent of the facilities used by each party over
total cost, including phone and utilities, and including an immaterial amount
for shared personnel. From July 1 through December 31, 1999, HealthWatch paid
Halis $8,250 a month for use of office space and personnel. This amount does
not include salary for Mr. Harrison in his capacity as an executive officer of
each organization, which is paid separately by each organization for the work
performed for such company. Beginning January 1, 2000, HealthWatch is now the
primary lessor of the principal office facilities in Atlanta. Halis is now
sharing these facilities under a similar arrangement. To date, no monthly
payment amount has been determined; however, the parties intend to negotiate a
payment by Halis to HealthWatch that will be designed to reflect the relative
usage of each party of the facilities and personnel.
Effective October 10, 1997, PHE and Paul W. Harrison entered into a
consulting agreement with HealthWatch which expired on December 31, 1998. The
agreement provided for, among other things, the payment to PHE commencing on
January 1, 1998 of $5,000 per month, Mr. Harrison's continued service on the
board of directors (prior to the negotiation and execution of the consulting
agreement Mr. Harrison was a director of HealthWatch; during the course of
negotiations, Mr. Harrison agreed to serve as Chairman of the Board), the
granting of a five-year non-statutory stock option to Mr. Harrison representing
the right to acquire up to 50,000 shares of HealthWatch common stock (750,000
shares before adjustments for certain reverse stock splits occurring after the
date of the agreement) at the then fair market value for the HealthWatch
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common stock (which at that time was $.53125 per share) and to loan to Mr.
Harrison up to $200,000 payable in four equal annual installments with interest
to accrue at 7% per annum to cover tax liabilities arising from the stock swaps
with PHE. As of the time the consulting agreement expired, $0 had been borrowed
pursuant to the loan commitment. In May 1998, the exercise price for the stock
options were repriced to $0.66 per share (which has subsequently been adjusted
to $3.30 to reflect the December 1999 reverse stock split). None of the options
have been exercised. In February 1999, the consulting agreement was modified to
remove PHE as a party and to provide for the payment of $12,500 to Paul W.
Harrison on a monthly basis to manage HealthWatch, effective as of January 1,
1999. During fiscal year 1999, $12,500 was paid to Mr. Harrison under the
revised consulting agreement.
On January 22, 1998, Paul W. Harrison and two other individuals each loaned
HealthWatch $17,000 for a period of 90 days to enable HealthWatch to make
payroll. The loans, which have been repaid, were to bear interest at 7% per
annum. As additional compensation for making the loan, Mr. Harrison was granted
a warrant to acquire 3,333 shares (which reflects the December 1999 reverse
stock split) of HealthWatch common stock at $l.7l875 per share, the fair market
value for HealthWatch common stock on January 22, 1998 (which has been adjusted
to $8.950 to reflect the December 1999 reverse stock split).
Business Collaboration Agreement
In October 1997, HealthWatch and Halis entered into a business
collaboration agreement. Under the business collaboration agreement,
HealthWatch has granted Halis a non-exclusive license to HealthWatch's
information technology software in exchange for a ten percent (10%) commission
on sales of products or services incorporating such software. Additionally,
Halis has granted HealthWatch a non-exclusive license to market the HES System
or other Halis products in exchange for a ten percent (10%) commission on all
revenues received from sales or services relating to such products. In
September 2000, the business collaboration agreement was amended to provide,
among other things, for revenue sharing based on a 60/40 split (i.e., the
selling company would receive 60% of the sales price and the company that owns
the technology would receive 40% of the sales price). Furthermore, HealthWatch
is obligated to pay Halis a collaboration fee of $50,000 per month which shall
be applied as a credit against any revenue sharing amount that is due to Halis.
Halis is obligated to provide support to HealthWatch for the Halis software
products, provide reasonable product enhancement as part of product release
updates and cooperate with HealthWatch in regard to product enhancement
requests. HealthWatch may terminate the $50,000 monthly collaboration fee
payable to Halis on or after October 1, 2001, under certain terms and
conditions.
In addition, Halis and HealthWatch have agreed to use their best efforts to
utilize the services of the other company whenever and wherever reasonably
possible when contacting with third parties to provide services to or in
connection with the sale, delivery and installation of products and/or services.
Halis and HealthWatch have also agreed to use their best efforts to share
facilities in order to permit one company to obtain an initial and temporary
location in a
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market in which the requesting company desires to establish a presence. Any such
facilities are to be provided subject to the reimbursement of the providing
company's reasonable costs incurred in connection with the providing of such
facilities. Currently, Halis and HealthWatch share office space and
administrative support for the corporate headquarters of both companies which is
located at 3525 Piedmont Road, Building Seven, Suite 300, Atlanta, Georgia,
30305.
The term of the business collaboration agreement was for a period of one-
year, with automatic one-year renewals unless terminated by one of the parties
by giving sixty-day written notice to the other party. The September amendment
extended the term through September 2005. HealthWatch paid Halis approximately
$49,500 and $55,473 in 2000 and 1999, respectively, under the business
collaboration agreement.
HealthWatch/Halis Merger
On March 8, 2000, HealthWatch executed a letter of intent with Halis to
merge Halis with and into a wholly-owned subsidiary of HealthWatch. As of June
30, 2000, HealthWatch was the single largest shareholder, owning approximately
25% of the outstanding common stock of Halis. Halis and HealthWatch currently
operate under a business collaboration agreement for the HES System and MERAD
technologies and a cost sharing arrangement for corporate office space and
administrative resources, as discussed above.
The letter of intent contains a binding provision providing HealthWatch an
unconditional right to purchase, prior to the closing of the merger, up to
$1,000,000 of Halis' common stock at $.20 per share for a total of 5,000,000
shares, and upon consummation of such financing, HealthWatch shall have a three
month option to purchase up to an additional $5,000,000 of Halis' common stock
at a price of $.20 per share.
In April 2000, HealthWatch exercised its option to purchase 5,000,000
shares of Halis' common stock for a total investment of $1,000,000. As a
result, HealthWatch received an option to purchase up to an additional
25,000,000 shares of common stock for a total purchase price of $5,000,000. On
July 28, 2000, without affecting the terms of the merger, HealthWatch and Halis
executed an amendment to the financing option which extended the option period
through and including September 29, 2000. All other terms and conditions to the
financing option, including the exercise price, were unchanged.
On June 29, 2000, the Company, Halis, Inc.. and HealthWatch Merger Sub,
Inc. executed a definitive Agreement and Plan of Merger. Under the terms of the
merger agreement, each outstanding share of Halis common stock would be
converted into one twentieth (.050) of a share of HealthWatch common stock (i.e.
an exchange ratio of 1 share of HealthWatch common stock for 20 shares of Halis
common stock). The merger agreement also provides, under certain circumstances,
for a termination fee of $500,000 to be imposed against a breaching party that
prevents the closing of the merger.
The merger agreement will automatically terminate on September 30, 2000,
if the merger has not closed by that date. Based on the conditions required for
closing as discussed below, the parties will not be able to close on or before
September 30, 2000. HealthWatch and Halis are currently negotiating to extend
the termination date in the merger agreement to provide additional time to close
the transaction. HealthWatch expects the merger to close during the last quarter
of calendar year 2000. However, there can be no assurances that the merger
agreement will be amended to extend the termination date, and even if the
termination date is extended, there can be no assurances that the parties will
be able to satisfy the conditions to closing the merger.
Page 49
<PAGE>
The merger is subject to the satisfaction of various conditions, including
without limitation, the approval of the transaction by the majority of the
shareholders of each such company, the qualification of the merger as a tax-free
reorganization for income tax purposes, the registration with the Securities and
Exchange Commission of the shares to be issued in the merger, listing of the
shares so issued on the Nasdaq SmallCap Market, issuance of favorable fairness
opinions of the financial advisors retained by each company and various other
customary conditions. No assurance can be given that the parties will be able to
satisfy the conditions to the consummation of the transaction. (See "Agreement
and Plan of Merger by and among Halis, Inc., HealthWatch Merger Sub, Inc. and
HealthWatch, Inc." attached hereto as Exhibit 10.6)
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K.
(a) Listing of Exhibits:
3.1 Articles of Incorporation, as amended, of the Company (2).
3.2 Bylaws, as amended, of the Company (3).
4.1 Specimen form of the Company's Common Stock certificate (3).
4.2 HealthWatch, Inc. Stock Option Plan of 1989 (4).
4.3 Form of Incentive Stock Option Agreement (4).
4.4 Form of Nonstatutory Stock Option Agreement (4).
4.5 HealthWatch, Inc. Stock Option Plan of 1993 (5).
4.6 HealthWatch, Inc. Stock Option Plan of 1995 (6).
4.7 HealthWatch, Inc. 1995 Stock Grant and Salary Deferral Plan (6).
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) (7).
4.9 Subscription and Purchase Agreement between HealthWatch, Inc. and Halis,
Inc.(8).
4.10 Certificate of the Designation, Preferences, Rights and Limitations of the
6% Series A Convertible Preferred Stock of HealthWatch, Inc. (11)
4.11 Certificate of the Designation, Preferences, Rights and Limitations of the
Series P Preferred Stock of HealthWatch, Inc. (11)
4.12 Certificate of the Designation, Preferences, Rights and Limitations of the
Series C 8% Convertible Preferred Stock of HealthWatch , Inc. Dated March
20th, 2000 and filed with the Minnesota Secretary of State on March 20th,
2000.(13)
4.13 Certificate of the Designation, Preferences, Rights and Limitations of the
Series D 8% Convertible Preferred Stock of HealthWatch , Inc. Dated March
20th, 2000 and filed with the Minnesota Secretary of State on March 20th,
2000. (13)
10.1 Business Collaboration Agreement dated as of October 10, 1997 between the
Company and Halis, Inc. (9).
10.2 Consulting Agreement dated as of October 10, 1997 among the Company, Paul
Harrison Enterprises, Inc. and Paul Harrison (9).
10.3 Consulting Agreement dated as of October 10, 1997 between the Company and
Larry Fisher (9).
Page 50
<PAGE>
10.4 Agreement and Plan of Merger dated as of September 30, 1998 among
HealthWatch, Inc., MERAD Software, Inc. and Paul Harrison Enterprises, Inc.
(10).
10.5 Letter of Intent between HealthWatch, Inc. and Halis, Inc. dated March 8th,
2000. (14)
10.6 Agreement and Plan of Merger by and among Halis, Inc., HealthWatch Merger
Sub, Inc. and HealthWatch, Inc. dated June 29, 2000. (1)
10.7 Amendment to the Business Collaboration Agreement dated as of September 20,
2000 between HealthWatch, Inc., and Halis, Inc. (1)
16.1 Letter on Change in Certifying Accountant (12).
21 Subsidiaries of the Company at June 30, 2000 (1).
23.2 Consent of Tauber & Balser, P.C. with regard to HealthWatch, Inc. (1)
23.3 Consent of Tauber & Balser, P.C. with regard to Halis, Inc. (1)
27.1 Financial Data Schedule. (1)
-----------------
(1) Filed herewith.
(2) Incorporated herein by reference to the Company's Annual Report, Form 10-K,
for the year ended June 30, 1990 (File No. 0-11476).
(3) Incorporated herein by reference to Registration Statement, Form S-18 (File
No. 2-85688D).
(4) Incorporated herein by reference to Registration Statement, Form S-2 (File
No. 33-42831).
(5) Incorporated herein by reference to the Company's Annual Report, Form
10-KSB, for the year ended June 30, 1994 (File No. 0-11476)
(6) Incorporated herein by reference to the Company's Annual Report, Form
10-KSB, for the year ended June 30, 1996 (File No. 0-11476).
(7) Incorporated herein by reference to Registration Statement, Form SB-2 (File
No. 33-73462).
(8) Incorporated herein by reference to the Company's Annual Report, Form
10-KSB, for the year ended June 30, 1997 (File No. 0-11476).
(9) Incorporated herein by reference to the Company's Quarterly Report, Form
10-QSB, for the quarter ended December 31, 1997.
(10) Incorporated herein by reference to the Company's Current Report, Form 8-K,
dated October 1, 1998.
(11) Incorporated herein by reference to the Company's Annual Report on Form
10-KSB, for the year ended June 30, 1998 (File No. 0-11475).
(12) Incorporated herein by reference to the Company's Current Report on Form
8-K, dated June 29, 1999.
(13) Incorporated herein by reference to the Company's Current Report, Form 8-K,
dated March 21, 2000.
(14) Incorporated herein by reference to the Company's Quarterly Report, Form
10-QSB, for the quarter ended March 31, 2000
(b)
During the quarter ended June 30, 2000, the Registrant filed no reports on Form
8-K.
Page 51
<PAGE>
HEALTHWATCH, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS
--------------------
TABLE OF CONTENTS
Page
----
Independent Auditors' Report............................................... F-2
Consolidated Balance Sheet................................................. F-3
Consolidated Statements of Operations...................................... F-5
Consolidated Statements of Cash Flows...................................... F-6
Consolidated Statements of Shareholders' Equity............................ F-8
Notes to Consolidated Financial Statements................................. F-9
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
HealthWatch, Inc.
We have audited the accompanying consolidated balance sheet of HealthWatch, Inc.
and subsidiaries as of June 30, 2000, and the related consolidated statements of
operations, shareholders' equity, and cash flows for the years ended June 30,
2000 and 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
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 audits 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 subsidiaries as of June 30, 2000, and the results of their operations and
their cash flows for the years ended June 30, 2000 and 1999 in conformity with
generally accepted accounting principles.
September 26, 2000
F-2
<PAGE>
HEALTHWATCH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 2000
ASSETS
CURRENT ASSETS
Cash $ 16,264
Accounts receivable, net of allowance for
doubtful accounts of $17,698 34,539
Marketable securities 3,935,500
Inventory 35,477
Other current assets 266,293
----------
TOTAL CURRENT ASSETS 4,288,073
----------
OTHER ASSETS
Property and equipment, net 15,054
Investment in and advances to Halis, Inc. 2,211,487
Intangible assets, net 1,058,816
Other assets 38,560
----------
TOTAL OTHER ASSETS 3,323,917
----------
TOTAL ASSETS $7,611,990
==========
F-3
<PAGE>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 277,365
Accrued expenses 229,679
Deferred revenue 8,490
Debentures payable 25,000
------------
TOTAL LIABILITIES (ALL CURRENT) 540,534
------------
SHAREHOLDERS' EQUITY
Cumulative preferred stock, 1,000,000 shares
authorized, $.05 par value; $11,182,300
liquidation preference
Series A, 5,000 shares issued and outstanding 250
Series P, 66,886 shares issued and outstanding 3,344
Series C, 4,000 shares issued and outstanding 200
Series D, 74,130 shares issued and outstanding 3,707
Common stock, $.05 par value; 10,000,000 shares
authorized; 2,142,751 shares issued and outstanding 107,137
Additional paid-in capital 30,111,240
Accumulated deficit (23,041,022)
Accumulated other comprehensive loss, net unrealized
investment losses (113,400)
------------
TOTAL SHAREHOLDERS' EQUITY 7,071,456
------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 7,611,990
============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
HEALTHWATCH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
SALES $ 551,682 $ 1,220,803
COST OF SALES 193,952 940,950
----------- -----------
GROSS PROFIT 357,730 279,853
----------- -----------
OPERATING COSTS AND EXPENSES
Selling, general and administrative 1,964,127 1,320,500
Depreciation and amortization 341,659 330,002
Research and development 136,780 286,921
----------- -----------
2,442,566 1,937,423
----------- -----------
OPERATING LOSS (2,084,836) (1,657,570)
----------- -----------
OTHER INCOME (EXPENSE)
Loss from investment in Halis, Inc. (523,450) (23,702)
Other-than-temporary decline in value of investment in Halis, Inc. (472,810) -
Loss from impairment of intangible assets (213,286) -
Gain on extinguishment of debt 165,405 -
Interest income 110,606 -
Interest expense (36,324) (67,659)
----------- -----------
(969,859) (91,361)
----------- -----------
NET LOSS $(3,054,695) $(1,748,931)
=========== ===========
BASIC AND DILUTED NET LOSS PER COMMON SHARE
Net loss $(3,054,695) $(1,748,931)
Less preferred stock dividends (undeclared) 425,304 269,358
----------- -----------
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS $(3,479,999) $(2,018,289)
=========== ===========
NET LOSS PER COMMON SHARE, BASIC AND DILUTED $ (2.26) $ (3.75)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 1,538,924 537,972
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
HEALTHWATCH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2000 AND 1999
2000 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(3,054,695) $(1,748,931)
----------- -----------
Adjustments:
Depreciation 18,163 19,196
Amortization 323,496 310,806
Loss on disposal of equipment 4,757 -
Loss from investment in Halis, Inc. 523,450 23,702
Decline in value of investment in
Halis, Inc. 472,810 -
Loss from impairment of intangible assets 213,286 -
Common stock issued for services 474,987 -
Gain on extinguishment of debt (165,405) -
Changes in:
Accounts receivable 63,369 86,507
Inventory 48,387 288,409
Other current assets (256,362) 13,782
Other assets (4,550) (24,759)
Accounts payable 91,741 (179,043)
Accrued expenses (257,190) 144,224
Deferred revenue (20,040) (8,434)
----------- -----------
Total adjustments 1,530,899 674,390
----------- -----------
Net cash used in operating activities (1,523,796) (1,074,541)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (15,178) (11,198)
Purchase of Halis, Inc. stock (1,000,000) (157,741)
Purchase of marketable securities (4,000,000) -
Increase in due from Halis, Inc. (287,712) (150,364)
Purchase of intangible assets, capitalized
MERAD Technology costs (217,496) -
----------- -----------
Net cash used in investing activities (5,520,386) (319,303)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of debentures payable - (100,000)
Proceeds from issuance of preferred
stock, net of stock issue costs
of $842,353 6,962,522 -
Proceeds from issuance of common stock 50,000 661,300
Proceeds from exercise of warrants 26,178 -
----------- -----------
Net cash provided by financing
activities 7,038,700 561,300
----------- -----------
NET DECREASE IN CASH (5,482) (832,544)
CASH, BEGINNING OF YEAR 21,746 854,290
----------- -----------
CASH, END OF YEAR $ 16,264 $ 21,746
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
HEALTHWATCH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 2000 AND 1999
2000 1999
------- -------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $20,725 $25,601
======= =======
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the year ended June 30, 2000:
The debenture holders converted debt of $455,000 and interest of $139,356 into
316,990 shares of common stock of the Company.
The Company issued 164,186 and 49,438 shares of common stock valued at
$357,487 and $109,122 for professional and consulting fees incurred in fiscal
2000 and fiscal 1999, respectively.
The Company issued 28,417 shares of common stock valued at $53,283 for payment
of additional consideration due to PHE shareholders which was accrued at June
30, 1999.
The Company issued 97,334 shares of common stock valued at $182,500 to Paul W.
Harrison, HealthWatch's Chairman and CEO, for payment of $117,500 of current
services performed by Mr. Harrison and a $65,000 loan due to Mr. Harrison.
The Company borrowed $48,900 from a financial institution in connection with
its marketable securities acquisition, and this margin loan is included in
accounts payable as of June 30, 2000.
The Company accrued liabilities of $20,420 and increased its carrying value of
the MERAD Technology for additional consideration associated with the
acquisition of MERAD Software, Inc.
The Company issued 229,000 shares of its common stock through the cashless
exercise of warrants, of which 177,200 shares were returned to the Company to
facilitate the transaction.
During the year ended June 30, 1999:
The Company issued 97,680 shares of common stock valued at $448,436 to MERAD
Software, Inc. (formerly Paul Harrison Enterprises, Inc.) prior to its
acquisition by the Company in exchange for 1,400,000 shares of Halis, Inc.
common stock.
The Company issued 66,886 shares of Series P preferred stock valued at
$2,560,000 for 6,177,010 shares of Halis, Inc. common stock valued at
$868,488, 177,680 shares of its own common stock valued at $710,720 which was
retired, other assets valued at $80,628, and the MERAD Technology valued at
$900,164 in connection with the acquisition of MERAD Software, Inc. (formerly
Paul Harrison Enterprises, Inc.).
The Company accrued liabilities of $94,437 and increased its carrying value of
the MERAD Technology for additional consideration associated with the
acquisition of MERAD Software, Inc.
The Company received 1,824,645 shares of Halis, Inc. common stock valued at
$157,741 in exchange for a note receivable from Halis, Inc.
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
HEALTHWATCH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
Preferred Stock Common Stock
--------------------- ---------------------------
Shares Amount Shares Amount
-------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Balance at June 30, 1998 as previously reported 1,145,000 $ 11,450 2,420,721 $ 24,207
One-for-five stock split (916,000) - (1,936,577) -
-------- ---------- ----------- ----------
Balance at June 30, 1998 as adjusted 229,000 11,450 484,144 24,207
Net loss - - - -
Series P preferred stock issued in private offering 66,886 3,344 - -
Common stock purchased and retired - - (177,680) (8,884)
Common stock issued - - 241,991 12,100
Common stock issued in stock exchange - - 97,680 4,884
Common stock options exercised - - 11,000 550
-------- ---------- ----------- ----------
Balance at June 30, 1999 295,886 14,794 657,135 32,857
Comprehensive Loss:
Net loss - - - -
Unrealized holding loss on marketable securities - - - -
Total Comprehensive Loss
Conversion of substantially all Series A preferred
stock (224,000) (11,200) 734,908 36,745
Common stock issued - - 367,957 18,398
Conversion of debentures and related interest
payable - - 316,990 15,849
Common stock warrants exercised - - 242,961 12,148
Common stock retired in cashless exercise of
warrants - - (177,200) (8,860)
Series C preferred stock issued in private offering 4,000 200 - -
Series D preferred stock issued in private offering 74,130 3,707 - -
-------- ---------- ----------- ----------
Balance at June 30, 2000 150,016 $ 7,501 2,142,751 $ 107,137
======== ========== =========== ==========
Accumulated
Additional Other Total
Paid-in Accumulated Comprehensive Shareholders
Capital Deficit Loss Equity
----------- ------------ ------------ -----------
Balance at June 30, 1998 as previously reported $18,895,757 $(18,237,396) $ - $ 694,018
One-for-five stock split - - - -
----------- ------------ ------------ -----------
Balance at June 30, 1998 as adjusted 18,895,757 (18,237,396) - 694,018
Comprehensive Loss:
Net loss - (1,748,931) - (1,748,931)
Series P preferred stock issued in private offering 2,556,656 - - 2,560,000
Common stock purchased and retired (701,836) - - (710,720)
Common stock issued 612,900 - - 625,000
Common stock issued in stock exchange 443,552 - - 448,436
Common stock options exercised 35,750 - - 36,300
----------- ------------ ------------ -----------
Balance at June 30, 1999 21,842,779 (19,986,327) - 1,904,103
Comprehensive Loss:
Net loss - (3,054,695) - (3,054,695)
Unrealized holding loss on marketable securities - - (113,400) (113,400)
-----------
Total Comprehensive Loss (3,168,095)
-----------
Conversion of Series A preferred stock (25,545) - - -
Common stock issued 733,994 - - 752,392
Conversion of debentures payable 578,507 - - 594,356
Common stock warrants exercised 14,030 - - 26,178
Common stock purchased and retired in cashless
exercise of warrants 8,860 - - -
Series C preferred stock issued in private offering 374,800 - - 375,000
Series D preferred stock issued in private offering 6,583,815 - - 6,587,522
----------- ------------ ------------ -----------
Balance at June 30, 2000 $30,111,240 $(23,041,022) $ (113,400) $ 7,071,456
=========== ============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
HEALTHWATCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Business
HealthWatch, Inc. was founded in 1983 and has evolved from a supplier of
noninvasive vascular diagnostic medical instruments including a proprietary
device used to monitor and control intravenous ("IV") drug infusion to hospitals
and medical clinics throughout the United States into primarily a software
information technology ("IT") company. The Company's virtual software
application utility (the "MERAD Technology") utilizes an advanced multi-media
object and relational database which creates knowledge objects that can be used
and reused in virtually unlimited number of combinations to provide efficient
applications that can be accessed in both an Internet and Intranet environment.
Headquartered in Atlanta, Georgia, HealthWatch has research and development,
marketing, sales and support capabilities in the healthcare IT sector.
During fiscal 2000, the Company raised additional capital through private
placements to begin the implementation of its business plan. The Company's
objective is to become a leading provider of web-based applications to process
and manage transactions for physician offices, hospitals, outpatient clinics,
and other healthcare providers. As part of this plan, the Company will offer and
market an enterprise software solution, known as the Healthcare Enterprise
System (the "HES System"), which is owned by Halis, Inc. ("Halis"), an
affiliated information technology company that is approximately 25% owned by
HealthWatch (see Note B). The HES System uses proprietary technology to
distribute, in a compressed digital format, one system that includes over 50
integrated applications for the management of a healthcare enterprise's
resources, patient data, clinical data, and finances. The HES System was
designed and built using the Company's software application utility, the "MERAD
Technology." As provided in a Business Collaboration Agreement between
HealthWatch and Halis, HealthWatch has granted Halis a non-exclusive license for
the use of the MERAD Technology, while Halis has granted HealthWatch a non-
exclusive license to market the HES System. Revenue sharing provisions from the
sale of the HES System are specified in the agreement. Through June 30, 2000, no
significant revenues have realized by the Company through the sale of the HES
System as the Company has refocused its efforts to upgrading the enterprise
software solution to market and facilitate a web-based enterprise solution in an
Internet environment. The Company has recently completed the upgrade of the HES
System and plans to introduce the new Internet version into the market in the
second quarter of fiscal 2001.
Principles of Consolidation and Accounting for Investees
The consolidated financial statements include the accounts of HealthWatch, Inc.
and the Company's wholly owned subsidiaries MERAD Software, Inc. and HealthWatch
Technologies, Inc. and their wholly owned subsidiaries, respectively.
HealthWatch's investment in a company in which it has the ability to exercise
significant influence over operating and financial policies is accounted for
under the equity method. Accordingly, HealthWatch's share of the net losses of
this company is included in consolidated net loss. Beginning January 29, 1999,
HealthWatch's investment in Halis was accounted for under the equity method.
Prior to this date, the Company accounted for its available-for-sale investment
in Halis, Inc. at its fair value. All significant intercompany balances and
transactions have been eliminated in consolidation.
Marketable Securities
The Company's investments in debt securities, which principally mature in two to
five years, consist of corporate debt securities that are classified as
available-for-sale. The aggregate fair value at June 30, 2000 was $3,935,500.
Unrealized holding losses on these securities were $113,400 at June 30, 2000 and
were recorded as a separate component of shareholders' equity.
F-9
<PAGE>
Inventory
Inventory is recorded at the lower of cost (determined on a first-in, first-out
basis) or market. During fiscal 2000 and 1999, approximately $35,000 and
$188,000 of inventory, respectively, was charged to operations - cost of sales
as the products were determined to be obsolete.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over 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
HealthWatch evaluates the carrying value of long-lived assets, including
intangibles, whenever events or changes in circumstances indicate that the
carrying value of the asset may be impaired. An impairment loss is recognized
when estimated future cash flows expected to result from the use of the asset,
including disposition, is less than the carrying value of the asset.
Net Loss Per Share
The Company has adopted SFAS No. 128, "Earnings Per Share," which requires basic
and dilutive earnings per share presentation. Basic loss per share is computed
as net loss available to common shareholders divided by the weighted average
number of common shares outstanding for the period. Diluted earnings per share
reflects the potential dilution that could occur from common shares issuable
through stock options, stock warrants, and convertible debt and stock. As the
Company's stock options, stock warrants, and convertible debt and stock are
antidilutive for all periods presented, dilutive loss per share is the same as
basic loss per share.
At June 30, 2000 and 1999, outstanding stock options, stock warrants, and
convertible debt and stock to purchase 9,620,800 and 4,553,353 shares,
respectively, of the Company's common stock were not included in the computation
of diluted loss per share as their effect would be antidilutive.
Revenue Recognition
HealthWatch recognizes revenue from product sales at the time ownership
transfers to the customer, principally, at shipment. Revenues from service
contracts are generally recognized on the straight-line basis over the life of
the contracts, which are principally 12 months. Deferred revenue represents
amounts received on service contracts but not yet earned.
F-10
<PAGE>
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 to the 1999 consolidated financial
statements to conform to the 2000 consolidated financial statement presentation.
NOTE B - INVESTMENTS IN AND ADVANCES TO HALIS, INC. AND SUBSEQUENT
MERGER OF HEALTHWATCH, INC. AND HALIS, INC.
At June 30, 2000, the Company owned 15,763,655 shares of Halis, for an
approximate 25% ownership interest. The Company has accounted for its investment
in Halis under the equity method. At June 30, 2000, the Halis stock was trading
on the NASDAQ OTC Bulletin Board at a price per share of $.0625, for an
aggregate value of $985,228. Due to the existence of recurring operating losses
of Halis and a decline in the quoted market price below its carrying amount,
management has deemed the decline to be other-than-temporary. As a result, a
loss in value of $472,810 has been recognized as a separate component in the
consolidated statements of operations. The investment's carrying value at June
30, 2000 was $1,773,411.
The carrying value of the investment in Halis under the equity method exceeded
the 25% equity in the underlying net assets of Halis at June 30, 2000 by
$1,773,411. This excess of the investment over the 25% equity in the underlying
net assets of Halis is being amortized on the straight-line method over a period
of ten years.
In October 1997, HealthWatch and Halis entered into a Business Collaboration
Agreement. Under the Business Collaboration Agreement, HealthWatch has granted
Halis a non-exclusive license to HealthWatch's information technology software
in exchange for a ten percent (10%) commission on sales of products or services
incorporating such software. Additional, Halis has granted HealthWatch a
non-exclusive license to market the HES System or other Halis products in
exchange for a ten percent (10%) commission on all revenues received from sales
or services relating to such products.
The agreement provides for the sharing of certain operating expenses, among
other things. During the years ended June 30, 2000 and 1999, approximately
$50,000 and $56,000, respectively, was expensed by the Company for shared
operating expenses.
In September 2000, the Business Collaboration Agreement was amended to provide,
among other things, the revenue sharing based on a 60/40 split (i.e. the selling
company would receive 60% of the sales price and the company that owns the
technology would received 40% of the sales price). Furthermore, HealthWatch is
obligated to pay Halis a collaboration fee of $50,000 per month which shall be
applied as a credit against any revenue sharing amount that is due to Halis.
Halis is obligated to provide support of HealthWatch for the Halis software
products, provide reasonable product enhancement as part of product release
updates and cooperate with HealthWatch with regard to product enhancement
requests. HealthWatch may terminate the $50,000 monthly collaboration fee
payable to Halis on or after October 1, 2001, under certain terms and
conditions.
Due from Halis represents amounts due from Halis for its portion of shared
operating expenses, amounts owed to the Company for unpaid royalties due on the
MERAD Technology, and amounts advanced to Halis for working capital purposes. At
June 30, 2000, the amount due from Halis was $438,076. The Company is unable to
determine the fair value of these advances because of the financial condition of
Halis as discussed above.
On June 29, 2000, the Company entered into an Agreement and Plan of Merger with
Halis. Halis is engaged in the business of providing information technology
applications and services to the healthcare industry. HealthWatch is currently
the single largest shareholder of Halis, owning approximately 25% of Halis'
issued and outstanding common stock, and has an option that expires on September
29, 2000 to purchase up to an additional 25,000,000 shares of Halis at $.20 per
share.
Under the Agreement and Plan of Merger, the Company will issue approximately
2,300,000 registered shares of its common stock in exchange for all of the
Outstanding shares of common stock of Halis (an exchange ratio of one share of
HealthWatch common stock for twenty shares of Halis common stock). The holders
of other convertible securities (i.e., warrants and options) of Halis will
receive convertible securities of the Company having similar terms and
conditions. The transaction is subject to shareholder approval and other
customary conditions.
If either company terminates or withdraws from the merger agreement without the
consent of the other party, they may be liable to the non-terminating party,
under certain conditions, for $500,000 in liquidated damages.
The Company anticipates accounting for the acquisition under the purchase
method of accounting, whereby the assets and liabilities of Halis are recorded
at their fair market value as of the date of the acquisition. The excess
purchase price over the fair market value of the net tangible assets acquired
has been identified as an intangible asset related to the HES Technology and
will be amortized over a ten year period.
F-11
<PAGE>
Summarized below is the unaudited condensed and pro forma consolidated balance
sheet and statement of operations as if the acquisition had taken place at the
beginning of the year ended June 30, 2000.
<TABLE>
<CAPTION>
Pro Forma Condensed Consolidated Balance Sheet (Unaudited)
----------------------------------------------------------
Pro Forma Pro Forma
HealthWatch, Inc. HALIS, Inc. Acquisition Consolidating HealthWatch,Inc
Consolidated Consolidated Adjustment Entries Consolidated
----------------- ------------- ----------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Current assets $4,288,073 $1,021,002 $ - $ - $ 5,309,075
Marketable equity
securities - related
party 1,773,411 22,395 - (1,795,806)(2)(3) -
Property and equipment
net 15,054 327,959 - - 343,013
Due from related party 438,076 - - (438,076)(4) -
Intangible assets, net 1,058,816 741,692 5,400,000 (1) (540,000)(5) 6,660,508
Other assets 38,560 102,840 - - 141,400
---------- ---------- ---------------- ------------ -----------
Total assets $7,611,990 $2,215,888 $ 5,400,000 $(2,773,882) $12,453,996
========== ========== ================ ============ ===========
Pro Forma Condensed Consolidated Balance Sheet (Unaudited)
----------------------------------------------------------
Pro Forma Pro Forma
HealthWatch, Inc. HALIS, Inc. Acquisition Consolidating HealthWatch, Inc.
Consolidated Consolidated Adjustment Entries Consolidated
----------------- ------------ ------------- ------------- -----------------
Current liabilities $ 540,534 $2,141,860 $ - $ (438,076)(4) $ 2,244,318
Long-term obligations
under capital leases - 175,734 - - 175,734
---------- ---------- ---------------- ----------- -----------
Total liabilities 540,534 2,317,594 - (438,076) 2,420,052
Shareholders' equity 7,071,456 (101,706) 5,400,000 (1) (2,335,806)(2)(3)(5) 10,033,944
---------- ---------- ---------------- ----------- -----------
Total liabilities and
equity $7,611,990 $2,215,888 $ 5,400,000 $(2,773,882) $12,453,996
========== ========== ================ =========== ===========
</TABLE>
(1) To reflect the acquisition of Halis as if the acquisition had occurred on
July 1, 1999, to record net assets purchased at fair market value, and
eliminate Halis' equity and goodwill.
(2) To eliminate HealthWatch's investment in Halis carried on the equity method
and Halis' investment in HealthWatch.
(3) To retire HealthWatch's common stock purchased as part of the acquisition
of Halis.
(4) To eliminate intercompany balances as of June 30, 2000.
(5) To record amortization of intangible assets over ten years.
F-12
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Condensed Consolidated Statement of Operations (Unaudited)
---------------------------------------------------------------------------
Pro Forma Pro Forma
HealthWatch, Inc. HALIS, Inc. Consolidating HealthWatch,Inc.
Consolidated Consolidated Entries Consolidated
------------------- -------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Sales $ 551,682 $ 4,326,750 $ (21,936)(3) $ 4,856,496
Cost of sales 193,952 188,941 (21,936)(3) 360,957
----------- ----------- ----------- -----------
Gross profit 357,730 4,137,809 - 4,495,539
Operating expenses 2,442,566 5,125,048 540,000 (2) 8,107,614
----------- ----------- ----------- -----------
Loss from operations (2,084,836) (987,239) (540,000) (3,612,075)
Other income (expense) (969,859) (639,983) 996,260 (1) (613,582)
----------- ----------- ----------- -----------
Net loss $(3,054,695) $(1,627,222) $ 456,260 $(4,225,657)
=========== =========== =========== ===========
Net loss per common share $(2.26) $(1.21)
=========== ===========
Weighted average number
of common shares outstanding 1,538,924 3,835,591
=========== ===========
</TABLE>
(1) To eliminate equity loss from investment in Halis and other-than-temporary
decline in value.
(2) To record amortization of intangible assets over ten years.
(3) To eliminate MERAD royalties on HES sales.
NOTE C - ACQUISITION OF MERAD SOFTWARE, INC. (FORMERLY PAUL HARRISON
ENTERPRISES, INC.) ("PHE")
On October 1, 1998, the Company completed the acquisition of MERAD Software,
Inc. (formerly Paul Harrison Enterprises, Inc.) and subsidiaries. The Company
issued 66,886 shares of Series P preferred stock in exchange for all of the
issued and outstanding common stock of PHE. In addition, the Company agreed to
pay to the former shareholders of PHE additional consideration determined based
on the terms of the contract. The additional consideration was payable for a
period of ten years or until the Company had paid an aggregate $7,000,000 in
additional consideration. Effective April 25, 2000, the former PHE shareholders
agreed to waive any rights to payment of additional consideration and terminated
the Consideration Agreement.
The former PHE shareholders as a group earned $20,420 and $94,437 in additional
consideration for the fiscal years ended June 30, 2000 and 1999, respectively.
The outstanding balance due to the former PHE shareholders at June 30, 2000 was
$6,241.
The Company has accounted 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 excess purchase price over
the fair market value of the net tangible assets acquired has been identified as
the MERAD Technology and is being amortized over a ten year period.
F-13
<PAGE>
Summarized below is the unaudited condensed and pro forma consolidated statement
of operations as if the acquisition had taken place at the beginning of the year
ended June 30, 1999.
<TABLE>
<CAPTION>
Pro Forma Condensed Consolidated Statement of Operations (Unaudited)
---------------------------------------------------------------------------
Paul Harrison Pro Forma Pro Forma
HealthWatch, Inc. Enterprises, Inc. Consolidating HealthWatch,Inc.
Consolidated Consolidated Entries Consolidated
------------------ ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Sales $ 1,220,803 $157,024 $ (117,024)(2) $ 1,260,803
Cost of sales 940,950 - - 940,950
----------- -------- ---------- -----------
Gross profit 279,853 157,024 (117,024) 319,853
Operating expenses 1,938,596 80,737 24,823 (1) 2,044,156
----------- -------- ---------- -----------
Loss from operations (1,658,743) 76,287 (141,847) (1,724,303)
Other income (expense) (90,188) - - (90,188)
----------- -------- ---------- -----------
Net income (loss) $(1,748,931) $ 76,287 $ (141,847) $(1,814,491)
=========== ======== ========== ===========
Net loss per common share $(3.75) $(3.87)
=========== ===========
Weighted average
number of common shares outstanding 537,972 537,972
=========== ===========
</TABLE>
(1) To record amortization of MERAD Technology.
(2) To eliminate intercompany sales.
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at June 30, 2000:
Furniture and equipment $ 318,620
Accumulated depreciation (303,566)
----------
Property and equipment, net $ 15,054
=========
NOTE E - INTANGIBLE ASSETS
Intangible assets arising from the acquisition of MERAD Software, Inc. (formerly
Paul Harrison Enterprises, Inc.) and subsidiaries consists of technology known
as the MERAD Technology and are being amortized over ten years on the straight-
line method. MERAD Technology consists of the following as of June 30, 2000:
MERAD Technology $ 1,232,517
Accumulated amortization (173,701)
-----------
MERAD Technology, net $ 1,058,816
===========
MERAD Technology includes the technology and virtual software application
utility. During fiscal 2000, the Company capitalized direct costs of $217,496
incurred in modifying the MERAD Technology, giving it Internet application
ability.
F-14
<PAGE>
In June 2000, due to a change in the business focus and the expiration of major
customer contracts of the Company's HealthWatch Technologies, Inc. subsidiary,
the Company reviewed the recoverability of goodwill related to the subsidiary.
The Company determined that the unamortized technology of $213,286 was not
recoverable and should be written off.
NOTE F - DEBENTURES PAYABLE
During fiscal 2000, $455,000 of the debentures payable, along with $139,356 of
accrued interest, were converted into 316,990 shares of common stock of the
Company. As of June 30, 2000, $25,000 of debentures, along with accrued
interest of $7,918, remained unpaid.
The remaining debentures accrue interest at an annual rate of 10%, payable
quarterly and are secured by substantially all assets of the Company. The
remaining debentures matured March 1, 1998 and are presently in default. As of
June 30, 2000, the remaining debentures had not been extended and the Company
was in default under the debenture agreements. The debentures are convertible
into common stock, at the option of the holder.
NOTE G - COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company has entered into an operating lease for office and warehouse space,
which began on January 1, 1999 and is for a period of three years. The lease
agreement calls for total annual rent of $49,200, with a 4% increase each year.
Prior to the execution of this lease, the Company leased its office and
warehouse space on a month-to-month basis.
Rent expense for 2000 and 1999 was $72,003 and $59,055, respectively.
NOTE H - STOCK SPLIT
On November 17, 1999, the Board of Directors authorized a one-for-five reverse
stock split of the Company's common stock and its Series A and Series P
preferred stock. The reverse stock split became effective on December 22, 1999,
thereby reducing the number of common and preferred shares outstanding by 80%
and increasing the par value of all classes of stock to $.05. All references in
the accompanying consolidated financial statements to the number of common and
preferred shares, number and exercise price of stock options and stock warrants,
and per share amounts for periods prior to the reverse stock split have been
restated to reflect the reverse stock split.
NOTE I - PREFERRED STOCK
Series A Preferred Stock
The Company has outstanding Series A 6% cumulative, non-voting preferred stock
which has a stated value of $5 per share. Shareholders have the option to
convert each of the Series A preferred stock into fully-paid and non-assessable
shares of common stock at a conversion rate equal to the lesser of $2.60 per
share or 70% of the market value of the common stock at the time of conversion.
Dividends are payable semi-
F-15
<PAGE>
annually, if declared. No dividends have been declared to date. At June 30,
2000, the amount of dividends in arrears was $3,000. The Series A preferred
stock has dividend and liquidation preferences over common stock and is on an
equal liquidation and dividend basis with the Series P preferred stock and is
subordinate to both the Series C and Series D preferred stock. The stated
liquidation preference value was $25,000 at June 30, 2000.
Series P Preferred Stock
The Company has outstanding Series P cumulative, non-voting preferred stock,
which has a stated value of $50 per share. Shareholders have the option to
convert each of the Series P preferred stock into fifty shares of fully-paid and
non-assessable shares of common stock, provided the conversion feature is
approved by the vote of the Company's shareholders. The Series P preferred stock
originally contained a cumulative dividend feature of 12% which adjusted to a
maximum of 24% if the shares are not granted the right to convert by certain
target dates. In connection with the private placement of the Company's Series D
preferred Stock during March 2000, the holders of Series P preferred stock
agreed to amend the Certificate of Designation, Rights and Limitations of the
Series P preferred stock. The amendments included a retroactive adjustment to
the cumulative dividend from the graduated dividend to an 8% cumulative dividend
from the date of issuance until the shares are converted into common stock. The
holders of Series P preferred stock also agreed to allow the Company to pay the
dividends in cash or stock, at the Company's option. Dividends are payable semi-
annually, if declared. No dividends have been declared to date. At June 30,
2000, the amount of dividends in arrears was $468,202. The Series P preferred
stock has dividend and liquidation preferences over all common stock and is on
an equal liquidation and dividend basis with the Series A preferred stock and is
subordinate to both the Series C and Series D preferred stock. The stated
liquidation preference value was $3,344,300 at June 30, 2000.
Series C Preferred Stock
The Company has outstanding Series C 8% cumulative preferred stock, which has a
stated value of $100 per share. Subject to anti-dilution provisions,
shareholders have the option to convert each of the Series C preferred stock
into fully-paid and non-assessable shares of common stock at a conversion rate
equal to the stated value divided by a conversion price of $1.88 per share.
Dividends are payable, at the Company's option, either in cash or in shares of
Series C preferred stock. No dividends have been declared to date. At June 30,
2000, the amount of dividends in arrears was $8,000. Series C preferred
shareholders have voting rights as one class on all matters as to which holders
of common stock are entitled to vote. Holders of Series C preferred stock are
entitled the same number of votes as if the Series C preferred stock had been
converted. The Series C preferred stock has dividend and liquidation preferences
over Series A and Series P preferred stock and common stock, and is on an equal
liquidation and dividend basis with the Series D preferred stock. The stated
liquidation preference value was $400,000 at June 30, 2000.
Series D Preferred Stock
The Company has outstanding Series D 8% cumulative, non-voting preferred stock,
which has a stated value of $100 per share. Subject to anti-dilution provisions,
shareholders have the option to convert each of the Series D preferred stock
into fully-paid and non-assessable shares of common stock at a conversion rate
equal to the stated value divided by a conversion price of $3.50 per share.
Dividends are payable, at the Company's option, either in cash or in shares of
Series D preferred stock. No dividends have been declared to date. At June 30,
2000, the amount of dividends in arrears was $148,260. Series D preferred
shareholders have voting rights as one class on all matters as to which holders
of common stock shall are entitled to vote. Holders of Series D preferred stock
are entitled to the same number of votes as if the Series D preferred stock had
been converted.
F-16
<PAGE>
The Series D preferred stock has dividend and liquidation preferences over
Series A and Series P preferred stock and common stock, and is on an equal
liquidation and dividend basis with the Series C preferred stock. The stated
liquidation preference value was $7,413,000 at June 30, 2000.
NOTE J - SHAREHOLDERS' EQUITY
Private Placement of Common Stock
During fiscal 2000, the Company offered and issued 28,572 shares of common stock
at $1.75 per share. The offering netted the Company proceeds of $50,000.
During fiscal 1999, the Company offered and issued 241,991 shares of common
stock at various prices per share in private offerings. Net proceeds to the
Company aggregated $625,000.
During fiscal 1999, the Company issued 11,000 shares of common stock at $3.30
per share as a result of options being exercised by former employees.
Stock Options
The Company has in place a 1995 Stock Option Plan. Pursuant to the plan, the
Board of Directors may grant options to key individuals at its discretion.
Option prices for incentive stock options 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 up to three
years. At June 30, 2000, there were no shares reserved for issuance under the
1995 Stock Option Plan.
A summary of the status of the Company's stock options plans as of June 30, 2000
and 1999 and changes during the years ending on those dates is presented below:
<TABLE>
<CAPTION>
2000 1999
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
------- -------------- ------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 252,569 $ 4.50 171,939 $ 6.45
Granted 583,333 $ 3.19 125,200 $ 4.80
Exercised - $ - (11,000) $ 3.30
Expired (286) $66.50 (1,310) $76.50
Cancelled (11,743) $11.43 (32,260) $ 9.55
------- ------ ------- ------
Outstanding at end of year 824,143 $ 3.45 252,569 $ 4.50
======= ====== ======= ======
Options exercisable at end of year 824,143 $ 3.45 238,902 $ 4.55
======= ====== ======= ======
Weighted-average fair value of
options granted during the year $ .45 $ .35
====== ======
</TABLE>
F-17
<PAGE>
The following table summarizes information about stock options outstanding at
June 30, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- ----------------------
Weighted- Weighted- Weighted-
Number Average Average Number Average
Outstanding Remaining Exercise Outstanding Exercise
at 6/30/00 Contractual Life Price at 6/30/00 Price
---------------------- ---------------- --------- ----------- ---------
<S> <C> <C> <C> <C>
3,333 9.61 years $8.95 3,333 $8.95
124,667 3.29 years $4.80 124,667 $4.80
440,000 9.61 years $3.50 440,000 $3.50
116,143 2.54 years $3.30 116,143 $3.30
80,000 9.56 years $2.25 80,000 $2.25
60,000 9.44 years $1.88 60,000 $1.88
------- -------
824,143 824,143
======= =======
</TABLE>
Various officers and directors have been granted a total of 648,000 options
under the Company's Stock Options Plans which are included in the above table
(see Note L).
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25), and related
interpretations in accounting for its employee stock options rather than
Statement of Financial Accounting Standards Board Statement No. 123, "Accounting
for Stock-Based Compensation" (SFAS 123). In accordance with APB 25, since the
exercise price of the underlying stock options equaled the fair market on the
date of grant, no compensation expense was recognized.
SFAS 123 requires the Company to provide pro forma information regarding net
loss and loss 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 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 2000 and 1999,
respectively: no dividend yield for each year; expected volatility of 162.50%
and 136.25%, respectively; weighted-average risk-free interest rates of 6.66%
and 4.72%, respectively, and weighted-average expected option lives of five and
three years, respectively.
2000 1999
----------- -----------
Net loss available to common shareholders:
As reported $(3,479,999) $(2,018,289)
Pro forma $(3,771,769) $(2,118,726)
Net loss per common share:
As reported $ (2.26) $ (3.75)
Pro forma $ (2.45) $ (3.94)
In May 2000, the Company adopted its 2000 Stock Option Plan. This plan provides
that 2,000,000 shares of the Company's common stock be reserved for issuance
subject to annual adjustment. The 2000 Stock Option Plan provides for the grant
of options that are intended to qualify as incentive stock options to any
employee of the Company or its subsidiaries, and the grants of options that are
considered non-qualified due to certain conditions as to issuance.
F-18
<PAGE>
The Company has issued stock warrants in conjunction with the issuance of
preferred and common stock and the conversion of debentures payable to common
stock, as commissions on the issuance of equity capital, and as debt costs
associated with short-term financing. Activity related to stock warrants was as
follows:
<TABLE>
<CAPTION>
Weighted Average
Warrants Exercise Price
---------------- --------------
<S> <C> <C>
Outstanding at June 30, 1998 299,583 $14.90
Granted 234,161 $ 3.15
Expired (60,583) $49.55
---------- ------
Outstanding at June 30, 1999 473,161 $ 4.65
Granted 2,849,284 $ 3.05
Exercised (242,961) $ 5.76
---------- ------
Outstanding at June 30, 2000 3,079,484 $ 3.08
========== ======
</TABLE>
At June 30, 2000, the Company had stock warrants outstanding as follows:
Common Shares Exercise Expiration
Under Warrant Price Per Share Date
------------- ------------------ ----------
10,000 $8.60 January 2003
20,000 $7.97 April 2001
37,736 $4.31 March 2001
2,058,977 $3.50 March 2005
133,334 $2.44 January 2001
29,091 $2.24 January 2001
790,346 $1.88 February 2001 to December 2004
---------
3,079,484
=========
NOTE K - RELATED PARTY TRANSACTIONS
Officer and Director Options
At June 30, 2000, the Company had outstanding the following qualified and
nonqualified stock options granted to officers and directors:
Common Shares Exercise Expiration
Under Warrant Price Per Share Date
------------- ------------------ ----------
3,333 $8.95 January 2003
124,667 $4.80 October 2003
400,000 $3.50 February 2010
50,000 $3.30 October 2002 to May 2003
50,000 $2.25 January 2010
20,000 $1.88 December 2009
-------
648,000
=======
All options granted to officers and directors as shown above are exercisable at
June 30, 2000.
F-19
<PAGE>
Officer and Director Warrants
At June 30, 2000, the Company had outstanding to officers and directors stock
warrants to purchase 171,198 shares of common stock at prices ranging from $1.88
per share to $8.60 per share. These warrants expire at various dates from
January 2001 through March 2005.
Director Fees
During fiscal 2000, 40,000 shares of the Company's common stock valued at
$75,000, were issued to two of the Company's directors as compensation.
Consulting Agreements
Creative Business Strategies, Inc. (CBS), a company owned by a former
director/shareholder of the Company, provides the Company with business
development consulting services in exchange for a fee. During 2000 and 1999,
the Company had incurred $46,203 and $29,674, respectively, of fees to CBS, of
which $10,000 and $15,326, respectively, remained unpaid at June 30, 2000 and
1999 and are included in accrued expenses.
MERAD Royalty
As a result of acquiring the MERAD Technology in the PHE acquisition, the
Company earns a royalty equal to 10% of the gross revenues generated by Halis on
sale of the Halis Healthcare Enterprise System and any derivative products or
services associated therewith. The Company earned $21,935 and $66,087 in
royalties during fiscal 2000 and fiscal 1999, respectively. As of June 30, 2000,
no amounts have been paid to HealthWatch by Halis in conjunction with the MERAD
royalty.
NOTE L - INCOME TAXES
The effective tax rate varies from the maximum federal statutory rate as a
result of the following items:
<TABLE>
<CAPTION>
2000 1999
------ ------
<S> <C> <C>
Tax benefit computed at the maximum federal statutory rate (34.0)% (34.0)%
Decrease in tax benefit resulting from:
Amortization of intangible assets 4.0 6.0
Loss to be carried forward 30.0 28.0
------ ------
Income tax provision 0.0% 0.0%
====== ======
</TABLE>
Deferred income tax assets and the related valuation allowances result
principally from the potential tax benefits of tax carryforwards and also from
the unrealized loss on marketable securities.
The Company has recorded a valuation allowance to reflect the uncertainty of the
ultimate utilization of the deferred tax assets as follows:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Deferred tax assets $ 5,054,000 $ 3,887,000
Less valuation allowance (5,054,000) (3,887,000)
----------- -----------
Net deferred tax assets $ - $ -
=========== ===========
</TABLE>
For financial statement purposes, no tax benefit has been reported in 2000 and
1999 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.
F-20
<PAGE>
The net change in the deferred tax valuation allowance was an increase of
$1,167,000 and $658,000 for the years ended June 30, 2000 and 1999,
respectively.
At June 30, 2000, the Company had the following net operating loss carryforwards
and investment tax credit carryforwards:
Carryforward Net Operating Investment
Expires Loss Tax Credits
June 30 Carryforwards Carryforwards
--------------- ------------- -------------
2002 $ - $ 3,798
2003 627,889 14,560
2004 11,744 -
2005 122,457 -
2006 1,371 -
2007 235,901 -
2008 1,461,790 -
2009 281,054 -
2010 1,644,839 -
2011 1,666,725 -
2012 1,815,490 -
2013 1,881,569 -
2019 1,901,851 -
2020 3,050,000 -
----------- ------------
$14,702,680 $18,358
=========== ============
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.
NOTE M - INFORMATION CONCERNING BUSINESS SEGMENTS
The Company's two reportable segments are strategic business units that offer
different products and services principally to United States customers. These
segments are Merad Software, Inc. ("Merad") and HealthWatch Technologies, Inc.
("Tech"). Merad is a healthcare information technology company that has
developed and is in the initial stages of marketing software capable of
processing and tracking information for a variety of healthcare enterprises.
Tech is a supplier of noninvasive vascular diagnostic medical instruments and
related supplies. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies.
F-21
<PAGE>
Segment information for fiscal 2000 and fiscal 1999 is as follows:
<TABLE>
<CAPTION>
Merad Tech Other Total
----------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
2000
Revenues from external customers $ 21,935 $ 529,747 $ - $ 551,682
Segment loss (88,262) (287,359) (2,679,074) (3,054,695)
Interest expense 29,740 6,584 - 36,324
Total assets 2,563,549 93,560 - 36,324
Capital expenditures
Depreciation and amortization 109,398 230,996 1,265 341,659
1999
Revenues from external customers 91,087 1,129,716 - 1,220,803
Segment profit (loss) 42,956 (717,763) (1,074,124) (1,748,931)
Interest expense - - 67,659 67,659
Total assets 1,001,150 668,237 1,878,585 3,547,972
Capital expenditures 9,608 1,590 - 11,198
Depreciation and amortization 73,897 256,105 - 330,002
</TABLE>
NOTE N - FOURTH QUARTER ADJUSTMENTS
Significant adjustments made in the fourth quarter of fiscal 2000 are as
follows:
<TABLE>
<S> <C>
Record other-than-temporary decline in value of investment in Halis, Inc. $472,810
Record loss from impairment of intangible assets $213,286
</TABLE>
F-22
<PAGE>
HALIS, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS FOR THE
YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
-----------------
page
Independent Auditors' Report.............................................. F2-2
Consolidated Balance Sheet................................................ F2-3
Consolidated Statements of Operations..................................... F2-5
Consolidated Statements of Cash Flows..................................... F2-6
Consolidated Statements of Stockholders' Equity (Deficit)................. F2-8
Notes to Consolidated Financial Statements................................ F2-9
F2-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Halis, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Halis, Inc. and
Subsidiaries as of December 31, 1999, and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for the years ended
December 31, 1999 and 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
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 Halis, Inc. and
Subsidiaries as of December 31, 1999, and the results of their operations and
their cash flows for the years ended December 31, 1999 and 1998 in conformity
with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note B to
the financial statements, the Company's recurring losses from operations and
limited capital resources raise substantial doubt about its ability to continue
as a going concern. Management's plans in regard to these matters are also
described in Note B. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
April 7, 2000
F2-2
<PAGE>
HALIS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
ASSETS
CURRENT ASSETS
Cash $ 13,503
Receivables, less allowance for possible losses of $229,800 257,388
Other current assets 74,158
----------
TOTAL CURRENT ASSETS 345,049
----------
PROPERTY AND EQUIPMENT
Computers and software 425,564
Vehicle 36,588
Office furniture and equipment 64,617
Leasehold improvements 29,770
----------
556,539
Less: accumulated depreciation 183,289
----------
PROPERTY AND EQUIPMENT, NET 373,250
----------
OTHER ASSETS
Deposits 99,250
Goodwill, net of accumulated amortization of $1,144,222 870,191
Other intangible, net of accumulated amortization of $69,283 49,488
Investment 48,958
----------
TOTAL OTHER ASSETS 1,067,887
----------
TOTAL ASSETS $1,786,186
==========
The accompanying notes are an integral part of these consolidated financial
statements.
F2-3
<PAGE>
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,767,853
Deferred revenue 36,294
Accrued payroll and payroll taxes 262,598
Note payable to a bank 318,891
Note payable - related party 15,000
Obligations under capital leases - current portion 60,211
-------------
TOTAL CURRENT LIABILITIES 2,460,847
-------------
LONG-TERM DEBT
Obligations under capital leases, net of current portion 208,560
-------------
STOCKHOLDERS' DEFICIT
Preferred stock, $.10 par value; 5,000,000 shares authorized;
none issued -
Common stock, $.01 par value; 100,000,000 shares authorized;
52,710,130 issued and outstanding 527,101
Common stock to be issued, 781,250 shares 40,000
Additional paid-in capital 36,687,723
Accumulated other comprehensive loss, unrealized
loss on investment (76,042)
Accumulated deficit (38,062,003)
-------------
TOTAL STOCKHOLDERS' DEFICIT (883,221)
-------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 1,786,186
=============
The accompanying notes are an integral part of these consolidated financial
statements.
F2-4
<PAGE>
HALIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---------- ------------
<S> <C> <C>
REVENUES $ 5,082,493 $ 7,630,370
----------- ------------
COST AND EXPENSES
Cost of goods sold 848,173 2,335,237
Selling, general and administrative 4,056,539 7,343,382
Depreciation and amortization 620,137 911,371
Research and development 287,254 725,994
Write down of intangibles 63,996 224,312
----------- ------------
TOTAL COST AND EXPENSES 5,876,099 11,540,296
----------- ------------
OPERATING LOSS (793,606) (3,909,926)
----------- ------------
OTHER INCOME (EXPENSE)
Provision for losses on note receivable - related party (623,377) -
Gain on sale of subsidiaries - 926,017
Loss on asset disposal - (174,603)
Interest expense (63,119) (60,341)
Interest income 27,131 25,643
Other income 8,144 44,411
----------- ------------
TOTAL OTHER INCOME (EXPENSE) (651,221) 761,127
----------- ------------
NET LOSS $(1,444,827) $(3,148,799)
=========== ============
BASIC AND DILUTED LOSS PER COMMON SHARE $(.03) $(.06)
=========== ============
BASIC AND DILUTED WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 51,266,751 50,804,461
=========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F2-5
<PAGE>
HALIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,444,827) $(3,148,799)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization:
Property and equipment 115,772 150,009
Goodwill 402,883 634,679
Other 101,482 126,683
Loss on disposal of property and equipment - 174,603
Gain on sale of subsidiaries - (926,109)
Write down of intangibles 63,996 224,312
Interest accrued on note receivable - related party (27,085) (21,461)
Provision for losses on accounts receivable 11,003 186,951
Provision for losses on note receivable 623,377 -
Issuance of common stock for services 15,400 -
Changes in operating assets and liabilities, net of
assets and liabilities sold:
Decrease (increase) in accounts receivable 94,540 (369,981)
Increase in other current assets (3,287) (9,469)
Decrease (increase) in deposits 70,137 (63,908)
Decrease in accounts payable and
accrued expenses (74,370) (215,440)
Increase (decrease) in accrued payroll and
payroll taxes (1,736) 201,700
Increase (decrease) in deferred revenues (120,752) 275,965
----------- -----------
Total adjustments 1,271,360 368,624
----------- -----------
Net cash used by operating activities (173,467) (2,780,175)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (76,162) (48,574)
Proceeds from sale of subsidiaries - 400,000
----------- -----------
Net cash provided (used) by investing activities (76,162) 351,426
----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F2-6
<PAGE>
HALIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net of
transaction costs $250,000 $1,585,199
Proceeds from 6% convertible promissory notes - 100,000
Proceeds from 4% convertible promissory notes - 100,000
Payments on convertible promissory notes - (215,000)
Payments on obligations under capital leases (42,216) (98,954)
Payments on note payable to a bank (56,635) (97,822)
Net proceeds (payments) on notes payable - related parties 59,500 (53,000)
-------- ----------
Net cash provided by financing activities 210,649 1,320,423
-------- ----------
NET DECREASE IN CASH (38,980) (1,108,326)
CASH, BEGINNING OF YEAR 52,483 1,160,809
-------- ----------
CASH, END OF YEAR $ 13,503 $ 52,483
======== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F2-7
<PAGE>
HALIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Accumulated
Common Stock Common Additional Other Total
-------------------- Stock Paid-In Comprehensive Accumulated Stockholders'
Shares Amount to be Issued Capital Loss Deficit Equity (Deficit)
---------- -------- ------------ ----------- -------------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1997 44,239,675 $442,397 $ - $35,743,205 $ - $(33,468,377) $ 2,717,225
Comprehensive Loss:
Net loss - - - - - (3,148,799) (3,148,799)
Change in unrealized loss on
investment - - - - (88,542) - (88,542)
-----------
Total Comprehensive Loss (3,237,341)
Shares received and canceled as
proceeds of sale of subsidiary (11,548,325) (115,483) - (1,501,282) - - (1,616,765)
Issuance of common stock 11,952,225 119,521 - 1,465,678 - - 1,585,199
Common stock issued for conversion
of convertible debt to equity 1,616,188 16,162 - 358,838 - - 375,000
----------- -------- ------------ ----------- ------------- ------------ -----------
Balances, December 31, 1998 46,259,763 462,597 - 36,066,439 (88,542) (36,617,176) (176,682)
Comprehensive Loss:
Net loss - - - - (1,444,827) (1,444,827)
Change in unrealized loss on
investment - - - - 12,500 - 12,500
-----------
Total Comprehensive Loss (1,432,327)
Issuance of common stock 2,066,667 20,667 - 189,333 - - 210,000
Common stock issued to
consultants 1,059,055 10,591 - 97,457 - - 108,048
Common stock issued for
conversion
of convertible debt to equity 1,824,645 18,246 - 139,494 - - 157,740
Common stock issued to an
employee
in lieu of accrued compensation 1,500,000 15,000 - 195,000 - - 210,000
Common stock to be issued - - 40,000 - - - 40,000
---------- -------- ------------ ----------- ------------- ------------ -----------
Balances, December 31, 1999 52,710,130 $527,101 $40,000 $36,687,723 $(76,042) $(38,062,003) $ (883,221)
========== ======== ============ =========== ============= ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F2-8
<PAGE>
HALIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of the Company and Basis of Presentation
Halis, Inc. ("Halis") and Subsidiaries (collectively, the "Company") develops
and supplies healthcare software systems and provides claims processing services
to managed healthcare markets, medical practices, and related point of service
markets. The Company also provides value added computer services, network
solutions, and connectivity solutions and systems integration principally to
Atlanta area businesses. Additionally, the Company provides services support,
including onsite hardware maintenance, as well as network support programs. It
grants credit to its customers without requiring collateral.
Principles of Consolidation
The consolidated financial statements include the accounts of Halis, Inc. and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Revenue Recognition
Revenue consists primarily of third party claims processing fees, consulting
services, software licensing fees, sales of related computer hardware, and post
contract customer support and maintenance. For 1999 and 1998, third party
claims processing fees accounted for approximately 66% and 36%, respectively, of
the Company's sales. Revenues are recognized as follows:
Claims processing, consulting services, When the services are provided.
installation, training and education
Software Licensing Revenue After shipment of the product and
fulfillment of acceptance terms,
provided no significant obligations
remain and collection of resulting
receivable is deemed probable.
Contract Support Ratably over the life of the
contract from the effective date.
Hardware Upon shipment of computer equipment
to the customer, provided no
significant obligations remain and
collection of resulting receivable
is deemed probable.
F2-9
<PAGE>
Cash - Agency Accounts
The Company, through its third party claims administration subsidiary, maintains
custody of cash funds on behalf of its customers for the payment of insurance
premiums to carriers and medical claims for covered individuals. The Company
has custody of the funds but no legal right to them. Therefore, the cash
balances and related liabilities are not reflected in the Company's balance
sheet. At December 31, 1999, the Company maintained custody of approximately
$1.3 million of customer funds.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method based on the estimated useful lives of the assets,
generally five to seven years.
Goodwill
Goodwill represents the excess of cost over the fair value of assets acquired
and is amortized using the straight-line method over a period of five years.
The Company assesses the recoverability of its goodwill whenever adverse events
or changes in circumstances or business climate indicate that expected future
cash flows (undiscounted and without interest charges) in individual business
units may not be sufficient to support the recorded asset. An impairment is
recognized by reducing the carrying value of the goodwill based on the expected
discounted cash flows of the business unit.
In December 1998, due to the anticipated expiration of major customer contracts
of the Company's Halis Consulting subsidiary ("Halis Consulting"), the Company
reviewed the recoverability of goodwill. The Company determined that the
unamortized goodwill from the Halis Consulting acquisition of $224,312 was not
recoverable and should be written off.
Software Development Costs
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed," research and development costs incurred prior to the attainment of
technological and marketing feasibility of products are charged to operations.
Thereafter, the Company capitalizes the direct costs and allocated overhead
incurred in the development of products until the point of market release of
such products, wherein costs incurred are again charged to operations.
Capitalized costs were amortized over a period of five years on a straight-line
basis, and amortization commenced when the product was available for market
release. In December 1999, due to the Company's plan to no longer sell its
existing "window" based software product and to convert to an "Internet" driven
software product in 2000, the Company reviewed the recoverability of software
development costs. The Company determined that the unamortized software
development costs of $63,996 was not recoverable and should be written off.
Other Intangible
Other intangible consists of license fees paid to a non-related company for the
right to use its software technology in the development of the Company's
software product and is amortized over a period of two years on a straight-line
basis.
F2-10
<PAGE>
Investment
The investment is in a marketable equity security of a related company, which is
classified as available-for-sale, and is carried at market value (see Note I).
The purchase cost and fair value of the investment at December 31, 1999 was
$125,000 and $48,958, respectively. The related unrealized holding loss of
$76,042 is reported as a separate component of stockholders' equity (deficit) at
December 31, 1999.
Income Taxes
Deferred income tax assets and liabilities are recognized for the estimated tax
effects of temporary differences between financial reporting and taxable income
(loss) and for the loss carry-forwards based on enacted tax laws and rates. A
valuation allowance is used to reduce deferred income tax assets to the amount
that is more likely than not to be utilized.
Earnings Per Share
The Company has adopted SFAS No. 128, "Earnings Per Share," which requires basic
earnings per share and diluted earnings per share presentation. The two
calculations differ as a result of potential common shares included in diluted
earnings per share, but excluded in basic earnings per share. As the Company
experienced net losses for the income statement periods presented, potential
common shares have an antidilutive effect and are excluded for purposes of
calculating diluted earnings per share. The number of shares which have an
antidilutive effect on diluted earnings per share was 14,269,317 and 11,584,189
in 1999 and 1998, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of certain assets, liabilities, revenues, expenses
and contingent assets and liabilities. Significant estimates included in these
financial statements relate to the allowance for possible losses, useful lives,
legal contingencies, and recoverability of long-term assets such as capitalized
software development costs and goodwill. Actual amounts could differ from those
estimates. Any adjustments applied to estimated amounts are recognized in the
year in which such adjustments are determined.
Fair Value of Financial Instruments
The carrying amounts reflected in the consolidated balance sheet for cash,
receivables and notes payable approximate their fair values due to the short
maturities of those instruments. Available-for-sale marketable securities are
recorded at fair value in the consolidated balance sheet. Management is unable
to estimate the fair value of its other financial instruments. These
instruments are being paid as cash becomes available.
Reclassifications
Certain reclassifications have been made to the 1998 consolidated financial
statements to conform to the 1999 consolidated financial statement presentation.
NOTE B - REALIZATION OF ASSETS AND SATISFACTION OF LIABILITIES
F2-11
<PAGE>
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate the continuation of
the Company as a going concern. However, the Company incurred a net loss of
$1,444,827 and $3,148,799 for the years ended December 31, 1999 and 1998,
respectively, and had a working capital deficiency of $2,115,798 and an equity
deficiency of $883,221 at December 31, 1999. The Company has sustained
continuous losses from operations. The Company has used, rather than provided,
cash in its operating activities during the years ended December 31, 1999 and
1998 and has deferred payment of certain accounts payable and accrued expenses.
Given these results, additional capital and improved operations will be needed
to sustain the Company's operations.
Management's plans in this regard include merging with HealthWatch, Inc.
("HealthWatch"), a related company which owns approximately 20% of Halis (see
Note I). The Company expects the merger to improve its liquidity by having
access to HealthWatch's cash reserves and increasing the Company's ability to
raise additional growth capital. In addition, the Company is upgrading its HES
software product to an Internet version. This upgrade will restructure the
software into several healthcare software products under a common architecture,
which the Company believes will improve market acceptance. The Company also
plans to expand its business model to include e-commerce services that will
supplement its software sales and value-added business services. The e-commerce
business will focus on technology-based transactions that are paid for on a
monthly or per-transaction basis. This revenue model is expected to generate
recurring, more predictable revenues that can be leveraged to work towards a
positive cash flow. Additionally, the Company will continue its efforts to
raise the additional capital required to fund planned 2000 activities.
In view of the matters described above, there is substantial doubt about the
Company's ability to continue as a going concern. The recoverability of the
recorded assets and satisfaction of the liabilities reflected in the
accompanying balance sheet is dependent upon continued operation of the Company,
which is in turn dependent upon the Company's ability to meet its financing
requirements on a continuing basis and to succeed in its future operations.
There can be no assurance that management will be successful in implementing its
plans. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
NOTE C - NOTE PAYABLE
The Company has a 10.5% note payable to a bank in the amount of $318,891 as of
December 31, 1999. The note is payable in monthly installments of $8,045,
including interest, with a balloon payment of all unpaid principal and interest
due on July 28, 2000. The note was assumed in connection with the disposal of a
subsidiary of the Company. Certain assets of the former subsidiary act as
collateral for the loan. The Company has guaranteed payment of the loan.
NOTE D - RELATED PARTY NOTES
The Company had an unsecured note receivable due from a stockholder of $623,377.
The note accrues interest at 5% per annum and is due October 31, 2001. The
stockholder may repay the note using Halis common stock if certain conditions
are met, including but not limited to the Company's common stock achieving a
traded market price of at least $3 per share for a specified period of time.
In December 1999, the Company reviewed the collectibility of this note and
determined that its collection was doubtful. The entire amount of the note has
been reserved at December 31, 1999.
F2-12
<PAGE>
At December 31, 1999, the Company had an unsecured note payable to a stockholder
and director of the Company in the amount of $15,000. This note was non-
interest bearing and due on demand.
NOTE E - COMMITMENTS AND CONTINGENCIES
Leases
The Company leases office space under several operating lease agreements
expiring in 2003. Rent expense for the office space and equipment classified as
operating leases totaled $536,547 and $586,121 for the years ended December 31,
1999 and 1998, respectively. At December 31, 1999, future minimum lease
payments under non-cancelable operating leases having remaining terms in excess
of one year are as follows:
2000 $ 541,567
2001 567,883
2002 575,768
2003 457,216
----------
$2,142,434
==========
Beginning January 2000, the Company will sublease one of its office facilities
under a four year operating lease expiring December 2003. Minimum future
subrental income anticipated under this agreement is as follows:
2000 $193,392
2001 222,372
2002 226,630
2003 231,104
--------
$873,498
========
During 1998, the Company acquired equipment totaling $44,650 under a five year
capital lease. During 1999, the Company acquired computers and software and a
vehicle totaling $266,943 under capital leases ranging from three to five years.
Amortization of these capital leases included in depreciation expense totaled
$78,200 and $2,236 for the years ended December 31, 1999 and 1998, respectively.
Accumulated depreciation amounted to $80,436 and $2,236 as of December 31, 1999
and 1998, respectively.
Future payments under these leases are as follows:
2000 $ 84,432
2001 82,635
2002 78,775
2003 71,572
2004 10,341
--------
Total minimum lease payments 327,755
Amount representing interest (58,984)
--------
Present value of minimum lease payments $268,771
========
Employment Agreements
F2-13
<PAGE>
The Company had in effect an employment agreement with Paul W. Harrison which
expired December 31, 1999. The agreement provided for an annual base salary of
$280,000 (to be increased upon the attainment of annual revenue targets) plus
certain incentive bonus payments and the issuance of qualified and non-qualified
stock options to purchase common stock of the Company. Mr. Harrison agreed to
reduce his 1998 salary to $235,000, of which $25,000 was paid in cash and the
remaining $210,000 was satisfied through the issuance of 1,500,000 shares of the
Company's common stock in February 1999. During 1999, Mr. Harrison agreed to
reduce his 1999 salary to $107,000, of which $27,000 was paid in cash and the
remaining $80,000 was satisfied through the issuance of 1,187,500 shares of the
Company's common stock in February 2000. The Company is presently in
negotiations with Mr. Harrison for terms of a new employment agreement.
The Company had also entered into an employment agreement with Larry Fisher
which was scheduled to expire December 31, 1999. The agreement provided for an
annual base salary of $175,000 plus incentive bonus payments and the issuance of
qualified and non-qualified stock options to purchase common stock of the
Company. During 1999, the Company and Mr. Fisher agreed to the mutual
termination of his agreement effective December 31, 1998. Pursuant to a
Separation and Settlement Agreement entered into with Mr. Fisher, the Company
agreed to pay Mr. Fisher's unpaid 1998 base salary in cash and to issue Mr.
Fisher 300,000 fully vested non-statutory stock options, exercisable at a price
of $0.13 per share, expiring January 2006. At December 31, 1999, the remaining
balance due to Mr. Fisher was $94,662.
Litigation
In February 1997, a complaint styled Advanced Custom Computer Solutions, Inc.
("ACCS"), Wayne W. Surman and Charlotte Surman v. Fisher Business Systems, Inc.,
Halis, Inc., Larry Fisher, Paul W. Harrison, and Nathan I. Lipson was filed in
the State Court of Fulton County, Georgia. The complaint alleges, among other
things, breach of contract in connection with the termination by the Company of
its merger agreement with ACCS, which the Company advised ACCS was terminated in
November 1996 due to the impossibility of ACCS's fulfilling certain conditions
to closing therein. In addition, the complaint alleges that the defendants made
false and misleading statements to the plaintiffs for the purpose of inducing
plaintiffs to lend money to the Company. The Surmans are the principals of ACCS
and claim personal damages against the Company on certain of the claims, and
claim a right to at least 150,000 shares of the Company's common stock, the
exact amount to be determined at trial, based on a claim of a breach of an
alleged oral contract to pay them shares of the Company's common stock as
compensation for soliciting investors (the "Oral Contract Claim"). The Surmans
further claim that the Company fraudulently induced them to solicit investors
for the Company (the "Investor Solicitation Claim"). The complaint seeks
damages in the amount of at least $2 million (the exact amount of such damages
to be proved at trial), additional damages to be determined by the jury at trial
and punitive damages. The Company answered, denying the allegations of
liability in the complaint, and the Company vigorously defended the lawsuit.
On November 19, 1998, the trial court granted summary judgment in favor of the
Company on all but two counts of the plaintiff's complaint, as amended. The two
counts remaining include the Oral Contract Claim and Investor Solicitation
Claim. The plaintiffs have appealed to the Georgia Court of Appeals from the
order granting partial summary judgment to the Company on all other claims, and
the Company has cross-appealed the portions of the order denying summary
judgment on the two surviving counts. The Georgia Court of Appeals has affirmed
the trial court's granting of summary judgment in favor of the Company on seven
of the nine counts in the complaint and affirming the denial of the Company's
cross appeal denying summary judgment on the two surviving counts. There can be
no assurance, however, that
F2-14
<PAGE>
the Company will be successful in its defense or that the resolution of this
matter will not have a material adverse effect on the financial condition or
results of operation of the Company.
On July 18, 1997, the Company was sued by Penelope Sellers in an action seeking
actual damages against the Company in the amount of $480,535, unspecified
attorneys fees, and punitive damages of not less than $1,000,000. Ms. Sellers
contends that a Finder's Fee Agreement into which she entered with the Company
in August 1995, and under which she was to receive a commission equal to 10% of
the amount of any equity investments in the Company or software licensing fees
paid to the Company in respect to transactions introduced to the Company by her,
entitles her to an amount in excess of the approximately $19,350 which she has
been paid to date under that agreement. That amount represents 10% of the
investment made by the principals of AUBIS, LLC ("AUBIS") in a private placement
of convertible notes (in which private placement other investors besides the
AUBIS principals participated) and 10% of the amounts received by the Company
from the sale of Fisher Restaurant Management Systems by AUBIS.
Ms. Sellers claims that the entirety of the convertible notes offering described
above (in which an aggregate of $1,470,000 was raised by the Company) would not
have been successful but for her introduction of the AUBIS principals to the
Company. As a result, Ms. Sellers has made a claim for 10% of all amounts
raised in the notes offering. Ms. Sellers has also made a claim, based on the
same rationale, to 10% of all capital funding raised by the Company (up to the
$500,000 maximum compensation), including the proceeds of a private placement
which raised gross proceeds of approximately $2 million. Finally, Ms. Sellers
has made a claim for 10% of the value of AUBIS and Halis Software, Inc.
The Company has answered Ms. Seller's complaint, denying liability under the
Finder's Fee Agreement in an amount exceeding that already paid, and denying
liability to Ms. Sellers under any of the factual or legal bases alleged in her
complaint. Discovery has been completed. The defendants filed a motion for
partial summary judgment, which was granted, effectively eliminating Larry
Fisher and Paul Harrison on claims asserted against them for tortuous
interference with contractual relations. The Company continues to vigorously
defend this lawsuit. There can be no assurance, however, that the Company will
be successful in its defense or that the resolution of this matter will not have
a material adverse effect on the financial condition or results of operation of
the Company.
On March 22, 1999, the Company and Paul Harrison were sued by Debra York, the
former President of the Company's wholly owned subsidiary, The Compass Group,
Inc. Ms. York's complaint alleged that she was owed compensation arising from
a certain Agreement and Plan of Merger and Reorganization and a certain
Employment Agreement, and in connection with certain alleged representations of
the Company and Paul Harrison. On September 24, 1999, a settlement was reached
among the parties in which the Company paid Ms. York $20,000 and Ms. York
returned to the Company stock options to purchase 809,500 shares of the
Company's common stock at a price of $0.13 per share.
On April 1, 2000, the Company was served a complaint by Carrera-Maximus, Inc.
(previously known as Carrera Consulting Group). The complaint alleges breach of
contract in connection with certain professional service fees, product support
fees, and license fees paid to the Company under a contract between the two
parties. Carrera-Maximus, Inc. is seeking the return of fees in the total
amount of approximately $538,000. The Company denies the allegations of
liability in the complaint and intends to vigorously defend this case, including
the filing of an answer and assertion of the appropriate counter claims. There
can be no assurance, however, that the Company will be successful in its defense
or that the resolution of this matter will not have a material adverse effect on
the financial condition or results of operation of the Company.
F2-15
<PAGE>
The Company is also party to litigation that it believes to be immaterial with
respect to amount and is not disclosed herein. No provision has been made in
these financial statements regarding these items due to the uncertainty of their
ultimate resolution.
NOTE F - INCOME TAXES
Significant components of the Company's deferred income tax assets as of
December 31, 1999 are as follows:
Deferred tax assets:
Net operating loss carry-forwards $ 6,297,108
Other, net 580,886
-----------
Net deferred tax asset 6,887,994
Valuation allowance (6,887,994)
-----------
Net deferred tax asset reported $ -
===========
The valuation allowance at December 31, 1998 amounted to $6,405,312.
The reconciliation of the effective income tax rate to the Federal statutory
rate is as follows:
1999 1998
------- ------
Federal income tax rate (34.0)% (34.0)%
Effect of valuation allowance on deferred tax assets 34.0 34.0
State income tax, net of Federal benefit 0.0 0.0
------- -----
Effective income tax rate 0.0% 0.0%
======= =====
At December 31, 1999, the Company had available for carryforward a net operating
loss of approximately $16.6 million. Approximately $9 million of the net
operating loss relates to losses prior to 1997, and as a result of an ownership
change on November 19, 1996, and in accordance with Section 382 of the Internal
Revenue Code, the loss carryforward is limited to approximately $841,000 for
each year thereafter. The net operating losses expire between the years 2000
and 2019. Future recognition of these carry-forwards will be reflected when it
is more likely than not that they will be utilized.
Net operating loss carry-forwards expiring in the next five years are
approximately as follows:
2000 $ 112,000
2001 246,000
2002 1,225,000
2003 1,571,000
2004 782,000
NOTE G - STOCK OPTION PLANS
During 1996, the Company adopted the 1996 Stock Option Plan which provided for
the issuance of both qualified and non-qualified stock options to employees and
non-employee directors pursuant to Section
F2-16
<PAGE>
422 of the Internal Revenue Code. The number of shares reserved for the plan was
3,000,000. On December 5, 1997 the shareholders of the Company approved an
amendment to increase the number of shares available for grant from 3,000,000
shares to 8,000,000 shares. Additional non-qualified options may be granted
outside of the plan upon approval of the Board of Directors.
Options issued to participants are granted with an exercise price of the mean
between the high "bid" and low "ask" price (average market price) as of the
close of business on the date of grant, and are exercisable up to ten years from
the date of grant. Incentive stock options issued to persons who directly or
indirectly own more than ten percent of the outstanding stock of the Company
shall have an exercise price of 110 percent of the average market price on the
date of grant and are exercisable up to five years from the date of grant.
The Company's previous incentive stock option plan, the 1986 Incentive Stock
Option Plan, expired on January 29, 1996. The 1988 Non-qualified Stock Option
Plan was terminated by the Company on April 24, 1996. Activity related to these
plans is as follows:
<TABLE>
<CAPTION>
1986 & Weighted Weighted Outside Weighted
1988 Plans: Average 1996 Plan: Average of Plans: Average
Number of Exercise Number of Exercise Number of Exercise
Options Price Options Price Options Price
----------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at December 31, 1997 71,940 $ 0.28 2,967,742 $1.67 7,872,000 $1.75
Granted - - 990,350 $0.13 3,995,290 $0.13
Expired - - - - - -
Terminated - - (2,206,842) $1.23 (2,222,200) $0.38
Exercised - - - - (1,000,000) $0.13
----------
Outstanding at December 31, 1998 71,940 $ 0.28 1,751,250 $0.25 8,645,090 $0.20
Granted - - - - 2,378,700 $0.08
Expired (220) $11.88 - - - -
Terminated - - (385,250) $0.13 (717,000) $0.13
Exercised - - - - - -
----------- ---------- ----------
Outstanding at December 31, 1999 71,720 $ 0.24 1,366,000 $0.20 10,306,790 $0.16
=========== ========== ==========
Options exercisable at
December 31, 1999 71,720 $ 0.24 775,475 $0.25 10,202,290 $0.16
=========== ========== ==========
</TABLE>
On February 25, 1998, the Company's Board of Directors adopted a resolution to
amend the terms of certain outstanding stock option agreements to reduce the
exercise price thereof and the number of shares of common stock subject thereto.
In connection with this resolution, the aggregate number of options outstanding
at December 31, 1997 was reduced by 2.1 million shares to approximately 8.8
million shares (prior to any other transactions in 1998). The weighted average
exercise price declined from $1.72 per share to $0.54 per share.
Exercise prices for options outstanding as of December 31, 1999 under the 1986
and 1988 Plans range from $0.13 to $10.63 per share. The weighted average
remaining life of these options was approximately three years.
F2-17
<PAGE>
Exercise prices for options outstanding as of December 31, 1999 granted under
the 1996 Plan ranged from $0.13 to $2.00 per share. The weighted average
remaining life of these options was approximately eight years.
Exercise prices for options outstanding as of December 31, 1999 granted outside
of the Plans ranged from $0.05 to $2.12 per share. The weighted average
remaining life of these options was approximately eight years.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25), and related interpretations
in accounting for its employee stock options rather than Statement of Financial
Accounting Standards Board Statement No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). In accordance with APB 25, since the exercise price
of the underlying stock options equaled the fair market value on the date of
grant, no compensation expense was recognized.
Pro forma information regarding net income (loss) and earnings (loss) per share
is required by SFAS 123 and has been determined as if the Company had accounted
for its employee stock options under the fair value method of that statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1999 and 1998:
1999 1998
---------- ----------
Risk-free interest rate 4.55-5.67% 4.31-4.72%
Dividend yield 0.0% 0.0%
Expected volatility 147.60% 125.33%
Weighted average expected life 4 years 4 years
Forfeiture rate 5.0% 5.0%
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma net loss and loss per share if compensation expense had been recognized
for the options issued would have been as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Net loss - as reported $(1,444,827) $(3,148,799)
Net loss - pro forma $(1,472,727) $(3,935,589)
Reported loss per share - basic & diluted $ (0.03) $ (0.06)
Pro forma loss per share - basic & diluted $ (0.03) $ (0.08)
Weighted average fair value of options granted
during the year $ 0.01 $ 0.13
</TABLE>
F2-18
<PAGE>
NOTE H - STOCK WARRANTS
The Company has issued stock warrants in conjunction with the issuance of common
stock. Activity related to stock warrants was as follows:
Weighted Average
Warrants Exercise Price
--------- ----------------
Outstanding at December 31, 1997 1,301,760 $1.73
Granted - $ -
Exercised - $ -
Expired (25,000) $1.35
----------
Outstanding at December 31,1998 1,276,760 $1.73
Granted 1,161,822 $0.29
Exercised - $ -
Expired - $ -
----------
Outstanding at December 31, 1999 2,438,582 $1.05
==========
At December 31, 1999 the Company had warrants outstanding as follows:
Common Shares Exercise Range of
Under Warrant Price Per Share Expiration Dates
------------- --------------- ------------------------------
437,500 $ .05 December 2004
535,000 $ .11 June 2004
237,982 $1.35 September 2002 - December 2002
1,228,100 $1.75 November 2001 - September 2002
---------
2,438,582
=========
NOTE I - RELATED PARTY TRANSACTIONS
On November 18, 1996, the Company entered into a license agreement for a
proprietary technology asset ("MERAD") from Paul Harrison Enterprises, Inc.
("PHE"), which was controlled by the Chairman and Chief Executive Officer of the
Company. Mr. Harrison served as the President of PHE and at the time
beneficially owned approximately 40% of this company. PHE was acquired by
HealthWatch, Inc. on October 2, 1998. The Company is obligated to pay a license
fee equal to 10% of the gross revenues generated from MERAD and any derivations
thereof by the Company or any of its affiliates to PHE (after the merger now
known as MERAD Software, Inc.). During 1999 and 1998, $62,518 and $28,815,
respectively, of license fees were incurred under this agreement. At December
31, 1999 and 1998, $87,483 and $24,965, respectively, was payable to PHE under
this agreement and was included in accounts payable.
In addition, the Company was obligated to pay MERAD Corporation, a 79%
subsidiary of PHE (Paul Harrison owns the remaining 21% interest), a development
fee of $15,000 per month pursuant to a license and software development
agreement between MERAD Corporation and Halis Software, Inc. ("HSI"), a
subsidiary of the Company. The development agreement with MERAD Corporation
ended June 30, 1998.
In addition, during 1998, $160,000 was earned by MERAD Corporation for specific
enhancements and maintenance required by the Company to its software products.
F2-19
<PAGE>
As part of the license agreement, HSI agreed to continue developing MERAD and to
be a beta site to test MERAD's capabilities and functionality. HSI agreed that
any enhancements and modifications to MERAD become the sole and exclusive
proprietary property of MERAD Software, Inc., subject to HSI's rights to use the
same under its license. With the exception of certain licenses to use MERAD,
MERAD Software, Inc. has exclusive ownership rights to MERAD.
During 1999, the Company granted options to an officer/director of the Company
to purchase 540,000 shares of the Company's common stock at a price of $.05 per
share. These options expire December 2009.
During 1999, the Company granted options to a director of the Company to
purchase 100,000 shares of the Company's common stock at a price of $.05 per
share. These options expire December 2009.
During 1999, the Company granted options to a relative of an officer/director of
the Company to purchase 100,000 shares of the Company's common stock at a price
of $.05 per share. These options expire December 2009.
At December 31, 1999, the Company had outstanding the following qualified and
nonqualified stock options granted to officers and directors:
Common Shares Exercise Range of
Under Option Price Per Share Expiration Dates
--------------- --------------- -------------------------
740,000 $.05 December 2009
5,666,500 $.13 June 2006 - December 2009
---------
6,406,500
=========
Of the total outstanding options granted to officers and directors as discussed
above, options to acquire up to an aggregate of $6,343,250 shares of common
stock are exercisable at December 31, 1999.
During 1999, 1,500,000 shares of the Company's stock were issued to an officer
of the Company for payment of accrued compensation of $210,000.
At December 31, 1998, the Company had outstanding a 6% convertible debenture to
HealthWatch, Inc., a related company, in the amount of $100,000. During 1999,
this related company loaned the Company an additional $57,741. In January 1999,
the outstanding convertible debenture in the total amount of $157,741 was
converted into 1,824,645 shares of the Company's common stock.
In 1997, the Company purchased an aggregate of 4,166 shares of HealthWatch
Preferred Stock for $125,000. The HealthWatch Preferred Stock purchased by the
Company was converted into 16,667 (adjusted for reverse stock split) shares of
HealthWatch common stock, or 3.9% of the outstanding HealthWatch common stock at
that time. The Company is not obligated and does not have the present intent to
purchase additional shares of the common stock of HealthWatch.
Paul W. Harrison, the Chairman and Chief Executive Officer of the Company, is
also the Chairman and Chief Executive Officer of HealthWatch. Mr. Harrison is
also a shareholder of both companies.
During 1999 and 1998, the Company and HealthWatch operated under a Business
Collaboration Agreement which allowed HealthWatch to act as a reseller of the
Company's software product and provided for the sharing of certain operating
expenses. The Company received from HealthWatch approximately $204,000 and
$125,000 in 1999 and 1998, respectively, under this agreement.
F2-20
<PAGE>
The Company and HealthWatch entered into a non-binding letter of intent, dated
August 8, 1998 (the "Letter of Intent"), providing for the merger of HealthWatch
with the Company. However, due to the market volatility of the two companies'
stock and accounting issues that would be caused as a result of the merger that
may have an adverse effect on HealthWatch, the companies agreed to delay the
consummation of the merger.
In March 2000, the Company and HealthWatch signed a binding letter of intent to
merge. In the merger, each share of common stock of the Company outstanding
immediately prior to the effective time of the merger would be converted into
the right to receive that fraction of a share of HealthWatch common stock equal
to $.33 divided by the average closing price of HealthWatch common stock on the
NASDAQ Market for the ten trading days immediately preceding the merger closing
date (the "Merger Consideration"). In addition, outstanding stock options and
stock warrants of the Company would be converted into options and warrants to
purchase HealthWatch common stock in accordance with the same conversion ratio.
The Letter of Intent also contains binding provisions providing HealthWatch with
an unconditional right to purchase prior to the closing of the merger, up to
$1,000,000 of the Company's common stock at $0.20 per share, and upon such
financing, HealthWatch shall have a three month option to purchase up to an
additional $5,000,000 of the Company's common stock at $0.20 per share.
The proposed merger is expected to take approximately 90 days from the date of
the binding letter of intent. The merger is subject to, among other conditions,
the approval of the shareholders of both companies. No assurance can be given
that the parties will reach a definitive merger agreement or that, if reached,
the parties will be able to satisfy the conditions to the consummation of the
merger.
NOTE J - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Details of non-cash transactions are as follows:
1999 1998
--------- ----------
Capital lease obligations incurred for the acquisition
of property and equipment $266,943 $ 44,650
======== ==========
Debt consolidated into a single note payable to a bank:
Line of credit $ - $ 92,334
Note payable - 368,341
-------- ----------
$ - $ 460,675
======== ==========
Debt converted to equity:
6% convertible promissory note, related party $157,741 $ -
Accounts payable, consultants 92,648 -
Accrued employee compensation 210,000 -
4% convertible promissory notes - 300,000
10% convertible promissory notes _______ 75,000
----------
$460,389 $ 375,000
======== ==========
12,048,305 shares of the Company's common stock
recorded as consideration for sale of subsidiary $ $1,686,763
==========
F2-21
<PAGE>
Capitalized license fees recorded by increasing
accounts payable $118,771 $
========
Cash paid for interest $ 61,050 $ 63,191
======== ==========
NOTE K - DISPOSITIONS
Sale of Physician's Resource Network in Fiscal 1998
On June 30, 1998, the Company sold to American Enterprise Solutions, Inc.
("AES") all of the stock of Physician's Resource Network, Inc. ("PRN"), a
wholly-owned subsidiary of the Company, that the Company had acquired in July
1997. Located in Tampa, Florida, PRN delivers practice management services to
healthcare providers. The sale of AES was effected pursuant to an Agreement and
Plan of Merger dated June 25, 1998 (but effective as of June 30, 1998) among the
Company, AES, PRN Acquisition Co., and PRN (the "Merger Agreement"). Under the
terms of the Merger Agreement, the Company received AES' promise to deliver
within 90 days of the closing date, all of the shares of Halis common stock
owned by AES of record and beneficially as of the closing date, including
without limitation shares that AES has the right to acquire as of the closing
date, which number of shares shall not be less than 9,984,000 shares of the
Company's common stock. The Merger Agreement provided that if AES delivers more
than 11,000,000 shares of Company common stock, then the Company must also
transfer to AES the right to receive contingent installment payments (the
"Installment Payments") under that certain Asset Purchase Agreement dated
December 31, 1997, between Communications Wiring and Accessories, Inc. and Halis
Services, Inc., a subsidiary of the Company. Additionally, pursuant to the
Merger Agreement the Company retained certain liabilities in the aggregate
amount of $478,797 related to the business of PRN.
On October 9, 1998, the Merger Agreement was amended by the parties to
acknowledge and agree that the number of shares of the Company's common stock to
be delivered by AES totaled 12,048,325 shares. AES delivered 11,548,325 shares
during 1998. The remaining 500,000 shares have not been received by the Company
as of the report date.
Charles Broes, who served as a director of the Company from July 1, 1997 until
he resigned on June 10, 1998, served as the Chief Executive Officer, Secretary,
Treasurer and board member of AES. Mr. Broes did not participate in any
meetings of the Company's board of directors with respect to the Merger
Agreement, or the amendment thereto.
For Federal income tax purposes, the merger is not intended to constitute a
reorganization within the meaning of Section 368 of the Code. The parties to
the Merger Agreement acknowledge that the merger is intended to constitute a
redemption by Halis of all Halis stock owned directly or indirectly by AES
pursuant to Section 302(b)(3) of the Internal Revenue Code of 1986, as amended.
Sale of the Homa Practice in Fiscal 1998
On September 30, 1998, the Company's wholly-owned subsidiary, PhySource, Ltd.
("PhySource"), sold to Physician's Enterprise System, LLC ("PES") all of the
medical and non-medical assets of its Dr. Homa medical practice that the Company
had acquired in 1997 (the "Homa Practice"). The Homa Practice had provided
medical services to patients in the Arlington Heights, Illinois vicinity. The
sale was effected through an Agreement for Purchase and Sale of Assets entered
into between PES, the Company and
F2-22
<PAGE>
PhySource, and was effective as of October 1, 1998 (the "Asset Agreement").
Under the terms of the Asset Agreement, PhySource received $400,000 at closing
and the right to receive 50% of collections on the receivables assigned to PES
in excess of $400,000, less a collection fee of 20% (the "Contingent Payment"),
and had certain specific liabilities assumed by the purchaser. The Contingent
Payment was to be calculated and paid to the Company on November 1, 1999. As of
December 31, 1999 and the report date, the calculation of the Contingent Payment
had not been made by PES and therefore, no amounts have been paid or accrued in
the Company's 1999 financials related to this Contingent Payment. The results
from operations for the Homa Practice were included in the Company's results
from operations for the nine-month period ended September 30, 1998.
NOTE L - FOURTH QUARTER ADJUSTMENTS
Significant adjustments made in the fourth quarter of 1999 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Record provision for losses on note receivable - related party $623,377
Decrease in deferred revenue on software sales/maintenance contracts $240,132
Additional accrual of accounts payable relating to legal fees $100,000
</TABLE>
F2-23
<PAGE>
HALIS, INC. AND SUBSIDIARIES
UNAUDITED FINANCIAL STATEMENTS FOR THE
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
TABLE OF CONTENTS
-----------------
page
Consolidated Balance Sheet................................................ F3-2
Consolidated Statements of Operations..................................... F3-4
Consolidated Statements of Cash Flows..................................... F3-6
Notes to Consolidated Financial Statements................................ F3-7
F3-1
<PAGE>
HALIS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
JUNE 30, 2000
ASSETS
Current Assets
Cash $ 671,734
Receivables, less allowance for possible losses
of $229,800 212,565
Other current assets 136,705
----------
Total current assets 1,021,004
Property and Equipment
Computer equipment 437,210
Vehicles 36,588
Office furniture and fixtures 74,683
Leasehold improvements 29,770
Less: accumulated depreciation (250,292)
----------
Total property and equipment, net 327,958
Other Assets
Deposits 102,840
Goodwill, net of accumulated
amortization of $1,350,667 663,747
Capitalized software development costs,
net of accumulated amortization of $160,995 58,150
Other intangibles, net of
accumulated amortization of $98,975 19,795
Long-term investments 22,395
----------
Total other assets 866,926
Total assets $2,215,888
==========
(The accompanying notes are an integral part of these statements)
F3-2
<PAGE>
HALIS, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
JUNE 30, 2000
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses $ 1,170,314
Deferred revenue and customer deposits 21,600
Accrued payroll and payroll taxes payable 144,026
Due to HealthWatch, Inc. 437,807
Notes payable - bank 306,563
Obligations under capital leases - current portion 61,549
-----------
Total current liabilities 2,141,859
Long-term debt
Obligations under capital leases - net of current portion 175,734
Shareholders' Equity (Deficit)
Common stock $.01 par value; 100,000,000
authorized; 61,078,880 issued and outstanding 610,788
Additional paid-in capital 37,835,036
Unrealized loss on investment (102,604)
Accumulated deficit (38,444,926)
-----------
Total stockholders' equity (deficit) (101,706)
-----------
Total liabilities and stockholders' equity (deficit) $ 2,215,888
===========
(The accompanying notes are an integral part of these statements)
F3-3
<PAGE>
HALIS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
Three Months Ended June 30,
------------------------------
2000 1999
----------- -----------
Sales Revenue $ 926,588 $ 1,147,735
Cost and Expenses
Cost of goods sold 1,600 218,476
Selling, general and administrative 906,705 937,254
Research and development 448 82,872
Amortization and depreciation 153,104 143,437
----------- -----------
1,061,857 1,382,039
Operating Income (Loss) (135,269) (234,304)
Other Income (Expense)
Interest expense (31,584) (12,514)
Interest income 6,703
Other income - 3,746
----------- -----------
(31,584) (2,065)
Net Income (Loss) $ (166,853) $ (236,369)
=========== ===========
Basic and Diluted Loss per Common Share $(0.00) $(0.01)
=========== ===========
Basic and Diluted Weighted Average
Shares Outstanding 58,374,553 51,182,228
=========== ===========
(The accompanying notes are an integral part of these statements.)
F3-4
<PAGE>
HALIS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30,
2000 1999
----------- -----------
<S> <C> <C>
Sales Revenue $ 1,974,828 $ 2,730,572
Cost and Expenses
Cost of goods sold 11,470 585,702
Selling, general, and administrative 1,973,763 1,896,607
Research and development 46,826 152,574
Amortization and depreciation 305,593 282,952
----------- -----------
2,337,652 2,917,835
Operating Income (Loss) (362,823) (187,263)
Other Income (Expense)
Gain on asset disposal 35,000 -
Interest expense (55,101) (30,343)
Interest income - 13,333
Other income - 3,746
----------- -----------
(20,101) (13,264)
Net Income (Loss) $ (382,925) $ (200,527)
=========== ===========
Basic and Diluted Loss per Common Share $(0.01) $(0.00)
=========== ===========
Basic and Diluted Weighted Average Shares Outstanding 56,390,075 50,041,380
=========== ===========
</TABLE>
(The accompanying notes are an integral part of these statements.)
F3-5
<PAGE>
HALIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30,
2000 1999
---------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (382,925) $(200,527)
---------- ---------
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 305,593 282,952
Decrease in allowances for losses on accounts receivable - (16,654)
Issuance of stock for current services 26,000 -
Changes in operating assets and liabilities, net of
assets and liabilities acquired and sold:
Decrease in customer claims and premium funds - 21,632
Decrease in accounts receivable 44,824 87,212
Increase in notes receivables - related parties - (13,533)
Increase in other current assets (60,630) (27,116)
Increase in capitalized software development costs (58,150) -
(Increase) decrease in deposits (3,590) 70,137
Decrease in accounts payable & accrued expenses (517,536) (110,932)
Decrease in sales & payroll taxes payable (118,572) (54,785)
(Decrease) increase in deferred revenues & customer deposits (14,694) 64,989
Decrease in other current liabilities 540 (214,029)
---------- ---------
Total adjustments (396,215) 89,873
---------- ---------
Net cash provided (used) by operating activities (779,140) (110,654)
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (24,163) (44,474)
---------- ---------
Net cash used by investing activities (24,163) (44,474)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 1,070,000 150,000
Proceeds (payments) on capital leases (33,405) (21,807)
Net increase in Due to HealthWatch, Inc. 437,267 -
Net (payments) / proceeds from notes payable (12,328) (25,018)
Net proceeds form notes payable - related parties - 112,150
---------- ---------
Net cash provided by financing activities 1,461,534 215,325
---------- ---------
Increase (decrease) in cash 658,231 60,197
Cash - beginning of period 13,503 52,483
---------- ---------
Cash - end of period $ 671,734 $ 112,680
========== =========
</TABLE>
(The accompanying notes are an integral part of these statements.)
F3-6
<PAGE>
HALIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2000
(UNAUDITED)
PRINCIPLES OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
management's opinion, all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation have been included. Operating results for the
three and six month periods ended June 30, 2000 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2000. For
further information, refer to the consolidated financial statements and the
notes thereto included in the Company's annual report on Form 10-KSB for the
year ended December 31, 1999.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Halis, Inc. and
its wholly owned subsidiaries (the "Company"). All significant inter-company
accounts and transactions have been eliminated.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Revenue Recognition
Revenue consists primarily of third party claims processing fees, consulting
services, software licensing fees, sales of related computer hardware and post
contract customer support and maintenance. Revenues are recognized as follows:
Claims processing, consulting services, When the services are provided.
installation, training and education
Software Licensing Revenue After shipment of the product and
fulfillment of acceptance terms,
provided no significant obligations
remain and collection of resulting
receivable is deemed probable.
Contract Support Ratably over the life of the
contract from the effective date.
Hardware Upon shipment of computer equipment
to the customer, provided no
significant obligations remain and
collection of resulting receivable
is deemed probable.
Goodwill
Goodwill represents the excess of cost over the fair value of assets acquired
and is amortized using the straight-line method over a period of five years.
The Company assesses the recoverability of its goodwill whenever adverse events
or changes in circumstances or business climate indicate that expected future
cash
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flows (undiscounted and without interest charges) in individual business units
may not be sufficient to support the recorded asset. An impairment is recognized
by reducing the carrying value of the goodwill based on the expected discounted
cash flows of the business unit.
Realization of Assets
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate the continuation of
the Company as a going concern. The Company has sustained losses during the
years ended December 31, 1998 and 1999, and such losses are continuing in fiscal
year 2000. Additionally, the Company has used, rather than provided, cash in
its operating activities during the years ended December 31, 1998 and 1999, and
this was also the case for the six months ended June 30, 2000. The Company had
working capital deficiencies of $2,115,798 and $1,120,855 as of December 31,
1999 and June 30, 2000, respectively. The Company's negative cash flow from
operating activities was $173,467 and $779,140 for year ended December 31, 1999
and the six months ended June 30, 2000, respectively. Due to its cash flow
situation, the Company has negotiated payment terms with vendors representing a
significant portion of the accounts payable and is managing the payment of the
remaining accounts payable on a case by case basis. The increased negative cash
flow from operating activities during the six months ended June 30, 2000 is
directly attributable to the Company settling and paying significant accounts
payable and accrued expenses.
In view of the matters described in the preceding paragraph, there is
significant doubt about the Company's ability to continue as a going concern.
The recoverability of the recorded assets and satisfaction of the liabilities
reflected in the accompanying balance sheet is dependent upon continued
operation of the Company, which is in turn dependent upon the Company's ability
to meet its financing requirements on a continuing basis and to succeed in its
future operations. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
amounts and classification of liabilities that might be necessary should the
Company be unable to continue in existence.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, on the 28th day of September 2000.
HEALTHWATCH, INC.
/s/ Paul Harrison
By: Paul W. Harrison
Chairman, President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Report has been signed by the following persons in the capacities and on
the dates indicated:
Signature Capacity Date
/s/ Paul W. Harrison Chairman, President and September 28, 2000
-------------------- Chief Executive Officer
Paul W. Harrison
/s/ David M. Engert Chief Operating Officer and September 28, 2000
-------------------- Director
David M. Engert
/s/ Tom Ridenour Chief Financial Officer September 28, 2000
--------------------
Tom Ridenour
/s/ Robert Tucker Director September 28, 2000
--------------------
Robert Tucker
/s/ John R. Prufeta Director September 28, 2000
--------------------
John R. Prufeta
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EXHIBIT INDEX
Exhibit
Number Description
10.6 Agreement and Plan of Merger by and among Halis, Inc., HealthWatch
Merger Sub, Inc. and HealthWatch, Inc. dated June 29, 2000.
10.7 Amendment to the Business Collaboration Agreement between HealthWatch,
Inc., and Halis, Inc. dated September 20, 2000.
21 List of Subsidiaries
23.2 Consent of Tauber & Balser, P.C. with regard to HealthWatch, Inc and
Subsidiaries
23.3 Consent of Tauber & Balser, P.C. with regard to Halis, Inc. and
Subsidiaries
27.1 Financial Data Schedule (for SEC use only)
