<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement
[_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12
HealthWatch, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
-------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-------------------------------------------------------------------------
(5) Total fee paid:
-------------------------------------------------------------------------
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-------------------------------------------------------------------------
(3) Filing Party:
-------------------------------------------------------------------------
(4) Date Filed:
-------------------------------------------------------------------------
<PAGE>
HEALTHWATCH, INC.
3525 Piedmont Road
Building Seven, Suite 300
Atlanta, Georgia 30305
NOTICE OF ANNUAL MEETING
to be held on
June 23, 2000
NOTICE IS HEREBY GIVEN that the Annual Meeting of the Stockholders of
HEALTHWATCH, INC., a Minnesota corporation (herein called the "Company"), will
be held at The W At Perimeter Center Hotel, 111 Perimeter Center West NE,
Atlanta, Georgia 30346 on Friday, June 23, 2000 at 10:00 AM (the "Annual
Meeting") for the following purposes:
1. To consider and vote upon a proposed amendment to the Company's
Articles of Incorporation to increase the number of authorized shares of common
stock, $.05 par value per share (the "Common Stock") from 10,000,000 shares to
50,000,000 shares and the number of authorized shares of preferred stock, $.05
par value per share (the "Preferred Stock") from 1,000,000 shares to 5,000,000
shares (Proposal 1);
2. To approve the HealthWatch, Inc. 2000 Stock Option Plan (Proposal 2);
3. To ratify and approve certain anti-dilution provisions contained in:
(i) the Certificate of Designation, Preferences and Rights of Series C 8%
Convertible Preferred Stock (the "Series C Preferred"); (ii) the Certificate of
Designation, Preferences and Rights of Series D 8% Convertible Preferred Stock
(the "Series D Preferred"); (iii) warrants to purchase Common Stock issued to
purchasers of the Series C Preferred in a bridge financing completed in February
2000 (the "Bridge Warrants"); (iv) warrants to purchase Common Stock issued to
purchasers of the Series D Preferred in a private placement completed in early
May 2000 (the "Offering Warrants"); and (v) warrants to purchase Common Stock
issued to an affiliate of Commonwealth Associates, L.P. in connection with a $2
million line of credit (the "Line of Credit Warrants") (Proposal 3);
4. To ratify and approve the issuance of shares of Common Stock upon
conversion of the Company's outstanding Series P Preferred Stock (the "Series P
Preferred") (Proposal 4);
5. To elect three directors to serve on the Company's Board of Directors
as follows: (i) one director to be elected by the holders of Common Stock and
holders of certain Preferred Stock authorized to vote with the holders of Common
Stock, voting as one class; (ii) one director to be elected by the holders of
the Series C Preferred, voting as one class; and (iii) one director to be
elected by the holders of the Series D Preferred, voting as one class (Proposal
5); and
6. To consider and act upon any other matters which may properly come
before the Annual Meeting and any adjournment thereof.
In accordance with the provisions of the Company's Bylaws, the Board of
Directors has fixed the close of business on May 19, 2000 as the record date for
the determination of the holders of Common Stock and Series C and Series D
Preferred Stock entitled to notice of and to vote at the Annual Meeting.
A list of stockholders entitled to vote at the Annual Meeting will be open
for examination by any stockholder for any purpose germane to the meeting during
ordinary business hours for a period of 10 days prior to the Annual Meeting at
the offices of the Company, 3525 Piedmont Road, Building 7, Suite 300, Atlanta,
Georgia 30305, and will also be available for examination at the Annual Meeting
until its adjournment.
<PAGE>
Your attention is directed to the accompanying Proxy Statement. We invite
all stockholders to attend the Annual Meeting. To ensure that your shares will
be voted at the Annual Meeting, please complete, date and sign the enclosed
proxy and return it promptly in the enclosed envelope. If you attend the Annual
Meeting, you may vote in person, even though you have sent in your proxy.
Accompanying this Notice is a copy of the Company's 1999 Annual Report on
Form 10-KSB as filed with the Securities and Exchange Commission.
By Order of the Board of Directors,
HealthWatch, Inc.
Paul W. Harrison
Chief Executive Officer
IMPORTANT: Whether or not you plan to attend the meeting, you are requested to
complete and promptly return the enclosed proxy in the envelope provided.
Atlanta, Georgia
May [ ], 2000
<PAGE>
PROXY STATEMENT
HEALTHWATCH, INC.
3525 Piedmont Road
Building 7, Suite 300
Atlanta, Georgia 30305
ANNUAL MEETING OF STOCKHOLDERS
to be held on
June 23, 2000
SOLICITATION AND REVOCATION OF PROXIES
The enclosed proxy is solicited by and on behalf of the Board of Directors
of HEALTHWATCH, INC., a Minnesota corporation (the "Company"), for use at the
Company's 2000 Annual Meeting of Stockholders to be held on Friday, June 23,
2000 at 10:00 AM at The W Atlanta At Perimeter Center Hotel, 111 Perimeter
Center West NE, Atlanta, Georgia 30346, and at any and all adjournments thereof
(the Annual Meeting"), for the purposes set forth in the accompanying Notice of
Annual Meeting. Any stockholder has the power to revoke his or her proxy at any
time before it is voted. A proxy may be revoked by delivering written notice of
revocation to the Company at its principal office, 3525 Piedmont Road, Building
7, Suite 300, Atlanta, Georgia 30305, Attention: Corporate Secretary, by a
subsequent proxy executed by the person executing the prior proxy and presented
at the meeting or by attendance at the Annual Meeting and voting in person by
the person executing the proxy. In addition to this solicitation, officers,
directors and regular employees of the Company, who will receive no additional
compensation for their services, may solicit proxies by mail, telegraph or
personal calls. The Company may engage a proxy solicitation firm in connection
with the solicitation of proxies. The expense of any such engagement is not
expected to exceed $10,000. All costs of solicitation will be borne by the
Company. The Company has requested brokers and nominees who hold stock in their
name to furnish this proxy material to their customers and the Company will
reimburse such brokers and nominees for their related out-of-pocket expenses.
This Proxy Statement of the Company will be mailed on or about [May 26, 2000]
to each stockholder of record as of the close of business on May 19, 2000 (the
"Record Date").
VOTING AT THE MEETING
The Company had 2,147,218 shares of Common Stock, par value $.05 per share
(the "Common Stock"), outstanding as of the Record Date. Holders of record of
shares of Common Stock at the close of business on the Record Date will be
entitled to notice of and to vote at the Annual Meeting and will be entitled to
one vote for each such share so held of record. Holders of the Company's Series
C 8% Convertible Preferred Stock, par value $.05 per share (the "Series C
Preferred") and Series D 8% Convertible Preferred Stock, par value $.05 per
share (the "Series D Preferred") are entitled to vote, together with the holders
of the Common Stock as one class, on all matters upon which the holders of the
Common Stock are entitled to vote, and will be entitled to one vote for each
share of Common Stock into which their shares of Series C Preferred and Series D
Preferred are then convertible. Accordingly, all references in this Proxy
Statement to the "voting power of the capital stock" shall mean the requisite
vote of the Common Stock and such Series C Preferred and Series D Preferred
voting as one class. There were 4,000 shares of Series C Preferred and 74,130
shares of Series D Preferred outstanding on the Record Date, convertible into
213,333 and 2,117,998 shares of Common Stock, respectively, as of the Record
Date.
Holders of a majority of the voting power of the capital stock, if present
in person or represented by proxy, will constitute a quorum at the Annual
Meeting. Abstentions and "broker non-votes" (which occur if a broker or other
nominee does not have discretionary authority and has not received voting
instructions from the beneficial owner with respect to the particular item) are
counted for purposes of determining the presence or
<PAGE>
absence of a quorum for the transaction of business. In all matters other than
the election of directors and amendment to the Company's Articles of
Incorporation, the affirmative vote of the majority of shares present in person
or by proxy at the Annual Meeting and entitled to vote thereon are required to
approve the proposals set forth herein. For such proposals, abstentions are
counted for purposes of calculating shares entitled to vote but are not counted
as shares voting and therefore have the effect of a vote against each such
proposal. Also, for these proposals, broker non-votes are not counted as shares
present at the meeting and entitled to vote and therefore have no effect.
Directors will be elected by a plurality of the votes of the shares present in
person or represented by proxy and entitled to vote. Accordingly, abstentions
and broker non-votes will have no effect on the outcome of the election of
directors. There are no cumulative voting rights with respect to the election of
directors. For the proposal to amend the Company's Articles of Incorporation,
the affirmative vote of the majority of the outstanding shares entitled to vote
thereon is required to approve the amendment.
The Company's Common Stock is listed on the Nasdaq SmallCap Market. In
December 1999, the Company's Board of Directors implemented a one-for-five
reverse split (the "December Reverse Split") of all capital stock of the
Company. All information regarding Company capital stock in this Proxy
Statement, unless otherwise indicated, has been adjusted to reflect the December
Reverse Split.
2
<PAGE>
AMENDMENT TO ARTICLES OF INCORPORATION
TO INCREASE AUTHORIZED CAPITAL STOCK
(PROPOSAL 1)
The Company's Board of Directors has approved and recommends the adoption
by the stockholders of the following amendment to Article III of the Articles of
Incorporation, which amendment would increase the number of authorized shares of
Common Stock from 10,000,000 shares to 50,000,000 shares and the number of
authorized shares of preferred stock, $.05 par value per share (the "Preferred
Stock") from 1,000,000 shares to 5,000,000 shares.
Text of Amendment
"Article III of the Articles of Incorporation of the Corporation hereby is
amended by deleting the first paragraph thereof in its entirety, and inserting
in lieu thereof the following (Sections A and B thereof not being amended or
otherwise changed):
ARTICLE III
The total number of shares of all classes of stock that the
corporation shall be authorized to issue shall be fifty five million
(55,000,000) shares, divided into the following: (i) fifty million
(50,000,000) shares of Common Stock, $.05 par value per share, and (ii)
five million (5,000,000) shares of Preferred Stock, $.05 par value per
share. A description of the respective classes of stock and a statement of
the designations, preferences, limitations and relative rights of such
classes of stock and the limitations on or denial of the voting rights of
the shares of such classes of stock are as described in Sections A and B of
this Article III."
The Articles of Incorporation, as presently in effect, provide that the
aggregate number of shares of stock which the Company shall have authority to
issue is 11,000,000 shares, consisting of 10,000,000 shares of Common Stock and
1,000,000 shares of Preferred Stock. On the Record Date, there were 2,147,218
issued and outstanding shares of Common Stock. Of the 1,000,000 shares of
Preferred Stock, the following classes have been designated and reserved for
issuance: 300,000 shares of 6% Series A Convertible Preferred Stock of which
5,000 shares are issued and outstanding; 4,500 shares of Series C 8% Convertible
Preferred Stock of which 4,000 shares are issued and outstanding; 300,000 shares
of Series D 8% Convertible Preferred of which 74,130 shares are issued and
outstanding; and 80,000 shares of Series P Preferred Stock of which 66,886
shares are issued and outstanding. Thus, as of the Record Date, 959,418 shares
of Common Stock (after deducting shares of Common Stock reserved for issuance
upon the conversion of the outstanding Preferred Stock described above and other
convertible securities of the Company) remain available for issuance and 315,500
shares of Preferred Stock remained available for designation and issuance
without further action by the Company's stockholders.
Reasons For and Possible Effects of the Proposed Amendment
The Board of Directors believes that the proposed increase in the
authorized shares of Common Stock and Preferred Stock is desirable to enhance
the Company's flexibility in connection with possible future actions, such as
stock splits, stock dividends, financings, mergers, acquisitions and other
general corporate purposes, including stock or option incentive grants for
employees, directors and consultants. Adoption of the proposed amendment would
enable the Company to issue additional shares of Common Stock and Preferred
Stock to be issued, without the expense and delay of a special meeting of
stockholders, other than in those circumstances where the issuance of shares or
the terms of a particular transaction would, under the Marketplace Rules of the
Nasdaq SmallCap Market, require stockholder approval. Elimination of the delay
occasioned by the necessity of obtaining stockholder approval may better enable
the Company to pursue financing and acquisition opportunities which can be
impacted by changing market conditions. There are no present agreements,
arrangements or understandings concerning the issuance of such shares other than
in connection with the proposed merger of the
3
<PAGE>
Company and HALIS, Inc. ("HALIS"). As previously announced, the Company has
entered into a letter of intent with HALIS regarding the merger of HALIS with
the Company (or a subsidiary of the Company) pursuant to which outstanding
shares of HALIS common stock will be converted into shares of the Company's
Common Stock. Consummation of the merger is subject to a number of conditions.
See "Certain Relationships and Certain Transactions" under Proposal 5.
The proposed shares of Common Stock for which authorization is sought would
be part of the existing class of such stock and would increase the number of
shares of Common Stock available for issuance by the Company, but would have no
effect upon the terms of the Common Stock or the rights of the holders of such
stock. If and when issued, the proposed additional authorized shares of Common
Stock would have the same rights and privileges as the shares of Common Stock
presently outstanding.
The proposed shares of Preferred Stock for which authorization is sought
would be subject, as is the case with the current authorized Preferred Stock, to
the right of the Company's Board of Directors to establish and designate series
of the Preferred Stock and to determine the relative rights and preferences of
the shares of any series so established, but would have no effect upon the terms
of any outstanding Preferred Stock or the rights of the holders of such stock.
However, additional shares of Preferred Stock could be issued in the future with
dividend, liquidation, conversion, voting or other rights which could adversely
impact the holders of the Common Stock and existing Preferred Stock.
Anti-Takeover Effect of Proposed Amendment
The existence of the additional authorized shares of Common Stock and
Preferred Stock could have the effect of discouraging an attempt by any person
or entity, through the acquisition of a substantial number of shares of Common
Stock, to acquire control of the Company with a view to imposing a merger, sale
of all or any part of the Company's assets or a similar transaction. Although
the Board of Directors has no present intention of doing so, it could issue
shares of Common Stock or Preferred Stock in a public or private sale to
purchasers who might agree with the Board of Directors in opposing an attempt to
change control of the Company. Thus, the issuance of the additional shares of
Common Stock and Preferred Stock could be used to dilute the stock ownership of
a takeover bidder. In addition, the Board of Directors may issue, without
stockholder action, Common Stock, Preferred Stock, or warrants or other rights
to acquire such stock, with terms designed to protect against certain takeovers,
including partial takeovers and front-end loaded, two-step takeovers and freeze-
outs and to control stockholder acquisitions, should the Board of Directors
consider the action of such entity or person not to be in the best interests of
the Company and its stockholders. To the extent that potential takeovers are
thereby discouraged, stockholders may not have the opportunity to dispose of all
or a part of their stock at a price that may be higher than that prevailing in
the market. However, it also is possible that making shares of authorized, but
unissued, Common Stock and Preferred Stock available for issuance may have the
effect of increasing the price offered to the Company's stockholders in a tender
or exchange offer.
The proposed amendment to the Articles of Incorporation is not intended as
an anti-takeover measure and is not part of a plan by the Board of Directors to
adopt a series of anti-takeover measures. The Company's Board of Directors does
not presently intend to propose any measures designed to discourage any unfair
or unnegotiated takeovers but reserves the right to propose and adopt such
measures if the Board of Directors determines that such measures are in the best
interests of the Company and its stockholders.
Required Vote and Related Matters
The affirmative vote of a majority of the outstanding voting power is
required to approve the amendment to the Articles of Incorporation to increase
the Company's number of authorized shares of Common Stock from 10,000,000 shares
to 50,000,000 shares and to increase the Company's number of authorized shares
of Preferred Stock from 1,000,000 shares to 5,000,000 shares.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 1.
4
<PAGE>
APPROVAL OF HEALTHWATCH, INC. 2000 STOCK OPTION PLAN
(PROPOSAL 2)
The HealthWatch, Inc. 2000 Stock Option Plan (the "2000 Option Plan") was
adopted by the Board of Directors on May 8, 2000, subject to the approval by the
Company's stockholders at the Annual Meeting. The 2000 Option Plan provides
that 2,000,000 shares of Common Stock will be reserved for issuance thereunder
subject to annual adjustment.
The Board of Directors believes that stock options are important to attract
and to encourage the continued employment and service of officers, directors and
other key employees and consultants by facilitating their purchase of an equity
interest in the Company. The purpose of the 2000 Option Plan is to further the
growth and success of the Company by enabling selected employees, directors and
consultants to acquire shares of Common Stock, thereby increasing their personal
interest in such growth and success, and to provide a means of rewarding
outstanding performance by such persons. The Board of Directors believes that
it is advisable that the Company and its stockholders continue to have the
incentive of stock options available as a means of attracting and retaining
officers and other key employees. Of the Company's current available stock
plans (the 1989 Incentive Stock Option Plan and 1993 and 1995 Stock Option
Plans), no shares remain available for issuance thereunder. As of the Record
Date, no options to purchase Common Stock have been granted under the 2000
Option Plan. Approximately 50 employees of the Company and its subsidiaries and
affiliates are eligible to participate in the 2000 Option Plan.
As previously announced, the Company has entered into a letter of intent
with HALIS regarding the merger of HALIS with the Company (or a subsidiary of
the Company) pursuant to which outstanding options to purchase approximately
11,650,510 shares of HALIS common stock will be converted into options to
purchase the Company's Common Stock. Consummation of the merger is subject to a
number of conditions. See "Certain Relationships and Certain Transactions"
under Proposal 5. Adoption of the 2000 Option Plan is necessary to provide a
sufficient number of shares for issuance in the HALIS merger.
The principal provisions of the 2000 Option Plan are summarized below.
This summary is not complete and is qualified in its entirety by reference to
the 2000 Option Plan, a copy of which is being filed as Appendix A to this Proxy
Statement.
Description of the 2000 Option Plan
The 2000 Option Plan provides for the grant of options that are intended to
qualify as "incentive stock options" under Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"), to any employee of HealthWatch or its
subsidiaries, except to the extent that any option is specifically designated at
the time of grant as not being an "incentive stock option" or to the extent that
any option would exceed certain aggregate fair market value limitations with
respect to the underlying Common Stock, as described below.
The 2000 Option Plan is currently administered by the Board of Directors
although the Board has the power to delegate administration of the Plan to a
committee composed of at least two members of the Board of Directors. Subject
to the limitations set forth in the 2000 Option Plan, the Board has the
authority to determine the persons to whom and the terms under which options
will be granted.
The exercise price for an incentive stock option may not be less than 100%
of the fair market value of the Common Stock on the date of grant of the option
(or 110% in the case of an incentive stock option granted to an optionee who
owns (or is deemed to own) stock possessing more than 10% of the total combined
voting control of the Company or any affiliate thereof). The exercise price for
a non-incentive stock option may not be less than 85% of the fair market value
of the Common Stock on the date of grant. The maximum option term is 10 years (5
years in the case of an incentive stock option granted to an optionee who owns
(or is deemed to own) stock possessing more than 10% of the total combined
voting control of the Company or any affiliate thereof). Options may be
exercised at any time after grant, subject to vesting and except as otherwise
provided in the particular option agreement. There is also a $100,000 limit on
the value of Common Stock (determined at the time of grant) covered by
5
<PAGE>
incentive stock options that first become exercisable by an optionee
in any calendar year. Any options becoming exercisable by an optionee in excess
of this limit will be nonqualified stock options. No option may be granted more
than 10 years after the effective date of the 2000 Option Plan. Options are
non-transferable other than by will or the laws of descent and distribution. No
individual may be granted, in any twelve-month period, stock options under the
Plan which are exercisable with respect to more than 1,000,000 shares of Common
Stock.
The Board of Directors determines the exercise periods for options which
generally vest and become exercisable in accordance with the optionee's length
of service with the Company as follows: one-third after one year of continuous
service; an additional one-third after the second year of continuous service;
and the final one-third after the third year of continuous service. The Board
may also include in each option additional limitations with respect to the
options in its discretion. Payment for shares purchased under the 2000 Option
Plan may be made in cash or, if permitted by the particular option agreement, by
exchanging shares of HealthWatch Common Stock with a fair market value equal to
the total option exercise price.
If an employee's employment with HealthWatch or its subsidiaries terminates
by reason of death or disability, his or her options, to the extent exercisable
at such termination date, may be exercised within one year after such death or
disability or the expiration of the option, whichever shall first occur. If an
employee's employment terminates for cause, the employee's options shall
terminate and the employee shall have no further right to purchase shares of
Common Stock pursuant to such options. If termination occurs without
cause, then his or her options, to the extent exercisable at such termination
date, may be exercised within three months after such termination date.
In addition, the 2000 Option Plan provides that 2,000,000 shares will
initially be reserved for issuance thereunder. The shares reserved will
automatically increase on January 1st of each year so that the number of shares
reserved for issuance will equal 20% of the outstanding Common Stock on a fully-
diluted basis as of December 31st of the immediately preceding year. However,
the Company will not be able to issue more than 2,000,000 shares as "incentive
stock options" without obtaining stockholder approval of that increased amount.
In the event the number of outstanding shares of Common Stock is increased
or decreased or shares of Common Stock are changed into or exchanged for a
different number or kind of shares or other securities of the Company, the
Company shall proportionately adjust the number and kinds of shares for which
options may be granted under the 2000 Option Plan and for which options are
outstanding so that a holder's proportionate interest immediately following such
event shall, to the extent practicable, be the same as immediately before such
event. Any such adjustment in outstanding options shall not change the
aggregate option price but shall include a corresponding proportionate
adjustment in the option price per share.
Upon (a) any dissolution or liquidation of the Company, (b) a merger,
consolidation or reorganization of the Company in which the Company is not the
surviving entity, (c) a sale of substantially all of the assets of the Company
to another entity or (d) any transaction that results in any person or entity
owning more than 50% of the outstanding stock of the Company, the 2000 Option
Plan and all options outstanding shall terminate, except to the extent provision
is made in connection with such transaction for the optionee to immediately
exercise his or her options prior to the consummation of the transaction in
question or for the substitution of such options into new options covering the
stock of a successor corporation or its parent or subsidiary. With respect to
transactions involving a sale of assets or change of control referenced in
subsections (c) and (d) above, the Board of Directors may, in its sole
discretion, elect to cancel outstanding options as of the effective date of the
transaction in return for payment to the optionees of an amount equal to a
reasonable difference between the net amount per share payable in such
transaction or as a result of such transaction, less the exercise price of the
option.
The 2000 Option Plan may be amended by the Board of Directors at any time.
Unless previously terminated, the 2000 Option Plan will terminate automatically
on May 8, 2010, the tenth anniversary of the date of adoption of the 2000 Option
Plan by the Board of Directors. No termination, suspension or amendment of the
2000 Option Plan may, without the consent of the optionee to whom an option has
been granted, adversely affect the rights of the holder of the option.
6
<PAGE>
Federal Income Tax Consequences Of The 2000 Option Plan
The grant of an option is not a taxable event for the optionee or the
Company. With respect to "incentive stock options," an optionee will not
recognize taxable income upon grant or exercise of an incentive option, and any
gain realized upon a disposition of shares received pursuant to the exercise of
an incentive option will be taxed as long-term capital gain if the optionee
holds the shares for at least two years after the date of grant and for one year
after the date of exercise. However, the excess of the fair market value of the
shares subject to an incentive option on the exercise date over the option
exercise price will be included in the optionee's alternative minimum taxable
income in the year of exercise (except that, if the optionee is subject to
certain securities law restrictions, the determination of the amount included in
the alternative minimum taxable income may be delayed, unless the optionee
elects within 30 days following exercise to have income determined without
regard to such restrictions) for purposes of the alternative minimum tax. If,
however, a disqualifying disposition occurs in the year in which the option is
exercised, the maximum amount that will be included in income for purposes of
alternative minimum tax is the gain on the disposition of the stock. This excess
increases the optionee's basis in the shares for purposes of the alternative
minimum tax but not for purposes of the regular income tax. An optionee may be
entitled to a credit against regular tax liability in future years for minimum
taxes paid with respect to the exercise of incentive options (e.g., for a year
in which the shares are sold at a gain). Generally, the Company and its
subsidiaries will not be entitled to any business expense deduction with respect
to the grant or exercise of an incentive option, except as discussed below.
For the exercise of an incentive option to qualify for the foregoing tax
treatment, the optionee generally must be an employee of the Company or a
subsidiary from the date the option is granted through a date within three
months before the date of exercise. In the case of an optionee who is disabled,
this three-month period is extended to one year. In the case of an employee who
dies, the three-month period is waived.
If all of the requirements for incentive option treatment are met except
for the special holding period rules set forth above, the optionee will
recognize as ordinary income upon the disposition of the shares an amount equal
to the excess of the fair market value of the shares at the time the option was
exercised over the option exercise price. However, if the optionee was subject
to certain restrictions under the securities laws at the time the option was
exercised, the measurement date may be delayed, unless the optionee has made a
special tax election within 30 days after the date of exercise to have taxable
income determined without regard to such restrictions. The balance of the
realized gain, if any, will be long- or short-term capital gain, depending upon
whether or not the shares were sold more than one year after the option was
exercised. If the optionee sells the shares prior to the satisfaction of the
holding period rules but at a price below the fair market value of the shares at
the time the option was exercised (or other applicable measurement date), the
amount of ordinary income (and the amount included in alternative minimum
taxable income, if the sale occurs during the same year as the option was
exercised) will be limited to the excess of the amount realized on the sale over
the option exercise price. If the Company complies with applicable reporting (if
any) and other requirements, it will be allowed a business expense deduction to
the extent the optionee recognizes ordinary income.
If, pursuant to an option agreement, an optionee exercises an incentive
option by tendering shares of common stock with a fair market value equal to
part or all of the option exercise price, the exchange of shares will be treated
as a non-taxable exchange (except that this treatment would not apply if the
optionee had acquired the shares being transferred pursuant to the exercise of
an incentive option and had not satisfied the special holding period
requirements summarized above). If the exercise is treated as a tax free
exchange, the optionee would have no taxable income from the exchange and
exercise (other than minimum taxable income as discussed above) and the tax
basis of the shares exchanged would be treated as the substituted basis for the
shares received. These rules would not apply if the optionee used shares
received pursuant to the exercise of an incentive option (or another statutory
option) as to which the optionee had not satisfied the applicable holding period
requirement. In that case, the exchange would be treated as a taxable
disqualifying disposition of the exchanged shares, with the result that the
excess of the fair market value of the shares tendered over the optionee's basis
in the shares would be taxable.
Upon exercising a non-qualifying option, an optionee will recognize
ordinary income in an amount equal to the difference between the exercise price
and the fair market value of the common stock on the date of exercise
7
<PAGE>
(except that, if the optionee is subject to certain restrictions imposed by the
securities laws, the measurement date may be delayed, unless the optionee makes
a special tax election within 30 days after exercise to have income determined
without regard to the restrictions). If the Company complies with applicable
reporting requirements, it will be entitled to a business expense deduction in
the same amount. Upon a subsequent sale or exchange of shares acquired pursuant
to the exercise of a non-incentive option, the optionee will have taxable gain
or loss, measured by the difference between the amount realized on the
disposition and the tax basis of the shares (generally, the amount paid for the
shares plus the amount treated as ordinary income at the time the option was
exercised). The Company will not realize any tax consequences as a result of the
disposition of shares acquired upon exercise of a non-statutory stock option.
If, pursuant to an option agreement, the optionee surrenders shares of
common stock in payment of part or all of the exercise price for non-qualifying
options, no gain or loss will be recognized with respect to the shares
surrendered (regardless of whether the shares were acquired pursuant to the
exercise of an incentive option) and the optionee will be treated as receiving
an equivalent number of shares pursuant to the exercise of the option in a non-
taxable exchange. The basis of the shares surrendered will be treated as the
substitute tax basis for an equivalent number of option shares received and the
new shares will be treated as having been held for the same holding period as
had expired with respect to the transferred shares. However, the fair market
value of any shares received in excess of the number of shares surrendered
(i.e., the difference between the aggregate option exercise price and the
aggregate fair market value of the shares received pursuant to the exercise of
the option) will be taxed as ordinary income.
Under Section 162(m) of the Code and regulations promulgated thereunder, no
federal income tax deduction by a publicly-held company is allowed for certain
types of compensation paid to certain highly compensated employees to the extent
that the amount of such compensation for a taxable year for any such individual
exceeds $1 million. Section 162(m) excludes "performance based" compensation
from its deductibility limits. Compensation realized upon the exercise of stock
options is considered "performance based" if, among other requirements, the plan
pursuant to which the options are granted has been approved by the sponsoring
company's stockholders, it has a limit on the total number of shares that may be
covered by options issuable to any plan participant in any given period and the
option exercise price of the grant is at least equal to the fair market value of
the underlying stock on the date of grant. The 2000 Option Plan allows for
grants which should satisfy the requirements of Code Section 162(m).
Required Vote and Related Matters
The affirmative vote of a majority of the voting power present or
represented by proxy at the Annual Meeting and entitled to vote thereon is
required to approve the 2000 Option Plan.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 2.
8
<PAGE>
APPROVAL OF CERTAIN MATTERS RELATING TO
SERIES C PREFERRED, SERIES D PREFERRED AND RELATED WARRANTS
(PROPOSAL 3)
The following is a summary of certain matters relating to recent issuances
by the Company of: (i) the Series C Preferred; (ii) the Series D Preferred;
(iii) warrants to purchase Common Stock issued to purchasers of the Series C
Preferred in a bridge financing completed in February 2000 (the "Bridge
Warrants"); (iv) warrants to purchase Common Stock issued to purchasers of the
Series D Preferred in a private placement initiated in March 2000 (the "Offering
Warrants"); and (v) warrants to purchase Common Stock issued to an affiliate of
Commonwealth Associates, L.P. ("Commonwealth") in connection with a $2 million
line of credit (the "Line of Credit Warrants"). The following summary is not
complete and is qualified in its entirety by reference to the Certificate of
Designation, Preferences and Rights of the Series C Preferred, the Certificate
of Designation, Preferences and Rights of the Series D Preferred and the form of
warrant which is representative of the Bridge Warrants, the Offering Warrants
and the Line of Credit Warrants, copies of which are being filed as Appendix B,
Appendix C and Appendix D, respectively, to this Proxy Statement.
Background of Recent Financings
In December 1999 and February 2000, the Company completed a $400,000 equity
bridge financing (the "Bridge Financing") pursuant to which certain accredited
investors purchased an aggregate of 4,000 shares of the Series C Preferred
(convertible into Common Stock at a price of $1.875 per share) and five-year
Bridge Warrants to purchase an aggregate of 666,669 shares of Common Stock at
$1.875 per share.
In February 2000, the Company entered into a $2,000,000 line of credit with
an affiliate of Commonwealth pursuant to which it issued five-year Line of
Credit Warrants to purchase an aggregate of 1,000,000 shares of Common Stock at
$3.50 per share subject to adjustment upward under certain circumstances. In
March 2000, the Company had drawn down $500,000 under the line of credit. This
amount has been repaid in full.
In March 2000, the Company began a private placement of units (the "Unit
Offering") consisting of shares of the Series D Preferred (convertible into
Common Stock at a price of $3.50 per share) and five-year Offering Warrants to
purchase shares of Common Stock at $3.50 per share. The Company sold
approximately $7.4 million in the Unit Offering which was completed in early May
2000.
Each of the above issuances were made in reliance upon the exemption from
registration afforded by Section 4(2), including Regulation D, of the Securities
Act of 1933, as amended.
Terms of the Series C and Series D Preferred
Ranking. The Series C Preferred and Series D Preferred will rank, with
respect to distributions upon a liquidation, pari passu with each other and with
the Company's Series A Preferred Stock and senior to all of the Company's other
capital stock.
Liquidation Value. The Series C Preferred and Series D Preferred each have
a liquidation value of $100.00 per share plus any declared but unpaid dividends.
Dividends. Beginning on the date the shares are issued until they are
converted by the holders, the holders of Series C Preferred and Series D
Preferred will be entitled to receive, when, and if declared by the Board of
Directors of the Company, dividends at the rate of 8% per annum per share (as
adjusted for any stock dividends, combinations or splits with respect to such
shares), payable out of funds legally available therefor. Accrued and unpaid
dividends will be paid upon the Company's liquidation or upon conversion of the
Series C Preferred and Series D Preferred and may be paid, at the Company's
option, in either cash or in additional shares
9
<PAGE>
of Series C or Series D Preferred, as the case may be. The dividends are payable
semi-annually, on June 30 and December 31 of each year.
Optional Conversion. Holders of Series C Preferred and Series D Preferred
shares will have the right, at any time, to convert their shares into shares of
Common Stock at $1.875 and $3.50 per share, respectively.
Automatic Conversion. The Series C Preferred and Series D Preferred will
automatically convert into shares of Common Stock at the conversion price then
in effect (i) in the event the Company completes a public offering or private
placement raising gross proceeds in excess of $25 million at a per share price
in excess of $5.00 and $10.50, respectively, or (ii) at such time as the closing
bid price for the Common Stock has equaled at least twice the conversion price
for the respective series for a period of 20 consecutive trading days, provided
that the Common Stock is then trading on a national securities exchange or the
Nasdaq SmallCap Market or National Market System and the conversion shares are
fully registered for resale and not subject to any lock-up provisions.
Voting Rights. In addition to their right to vote on certain matters as a
separate class, holders of the Series C Preferred and Series D Preferred will
vote together as a single class with the holders of Common Stock on all matters
submitted to a vote of the Company's stockholders, based on the number of
conversion shares into which their Series C or Series D Preferred shares are
then convertible.
Lock-Up Agreements. The holders of the Series C Preferred and Series D
Preferred have or will agree not to sell, transfer or otherwise dispose of any
of the Series C Preferred and Series D Preferred shares and any conversion
shares for one year following issuance and thereafter, will not sell, transfer
or otherwise dispose of more than 25% of these securities on a cumulative basis
during each subsequent 90-day period thereafter (the "Lock-Up Period");
provided, however, that if the Company undertakes a public offering within the
first 12 months of the Lock-Up Period, the holders cannot sell, transfer or
otherwise dispose of these securities for such period of time after completion
of such public offering (not to exceed one year) as the managing underwriter may
request in writing and the placement agent for the Bridge Financing and Unit
Offering may agree to.
Terms of the Warrants
Exercise Terms. Each of the Bridge Warrants, Offering Warrants and Line of
Credit Warrants are exercisable for a period of five years from their respective
issuances for one share of Common Stock at an exercise price per share equal to
$1.875, $3.50 and $3.50, respectively, subject to adjustment as set forth below.
Each of the above warrants contain a provision allowing for exercise on a
cashless basis.
Redemption. In the event that the market price of the Company' Common
Stock is at least 300% of the exercise price (subject to adjustment) for a
period of 20 consecutive trading days and subject to the following conditions,
the Company may elect to redeem the Bridge Warrants and the Offering Warrants
for $.05 per warrant on written notice setting forth the redemption date, prior
to which the warrants may be exercised in whole or part by the holder. The
Company may exercise its redemption right only if there is an effective
registration statement covering the shares of Common Stock underlying the
warrants (the "Warrant Shares") and there is no lockup in effect with respect to
their sale or transfer. With respect to the Offering Warrants only, in the
event that the market price of the Company's Common Stock is at least 300% of
the exercise price (subject to adjustment) for a period of 20 consecutive
trading days at any time prior to December 21, 2000 when there is not an
effective registration statement covering the Warrant Shares, the Company may
elect (and Commonwealth Associates or a committee representing 20% of the
outstanding Series D Preferred can require the Company) to redeem the Offering
Warrants for $.05 per warrant on written notice setting forth the redemption
date, prior to which the Offering Warrants may be exercised in whole or part by
the holder. In the event a holder utilized the cashless exercise procedure in
this case, and stockholder approval has been received as described below, the
exercise price used would equal 10% of the current market value of the Company's
Common Stock. No reduction in the exercise price will be made unless the
Company's stockholders approve the anti-dilution terms of the Offering Warrants
or it is not determined to be in violation of certain listing criteria of
Nasdaq. The Line of Credit Warrants do not contain any redemption provisions.
10
<PAGE>
Agent Option. The placement agent for the Unit Offering has an option (the
"Agent Option") to purchase an amount equal to 20% of the shares of Series D
Preferred and Offering Warrants sold to investors in the Unit Offering. The
terms governing the Series D Preferred and Offering Warrants, including the
anti-dilution provisions referenced below, have been incorporated into the Agent
Option.
Proposal 3
Anti-Dilution Protection of the Series C Preferred and Series D Preferred.
If stockholder approval is received, in the event that at anytime during the
Lock-Up Period the Company issues shares of Common Stock or securities
convertible or exchangeable for Common Stock having a sale, conversion or
exercise price less than the conversion price for the Series C Preferred or
Series D Preferred then in effect, their respective conversion prices will be
reset to such lower price. The Series C Preferred and Series D Preferred will
also be protected against dilution on a weighted average basis in the event the
Company issues shares of Common Stock or securities convertible into Common
Stock (other than in connection with transactions specifically excluded in their
respective Certificates of Designation) at a price less than the then current
market price. Issuances that will not trigger an adjustment include (i) certain
option grants pursuant to employee benefit plans, (ii) public offerings, (iii)
private placements through Commonwealth Associates, L.P. as placement agent or
which are otherwise at least 90% of the current market price and (iv) issuances
in connection with acquisitions of businesses or technologies. Further, no
adjustment for below market issuances will be required if (i) the current market
price is at least 300% of the then conversion price and either a registration
statement covering the resale of the conversion shares remains in effect for the
90 days after such below market issuance or Rule 144(k) under the Securities Act
is available for resale of all of the conversion shares or (ii) at the time of
the issuance the Company has less than $100,000 in cash and cash equivalents.
If approval is not received at this meeting, these provisions of the Series C
Preferred and Series D Preferred will have no effect.
Anti-Dilution Protection of the Warrants. Each of the Bridge Warrants,
Offering Warrants and Line of Credit Warrants contain anti-dilution provisions
substantially the same as and subject to the same conditions as those applicable
to the Series C Preferred and Series D Preferred. In addition, in the case of
the Offering Warrants and Line of Credit Warrants, if the stockholders do not
approve the anti-dilution provisions of those warrants and the provisions are
determined to be in violation of certain listing criteria of Nasdaq such that no
anti-dilution protection will be available, the number of Offering Warrants and
Line of Credit Warrants outstanding will be automatically doubled.
Nasdaq Stockholder Approval Requirements
Stockholder ratification and approval of the anti-dilution provisions
contained in the Series C Preferred, the Series D Preferred, the Bridge
Warrants, the Offering Warrants and the Line of Credit Warrants is not required
under Minnesota law or the Company's Articles of Incorporation or Bylaws.
Stockholder ratification and approval are also currently not required under the
Marketplace Rules of the Nasdaq Stock Market SmallCap Market System ("Nasdaq"),
through which The Company's Common Stock is traded. However, in order to
qualify for continued inclusion in Nasdaq, it is necessary to satisfy certain
financial and other criteria set forth in the Marketplace Rules and to follow
certain corporate governance procedures, including obtaining stockholder
approval in connection with certain corporate transactions. For example, Rule
4310(c)(25)(H)(i) requires stockholder approval if the Company issues common
stock or securities exercisable or convertible into common stock representing
20% or more of the Company's outstanding shares of common stock or voting power
at a price that is below the greater of book value or market value per share
(the "20% Rule").
The 20% Rule is not implicated by the provisions governing the conversion
or exercise of the Series C Preferred and Bridge Warrants (since the $1.875
conversion and/or exercise price for these securities was equal to or greater
than the market price of the Company's Common Stock on their respective dates of
issuance) or by the provisions governing the conversion or exercise of the
Series D Preferred, Offering Warrants or Line of Credit Warrants (since the
$3.50 conversion and/or exercise price for these securities was equal to or
greater than the market price of the Company's Common Stock on the date the
agreement relating to the Unit Offering and line of
11
<PAGE>
credit was approved and executed). However, the anti-dilution provisions
contained in each of these various securities provide for a potential lowering
of the conversion and exercise prices currently in place in the event the
Company takes certain actions with respect to future security issuances. As a
result, the shares of Common Stock issued upon conversion of the Series C or
Series D Preferred or the various warrants described in this proposal could be
issued for less than the greater of book value or market value of such shares if
the anti-dilution provisions were allowed to take effect, which could, in the
future, implicate the 20% Rule.
Whether or not the 20% Rule is implicated by the anti-dilution provisions
contained in these various securities will depend on the price of the Company's
Common Stock at the time the Company issues securities in the future. It is
possible that the 20% Rule will never be implicated. However, if the market
price of the Company's Common Stock declined and did not recover for a
significant period of time, the 20% Rule could be implicated. Although
stockholder approval is not currently required to satisfy the listing
requirements under the Marketplace Rules for the continued inclusion of the
Company in Nasdaq, it is possible that stockholder approval may be required in
the future. Therefore, the Board of Directors agreed with the holders of these
securities to seek stockholder approval at this time rather than possibly being
required to call a special meeting of stockholders if the 20% Rule is
implicated.
Impact of the Preferred Stock and Warrant Issuances
Assuming the conversion of all the shares of Series C and Series D
Preferred, and the exercise of all Bridge Warrants, Offering Warrants and Line
of Credit Warrants, the holders of these securities (or persons having a right
to purchase these securities) would currently be entitled to receive an
aggregate of approximately 4.2 million shares of the Company's Common Stock.
These shares, in addition to the indeterminable number of shares of Common Stock
which could be used to satisfy the dividend payment requirements of the Series C
and Series D Preferred, will, upon issuance, result in an increase in the number
of shares of Common Stock outstanding, which will result in a dilution of the
percentage ownership of other stockholders. If the anti-dilution provisions are
allowed to take effect and are subsequently triggered, these securities could
become convertible into an even larger number of shares of Common Stock, the
exact amount of which is currently not determinable.
Impact of a Vote Against Issuance
The Company has agreed to seek stockholder approval of the anti-dilution
provisions contained in the various securities described in this Proposal.
Further, under the terms of the Line of Credit Warrants and the Offering
Warrants, if the stockholders do not approve the anti-dilution provisions of
those warrants and the provisions are determined to be in violation of certain
listing criteria of Nasdaq such that no anti-dilution protection will be
available, the number of Offering Warrants outstanding would automatically
increase from 529,500 warrants to 1,059,000 warrants and Line of Credit Warrants
outstanding would automatically increase from 1,000,000 warrants to 2,000,000
warrants. In that case, the Company would be required to issue additional
shares of Common Stock upon exercise and the dilution of the percentage
ownership of other stockholders would be even greater.
Potential Conflicts of Interest; Interests of Certain Persons
Sheldon Misher, a director of the Company, owns 175 shares of the Series C
Preferred and 29,167 of the Bridge Warrants. Mr. Misher is also associated with
Commonwealth Associates, L.P., an affiliate of which owns the 1,000,000 Line of
Credit Warrants. Robert Priddy, a director of the Company, owns 10,000 shares
of the Series D Preferred and 71,429 of the Offering Warrants. The security
purchases made by Messrs. Misher and Priddy, however, occurred prior to their
becoming members of the Company's Board of Directors.
The Board of Directors was aware of these relationships and considered
them, among other factors, in making its recommendation to the stockholders that
the stockholders ratify and approve the anti-dilution provisions contained in
the various securities described in this Proposal.
12
<PAGE>
Required Vote and Related Matters
The affirmative vote of a majority of the voting power present or
represented by proxy at the Annual Meeting and entitled to vote thereon is
required to ratify and approve the anti-dilution provisions contained in the
Series C Preferred, the Series D Preferred, the Bridge Warrants, the Offering
Warrants and the Line of Credit Warrants.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 3.
13
<PAGE>
APPROVAL OF CERTAIN MATTERS RELATING
TO THE SERIES P PREFERRED STOCK
(PROPOSAL 4)
The following is a summary of certain matters relating to the Company's
outstanding Series P Preferred Stock (the "Series P Preferred"). The following
summary is not complete and is qualified in its entirety by reference to the
Certificate of Designation, Preferences and Rights of the Series P Preferred, as
amended, a copy of which is being filed as Appendix E to this Proxy Statement.
Background of Series P Preferred
On October 2, 1998, the Company acquired Paul Harrison Enterprises, Inc.
("PHE"). In the acquisition, the stockholders of PHE received, among other
things, in the aggregate 66,886 shares (reflecting the December Reverse Split)
of the Company's Series P Preferred Stock. The acquisition of PHE allowed the
Company (i) to acquire the MERAD technology in order for it to focus its
business strategy on being a premier information technology company, (ii) to
acquire a significant interest in HALIS which is the first vertical
implementation of the MERAD technology and (iii) to come into compliance with
Nasdaq's $2,000,000 minimum net worth requirement (by reflecting the value of
the HALIS stock and MERAD technology on its balance sheet). Without the
acquisition, the Company's Common Stock was likely to be delisted by Nasdaq.
However, in order to issue Common Stock or securities convertible into Common
Stock to the PHE stockholders, a meeting of the Company's stockholders was
required and approval of the Company's stockholders was necessary but impossible
to obtain within the time frame needed. Recognizing the impending Nasdaq
delisting, the Company's Board of Directors elected to issue the Series P
Preferred prior to obtaining stockholder approval, and the PHE stockholders
agreed to accept such Series P Preferred, agreeing that it would become
convertible only if stockholder approval were obtained, in order to allow the
Company to remain in compliance with Nasdaq. Because stockholder approval was
necessary to give conversion rights to the PHE stockholders with respect to the
Series P Preferred, the Board agreed to bring the issue of approving the
conversion feature set forth in the Certificate of Designation for the Series P
Preferred to the Company's stockholders at the next annual meeting.
Consequently, the Board of Directors has included this Proposal to be considered
and approved by the Company's stockholders at the Annual Meeting.
Terms of the Series P Preferred
Dividends. 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
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 Common Stock prior to August 1, 1999, the dividends were to accrue at
the rate of 24% per annum from August 1, 1999 thereafter. In connection with
the Unit Offering, 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. The Certificate of Designations has been amended to reflect
a dividend rate of 8% per annum retroactive to the effective date of issuance
and provides that the Company may pay this dividend in cash or in shares of
Common Stock at the Company's option. The dividends are paid semi-annually, on
June 30 and December 31 of each year, and are cumulative.
Liquidation Value. The Series P Preferred has a liquidation value of
$50.00 per share, plus any accrued and unpaid dividends. The shares of Series P
Preferred have preference over the Common Stock in the event of liquidation,
dissolution or winding up of the Company.
Conversion. If approved by the stockholders of the Company at this Annual
Meeting, each share of the Series P Preferred shall be convertible into ten (10)
shares of the Company's Common Stock.
14
<PAGE>
Voting Rights. Unless and except to the extent otherwise required by law,
the holders of the Series P Preferred have no voting power; provided that if any
dividends on the Series P Preferred have not been paid for a period of one year
or more, the holders of the Series P Preferred will, until such dividends have
been paid, be entitled, with the holders of the Common Stock voting as a class,
to vote for the election of directors, with the number of votes per share of the
Series P Preferred Stock in such election to be equal to the vote of 10 shares
of Common Stock.
Potential Conflicts of Interest; Interests of Certain Persons
Paul W. Harrison, Chairman, President and Chief Executive Officer of the
Company, owns 25,018 shares of the Series P Preferred and David M. Engert, Chief
Operating Officer of the Company, owns 3,177 shares. If the proposal is
approved, Messrs. Harrison and Engert will be entitled to convert their shares
of Series P Preferred into 250,180 shares and 31,770 shares of Common Stock,
respectively.
The Board of Directors was aware of these relationships and considered
them, among other factors, in making its recommendation to the stockholders that
the stockholders approve the conversion of the Series P Preferred into Common
Stock.
Required Vote and Related Matters
The affirmative vote of a majority of the voting power present or
represented by proxy at the Annual Meeting and entitled to vote thereon is
required to approve all shares of Common Stock that may be issued upon the
conversion of the Company's outstanding Series P Preferred.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 4.
15
<PAGE>
NOMINATION AND ELECTION OF DIRECTORS
(PROPOSAL 5)
The persons named in the enclosed proxy will vote FOR the three nominees
named below under "Nominees for Directors" as the three Directors, unless
instructed otherwise in the proxy. The persons receiving the greatest number of
votes, up to the number of directors to be elected, shall be the persons elected
as Directors. Each Director is to hold office until the 2001 Annual Meeting of
Stockholders and until his or her respective successor is duly qualified and
elected.
The names and certain information concerning the persons to be nominated to
become directors by the Board of Directors at the Annual Meeting are set forth
below. YOUR BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE
ELECTION OF EACH OF THE NOMINEES NAMED BELOW UNDER "NOMINEES FOR DIRECTORS". It
is intended that shares represented by the proxies will be voted FOR the
election to the Board of Directors of the persons named below unless authority
to vote for nominees has been withheld in the proxy. Although each of the
persons nominated has consented to serve as a director if elected and your Board
of Directors has no reason to believe that any of the nominees will be unable to
serve as a director, if any nominee withdraws or otherwise becomes unavailable
to serve, the persons named as proxies will vote for any substitute nominee
designated by the Board of Directors. The following information regarding the
Company's directors (including the nominees) and executive officers is relevant
to your consideration of the slate proposed by your Board of Directors.
Information as to Nominees, Other Directors, Executive Officers and Other
Significant Employees
The directors and nominees for director of the Company and executive
officers and other significant employees of the Company as of the date of this
Proxy Statement, are as follows:
<TABLE>
<S> <C> <C>
Paul W. Harrison 45 Chairman of the Board and Chief Executive Officer
David M. Engert 49 Chief Operating Officer
Marilyn May 37 Vice President of Business Development
A.E. Harrison 40 Vice President of Research and Development
Sheldon Misher 59 Director
Robert Priddy 54 Director
</TABLE>
Each director on the Board of Directors serves for a one-year term and
until his or her successor is duly qualified and elected. All executive
officers of the Company are chosen by the Board of Directors and serve at the
Board's discretion. A.E. Harrison is the brother of Paul W. Harrison.
Attendance at Meetings and Board Committees
During the fiscal year ended June 30, 1999, the Board of Directors, then
comprised of Paul W. Harrison, Richard Case and Sanford Schwartz, held a total
of six meetings. All of such directors attended at least 75% of the meetings of
the Board held during fiscal 1999. During fiscal 1999, the functions that would
be served by an audit, nominating and compensation committee were reserved to
the full Board of Directors. It is anticipated that new audit and compensation
committees will be appointed following the Annual Meeting. Directors who are
not otherwise compensated by the Company generally have been compensated through
the issuance of stock options.
In March 2000, Richard Case and Sanford Schwartz resigned from the Board of
Directors. Such resignations were not the result of disagreements with the
Company on matters relating to the Company's operations, policies or practices.
On April 5, 2000, Sheldon Misher and Robert Priddy were appointed to fill the
vacancies on the Board of Directors created by the resignation of Messrs. Case
and Schwartz.
16
<PAGE>
Nominees for Directors
The following three persons will be placed in nomination for election to
the Board of Directors. One director is to be elected by the holders of Common
Stock and holders of certain Preferred Stock authorized to vote with the holders
of Common Stock, voting as one class. One director is to be elected by the
holders of the Series C Preferred, voting as one class, and the remaining
director is to be elected by the holders of the Series D Preferred, voting as
one class.
Nominee to be Voted on by the Holders of the Common Stock:
Paul W. Harrison has served as Chairman of the Board of Directors since
October 1997 and has acted as Chief Executive Officer since October 1998. He is
also Chairman and CEO of HALIS, which is approximately 25% owned by the Company.
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 The Company 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 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 1991. 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.
Nominee to be Voted on by the Holders of the Series C Preferred:
Sheldon Misher has served on the Board of Directors since April 5, 2000.
Mr. Misher has been associated with Commonwealth Associates, L.P. since May
1999. Prior to that time, he was a senior partner of the law firm of Bachner,
Tally, Polevoy & Misher for more than 25 years. Mr. Misher is a director of
Ridgewood Hotels, Inc., an Atlanta based publicly held hospitality management
company.
Nominee to be Voted on by the Holders of the Series D Preferred:
Robert Priddy has served on the Board of Directors since April 5, 2000. Mr.
Priddy served as chairman and chief executive officer of ValuJet, Inc. from its
inception in October 1995 until November 1997 and remains on the board of
directors of Airtran Airlines, its successor entity. He was one of the founding
partners of ValueJet Airlines, a wholly-owned subsidiary of ValuJet, Inc. and
served as its chairman and chief executive officer from July 1992 until November
1996. From July 1991 until January 1993, Mr. Priddy served as president of
Florida Gulf Airlines. From January 1988 until November 1991, he served as
president and chief executive officer of Air Midwest, Inc. From 1978 to 1987,
Mr. Priddy served as vice president and chief financial officer of Atlantic
Southeast Airlines, an entity which he founded. Mr. Priddy serves on the boards
of directors of a number of public and privately-held companies. Mr. Priddy is
a stockholder and director of the placement agent involved in the Bridge
Financing and the Unit Offering.
Other Directors, Executive Officers and Significant Employees
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. From July
1993 until April 2000, Mr. Engert was Senior Vice President and General Manager
of the Managed Care Group at McKesson HBOC, Inc. He founded that group in 1993
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 the Company in September 1996
and previously served as Director of Marketing for the Company and HALIS. From
1990 until 1996, Ms. May was in marketing for Procter & Gamble. From 1984
17
<PAGE>
until 1988, she 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 Company since April 1999. From 1995 to March 1999, Mr. Harrison served
as Vice President of R&D for HALIS. From 1993 to 1995, Mr. Harrison was
employed by McKesson HBOC in its software development department. Prior to his
employment with McKesson HBOC, Mr. Harrison was in several information
technology companies including SOTRISS, Marcon, a publicly-traded
telecommunications company, and ITT, a diversified Fortune 500 communications
company.
Certain Relationships and Certain Transactions
Background of HALIS and PHE Relationships
Since August 1997, the Company has entered into a number of transactions
with HALIS, and a number of its affiliates and stockholders. HALIS supplies
information technology and services focused on the healthcare industry and has
developed the HALIS Healthcare Enterprise System ("HES"), a single system which
integrates all of the major functions needed by clinics, hospitals, healthcare
practices, payors, long-term care facilities, laboratories, pharmacies and home
healthcare facilities. The HES was developed by HALIS utilizing the MERAD
technology, an advanced virtual software and information media utility developed
by Paul W. Harrison and previously owned by PHE (which was controlled by Paul W.
Harrison), prior to its acquisition by the Company on October 2, 1998. PHE was
also a significant stockholder of HALIS.
In October 1997, the Company entered into a software license and
development agreement with MERAD Corporation ("MERAD"), a company owned by PHE.
Pursuant to the agreement, the Company was to license certain computer
architecture, concepts, algorithms and processes from MERAD which the Company
originally planned to integrate into a line of noninvasive vascular diagnostic
equipment. In addition, MERAD was to develop healthcare software for the
Company. In exchange for these licenses and services, the Company agreed to pay
MERAD a development fee of $15,000 per month during the period January 1998
through June 1998. In addition, The Company was to pay MERAD a fee based on
a variable rate of gross software revenues.
Although the Company 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, the Company and HALIS entered into a business collaboration
agreement whereby the Company and HALIS share sales prospects and the Company
acts as a reseller of the HES software. Additionally, the Company 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 the Company'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 and prior to its acquisition
by the Company, PHE was granted an option to acquire 320,000 additional shares
of the Company's Common Stock in exchange for 400,000 additional shares of HALIS
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.
Additionally, the agreements provided that HALIS was to acquire 83,333 shares of
the Company's Common Stock for a purchase price of $125,000. During February
1998, the option was exercised by PHE and its assigns and PHE exchanged an
additional 1,262,000 shares of HALIS common stock for 378,000 shares of the
Company's Common Stock. The exchange ratio for the shares exchanged in February
was based on the market value for each company's common stock at the time that
the exchange was negotiated. As a result of these transactions, at September
30, 1998 PHE held 888,400 shares of the Company's Common Stock. As a result of
the acquisition of PHE by the Company on October 2, 1998, these shares became
treasury shares and are deemed cancelled and not outstanding. None of the
references to the shares of Common Stock held or acquired by PHE above reflect
the December Reverse Split.
During October 1998, the Company 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 stockholders
18
<PAGE>
of PHE received 66,886 shares of the Company's Series P Preferred Stock (which
reflects the December Reverse Split). Subject to prior approval by the Company's
stockholders (see Proposal 4), the Series P Preferred will be convertible into
668,860 shares of the Company's Common Stock. Paul W. Harrison, Chairman,
President and Chief Executive Officer of the Company, received 25,080 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 the
Company's 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.
At the time of the merger, PHE held 6,177,010 shares of common stock in
HALIS and owned the MERAD technology. As a result of the merger, the Company
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, the Company converted outstanding debt owed by HALIS to the Company into
1,824,645 additional shares of common stock of HALIS, bringing the number of
HALIS shares held by the Company to 10,763,655, representing approximately 21%
of HALIS' outstanding shares. The Company is now the single largest stockholder
of HALIS and, due to the size of its holdings, now accounts for its investment
under the equity method of accounting (i.e., it recognizes its proportionate
amount of HALIS' income or loss each month)
Further, as a result of the merger of PHE into MERAD Software, Inc., the
MERAD technology is now owned by the Company. HALIS is obligated to pay the
Company 10% of the gross revenues generated by HALIS from products and services
utilizing the MERAD technology. During fiscal 1999, the Company earned $66,087
in royalties from HALIS, none of which had been paid to the Company as of year-
end. Additionally, the Company and HALIS currently share office space and have
a cost sharing arrangement relating to key personnel under an arrangement that
requires the Company to pay HALIS a calculated amount each month based upon a
reasonable cost basis of services provided.
In addition to the issuance of the Series P Preferred, the PHE stockholders
are entitled be paid royalties based on revenues derived by the Company from the
sale of software developed utilizing the MERAD technology. In connection with
the Company's merger with PHE, each PHE stockholder entered into an Additional
Consideration Agreement with the Company 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 merger). The additional consideration to be
paid was to be paid in equal amounts of cash and 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 the Company 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, 50% of which will be paid in
cash and the balance to be paid in Common Stock of the Company. None of this
amount had been paid as of year-end. Subsequent to year-end and prior to March
31, 2000 the Company paid $53,283 in stock and $55,334 in cash. During the first
three quarters of fiscal 2000, the PHE stockholders have earned $20,285 as
additional consideration. $6,107 is owed and unpaid as of March 31, 2000.
In connection with the Unit Offering, Paul W. Harrison, the Company's
Chairman, Chief Executive Officer and President, and David M. Engert, the
Company's Chief Operating Officer (who were both former PHE stockholders), have
agreed to waive 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, the
Company has the option to pay the additional consideration in cash, or in a
combination comprised of one-half cash and one-half shares of 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.
Effective October 10, 1997, PHE and Paul W. Harrison entered into a
consulting agreement with the Company which expired on December 31, 1998. The
agreement provided for, among other things, the payment to PHE commencing on
January 1, 1998 of $15,000 per month through June 30, 1998, the granting of a
five-year non-statutory stock option to Mr. Harrison representing the right to
acquire up to 30,000 shares (which reflects the December Reverse Split) of the
Company's Common Stock at $2.65625 per share, the then fair market value for the
Company's Common Stock, 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
19
<PAGE>
PHE. As of the date hereof, $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 been adjusted to $3.30 to reflect the December
Reverse 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 the
Company, effective as of January 1, 1999. As of June 30, 1999, $12,500 was paid
under the revised consulting agreement to Mr. Harrison.
On January 22, 1998, Paul W. Harrison loaned the Company $17,000 for a
period of 90 days. The loan was 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 Reverse Split) of the
Company's Common Stock at $l.7l875 per share, the fair market value for the
Company's Common Stock on January 22, 1998 (which has been adjusted to $8.950 to
reflect the December Reverse Split).
Paul W. Harrison, Chairman of the Board, Chief Executive Officer and
President of the Company, is also the Chairman, President and Chief Executive
Officer of HALIS.
The Halis Merger
On March 8, 2000, the Company entered into a letter of intent with HALIS
regarding a proposed merger of HALIS with or into the Company or a subsidiary of
the Company (the "Merger").
The Merger will provide for the issuance of shares of the Company's Common
Stock to HALIS stockholders in exchange for all outstanding stock of HALIS. The
letter of intent provides that outstanding HALIS common stock will be converted
into shares of the Company's Common Stock. In addition, the Company intends to
offer holders of HALIS' outstanding options the opportunity to receive cash or
to convert their HALIS options into options to purchase an equivalent amount of
the Company's Common Stock. Completion of the Merger is conditioned upon
certain events such as execution of a definitive merger agreement, approval by
both companies' stockholders and directors, obtaining any required governmental
and regulatory approvals and the absence of any material adverse changes in
HALIS' business or operations. If the parties fail to enter into a definitive
merger agreement or the parties' respective stockholders do not approve the
merger agreement, the Company will not obtain ownership of the HES System and
the parties will continue operating under the current business collaboration
agreement.
As of October 31, 1999, HALIS currently had 57,317,222 shares of common
stock outstanding. Of that amount, the Company owns 10,763,655 shares and Paul
W. Harrison owns 3,678,349 shares. Accordingly, Paul Harrison and the Company
together own approximately 25% of HALIS' outstanding common stock. The letter
of intent contains a financing option under which the Company will have the
right to purchase 5,000,000 additional shares of HALIS' common stock for an
investment of $1,000,000 at any time prior to the Merger. On April 29, 2000,
the Company exercised the $1,000,000 financing option. The letter of intent
also provides that, once the Company completes such $1,000,000 financing, it
will have the right to purchase 25,000,000 additional shares of HALIS' common
stock for an additional investment of $5,000,000. Assuming the Company
exercises all of the financing options under the letter of intent, Paul Harrison
(who has indicated his intent to vote in favor of the Merger) and the Company
would own in the aggregate approximately 50% of HALIS' common stock.
20
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to beneficial
ownership of the Company's Common Stock by each person who beneficially owns
more than 5% of the 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 Company's outstanding Common Stock owned as of May 1, 2000. Unless
otherwise indicated, the Company 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 Percentage of
Common Stock Outstanding Shares
Name of Beneficial Owner Beneficially Owned Beneficially Owned
- -------------------------------------- ----------------------- ---------------------
<S> <C> <C>
Paul W. Harrison/1/ 557,837 21.7%
Sheldon Misher/2/ 38,500 1.8%
Robert Priddy/3/ 357,143 14.3%
All Directors & Executive Officers as
a Group(6 persons)/4/ 1,203,370 37.8%
</TABLE>
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 Common Stock shown as
beneficially owned by them. Mr. Harrison's address is 3525 Piedmont Road,
Building Seven, Suite 300, Atlanta, Georgia 30305. Mr. Misher's address is 830
Third Avenue, New York, New York 10022. Mr. Priddy's address is 3435 Kingsboro
Road, Suite 1601, Atlanta, Georgia 30326.
The percentages shown are calculated based upon 2,147,218 shares of Common Stock
outstanding on May 1, 2000. In calculating the percentage of ownership, all
shares of Common Stock that the identified person or group had the right to
acquire within 60 days of May 1, 2000 upon the exercise of options and warrant
are deemed to be outstanding for the purpose of computing the percentage of
shares of 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 Common
Stock owned by any other person.
- -----------------------------------
/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
shareholder and 419,639 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 Common Stock only after
stockholder approval is obtained.
/2/ Includes 38,500 shares issuable upon conversion of Series C Preferred and
warrants exercisable within 60 days.
/3/ Includes 357,143 shares issuable upon conversion of Series D Preferred and
warrants exercisable within 60 days. Does not include shares beneficially owned
by Commonwealth Associates Management Company, Inc. ("CAMC") and ComVest Capital
Management LLC ("ComVest"). As a director and principal stockholder of CAMC and
a Manager of ComVest, Mr. Priddy may be deemed to share voting and dispositive
power with respect to such shares.
/4/ Includes 1,038,614 shares subject to Series C Preferred, Series D Preferred,
warrants and options exercisable within 60 days.
21
<PAGE>
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Exchange Act requires the Company's executive
officers, directors and 10% stockholders to file reports regarding initial
ownership and changes in ownership with the Securities and Exchange Commission
and The Nasdaq Stock Market, Inc. Executive officers, directors and 10%
stockholders are required by Securities and Exchange Commission regulations to
furnish the Company with copies of all Section 16(a) forms they file. The
Company's information regarding compliance with Section 16(a) is based solely on
a review of the copies of such reports furnished to the Company by the Company's
executive officers, directors and 10% stockholders. The Company is not aware of
any noncompliance with the requirements of Section 16(a) to file reports during
the Company's last fiscal year.
COMPENSATION OF EXECUTIVE OFFICERS AND NON-EMPLOYEE DIRECTORS
Compensation of Executive Officers
The following table sets forth, on an accrual basis, the aggregate cash
compensation paid by the Company and its subsidiaries during the three fiscal
years ended June 30, 1999, 1998 and 1997, respectively, to the Company's Chief
Executive Officer. No officer or director of the Company received compensation
of $100,000 or more in fiscal 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Shares of Common
Fiscal Stock Underlying
Name and Principal Position Year Salary($) Bonus($) Options Granted
- --------------------------- ---------- --------------- ------------ -----------------
<S> <C> <C> <C> <C>
Paul W. Harrison (a) 1999 $12,500(b) --- ---
President, Chief Executive 1998 --- --- 53,333
Officer and Director 1997 --- --- ---
</TABLE>
(a) Mr. Harrison became President and CEO of the Company effective June 1,
1998.
(b) 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 Mr. Harrison received only $12,500 of this amount.
STOCK BASED COMPENSATION
The Company has a 1989 Incentive Stock Option Plan and 1993 and 1995 Stock
Option Plans (the "Plans") for its key employees directors and consultants to
purchase shares of the Company's Common Stock. The Plans provide that the
purchase price of the shares covered by incentive stock options may not be less
than the fair market value of the shares on the date the option was granted.
Non-statutory stock options granted can be granted at exercise prices of 85% or
more of the fair market value of the Company's Common Stock on the date of
grant. To date, all options granted under the Plans have been at exercise
prices equal to the fair market value of the Common Stock on the date the
Company agreed to grant the options.
As part of the acquisition of PHE by the Company on October 2, 1998, the
Company agreed to assume 600,000 options for PHE outstanding at the time of the
merger, and converted such options into 125,000 (which reflects the December
Reverse Split) non-statutory stock options of the Company. Paul W. Harrison
holds 116,667 of these options which have an exercise price of $4.80 per share,
as adjusted to reflect the December Reverse Split, exercisable on or before
December 31, 2003.
22
<PAGE>
The Company has, from time to time, also provided non-statutory stock
options outside of the Plans to directors, officers and consultants and has
awarded stock grants to officers, directors, employees and consultants in
consideration for services. These non-statutory options generally have had a
term of three to seven years and have had exercise prices equal to the fair
market value of the Company's Common Stock on the date the options were granted.
As of May 1, 2000, the Company had an aggregate of 824,143 shares reserved for
issuance pursuant to outstanding stock options under the Plans and other stock
option grants, and an additional 260,304 shares reserved for outstanding
warrants.
The following table shows option grants during fiscal 1999 to the named
executive officers of the Company. Reference is also made to the information
included above under "Compensation."
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Options Granted in Percent of Total
Name Fiscal 1999 Options Granted Exercise Price
---- -------------------- ------------------ ----------------
<S> <C> <C> <C>
Paul W. Harrison (a) 116,667 93.3% $4.80
</TABLE>
(a) These shares (which reflect the December Reverse Split) were issued
pursuant to the acquisition of Paul Harrison Enterprises, Inc. in replacement of
options then outstanding to Mr. Harrison by PHE.
The following table shows the number of options exercised during fiscal
1999 and the 1999 fiscal year-end value of the options held at the end of the
fiscal year by the named executive officer.
OPTION EXERCISES AND YEAR-END VALUE TABLE
<TABLE>
<CAPTION>
Number of Unexercised Options at
Shares Acquired on Exercise of June 30, 1999
Name Options Exercisable/Unexercisable (a)
------- ------------------------------ ---------------------------------
<S> <C> <C>
Paul W. Harrison (b) None 160,000 / 6,667 shs.
</TABLE>
(a) The market price of the Company's Common Stock on June 30, 1999 was $1.00
per share. Numbers reflect the December Reverse Split.
(b) Mr. Harrison also holds 14,545 warrants exercisable at a price of $2.235
per share and 15,094 warrants exercisable at a price of $4.306 per share. All
of these warrants are immediately exercisable.
23
<PAGE>
INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors has selected Tauber & Balser, P.C. ("Tauber &
Balser") to audit the financial statements of the Company for the fiscal year
ending June 30, 2000. As indicated below, Tauber & Balser has audited the
Company's financial statements since 1999. A representative of Tauber &
Balser, P.C. will be present at the Annual Meeting to respond to any questions
and to make a statement on behalf of his firm, if he so desires.
Information on Prior Auditors
On June 4, 1999, the Company dismissed its independent auditors, Silverman
Olson Thorvilson & Kaufman LTD ("Silverman Olson"), and on the same date
authorized the engagement of 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, the Board of Directors concluded that it would be more
economical to use a regional firm based in Atlanta, such as Tauber & Balser, 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 20 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
nor 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.
24
<PAGE>
TRANSACTION OF OTHER BUSINESS
As of the date of this Proxy Statement, the Board of Directors is not aware
of any matters other than those set forth herein and in the Notice of Annual
Meeting that will come before the meeting. Should any other matters arise
requiring the vote of stockholders, it is intended that proxies will be voted in
respect thereto in accordance with the best judgment of the person or persons
voting the proxies.
FUTURE STOCKHOLDER PROPOSALS
The Company provides all stockholders with the opportunity, under certain
circumstances, to participate in the governance of the Company by submitting
proposals that they believe merit consideration at the next Annual Meeting of
Stockholders, which currently is expected to be held in May 2001. To enable
management to analyze and respond adequately to proposals and to prepare
appropriate proposals for presentation in the Company's Proxy Statement for the
next Annual Meeting of Stockholders, any such proposal should be submitted to
the Company no later than January 24, 2001, to the attention of its Secretary,
at its principal office appearing on the front page of this Proxy Statement.
Stockholders may also submit the names of individuals who they wish to be
considered by the Board of Directors as nominees for directors. Any proposal
submitted by a stockholder outside the processes of Rule 14a-8 under the
Exchange Act for presentation at the Company's next annual meeting will be
considered untimely for purposes of Rules 14a-4 and 14a-5 if received by the
Company after April 7, 2001.
Please return your proxy as soon as possible. Unless a quorum consisting of
a majority of the outstanding shares entitled to vote is represented at the
meeting, no business can be transacted. Therefore, please be sure to date and
sign your proxy exactly as your name appears on your stock certificate and
return it in the enclosed prepaid return envelope. Please act promptly to ensure
that you will be represented at this important meeting.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act and, in accordance therewith, is required to file reports, proxy statements
and other information with the Commission. Stockholders may inspect and copy
such reports, proxy statements and other information at the Public Reference
Section of the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the Commission's regional offices at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center,
Suite 1300, New York, New York 10048. Stockholders may also obtain copies of the
reports, proxy statements and other information from the Public Reference
Section of the Commission, Washington, D.C. 20549, at prescribed rates. The
Commission maintains a World Wide Web site on the internet at http://www.sec.gov
------------------
that contains reports, proxies, information statements, and registration
statements and other information filed with the Commission through the EDGAR
system. The common stock of the Company is traded on the Nasdaq Smallcap Market
(Symbol: HEAL), and such reports, proxy statements and other information
concerning the Company also can be inspected at the offices of Nasdaq
Operations, 1735 K Street, N.W., Washington, D.C. 20006.
By Order of the Board of Directors
HEALTHWATCH, INC.
Paul W. Harrison
Chief Executive Officer
May [ ], 2000
25
<PAGE>
APPENDIX A
----------
HEALTHWATCH, INC. 2000 STOCK OPTION PLAN
----------------------------------------
Article I.
Establishment and Purpose
1.1 Establishment. HealthWatch, Inc., a Minnesota Corporation (the
-------------
"Company"), hereby establishes a stock option plan for employees and others
providing services to the Company and its Subsidiary Corporations, as described
herein, which shall be known as the "2000 STOCK OPTION PLAN" (the "Plan"). It is
intended that certain of the options issued pursuant to the Plan to employees
may, subject to the Plan being approved by the stockholders of the Company by
May 8, 2001, constitute incentive stock options within the meaning of Section
422 of the Internal Revenue Code and that other options issued pursuant to the
Plan shall constitute nonstatutory options. The Board shall determine which
options are to be incentive stock options and which are to be nonstatutory
options and shall enter into option agreements with recipients accordingly.
1.2 Purpose. The purpose of this Plan is to enhance stockholder
-------
investment by attracting, retaining and motivating key employees and consultants
of the Company and its Subsidiary Corporations, and to encourage stock ownership
by such employees and consultants by providing them with a means to acquire a
proprietary interest in the Company's success.
Article II.
Definitions
2.1 Definitions. Whenever used herein, the following terms shall have
-----------
the respective meanings set forth below, unless the context clearly requires
otherwise, and when said meaning is intended, the term shall be capitalized.
(a) "Board" means the Board of Directors of the Company.
(b) "Cause" means (i) an act or acts of personal dishonesty taken
by Employee or Consultant and intended to result in substantial personal
enrichment to Employee or Consultant at the expense of the Company; (ii)
repeated violations by Employee or Consultant of his obligations which are
demonstrably willful and deliberate on Employee's or Consultant's part and which
are not remedied within a reasonable period after Employee's or Consultant's
receipt of written notice of such violations from the Company; (iii) the
conviction of Employee or Consultant of a felony that is materially and
demonstrably injurious to the Company; (iv) sexual harassment by Employee or
Consultant of any other Employee or Consultant of the Company; or (v) illegal
use of drugs. No act, or failure to act, on Employee's or Consultant's part
shall be considered "dishonest," "willful," or "deliberate," unless done, or
admitted to be done, by Employee or Consultant in bad faith and without
reasonable belief that Employee's or Consultant's action or omission was in the
best interest of the Company.
<PAGE>
(c) "Code" means the Internal Revenue Code of 1986, as amended.
(d) "Committee" shall mean the Committee provided for by Article IV
hereof, which may be created at the discretion of the Board.
(e) "Company" means HealthWatch, Inc., a Minnesota Corporation.
(f) "Consultant" means any person or entity, including an officer
or director of the Company or a Subsidiary Corporation, who provides services
(other than as an Employee) to the Company or a Subsidiary Corporation, and
shall include a Non-Employee Director, as defined below.
(g) "Date of Exercise" means the date the Company receives notice,
by an Optionee, of the exercise of an Option pursuant to Section 8.1 of this
Plan. Such notice shall indicate the number of shares of Stock the Optionee
intends to exercise.
(h) "Employee" means any person, including an officer or director
of the Company or a Subsidiary Corporation, who is employed by the Company or a
Subsidiary Corporation.
(i) "Exchange Act" means the Securities Exchange Act of 1934. Any
reference herein to a specific section of the Exchange Act shall be deemed to
include a reference to any corresponding provision of future law.
(j) "Fair Market Value" on any date means (i) the closing sales
price of the Stock, regular way, on such date on the national securities
exchange having the greatest volume of trading in the Stock on the date such
value is to be determined or, if such exchange was not open for trading on such
date, the next preceding day on which it was open; (ii) if the Stock is not
traded on any national securities exchange, the average of the closing high bid
and low asked prices of the Stock on the over-the-counter market on the day such
value is to be determined, or in the absence of closing bids on such date, the
closing bids on the next preceding day on which there were bids; or (iii) if the
Stock is not traded on an exchange or in the over-the-counter market, the fair
market value as determined by the Board in good faith.
(k) "Incentive Stock Option" means an Option granted under this
Plan which is intended to qualify as an "incentive stock option" within the
meaning of Section 422 of the Code.
(l) "Non-Employee Director" shall have the meaning set forth in
Rule 16b-3 under the Exchange Act.
(m) "Nonstatutory Option" means an Option granted under this Plan
which is not intended to qualify as an incentive stock option within the meaning
of Section 422 of the Code. Nonstatutory Options may be granted at such times
and subject to such restrictions as the
2
<PAGE>
Board shall determine without conforming to the statutory rules of Section 422
of the Code applicable to incentive stock options.
(n) "Option" means the right, granted under this Plan, to purchase
Stock of the Company at the option price for a specified period of time. For
purposes of this Plan, an Option may be either an Incentive Stock Option or a
Nonstatutory Option.
(o) "Optionee" means an Employee or Consultant holding an Option
under the Plan.
(p) "Parent Corporation" shall have the meaning set forth in
Section 424 (e) of the Code with the Company being treated as the employer
corporation for purposes of this definition.
(q) "Section 16 Insider" means any person who is subject to the
provisions of Section 16 of the Exchange Act, as provided in Rule 16a-2
promulgated pursuant to the Exchange Act.
(r) "Subsidiary Corporation" shall have the meaning set forth in
Section 424
(f) of the Code with the Company being treated as the employer
corporation for purposes of this definition.
(s) "Significant Shareholder" means an individual who, within the
meaning of Section 422(b)(6) of the Code, owns stock possessing more than ten
percent of the total combined voting power of all classes of stock of the
Company or of any Parent Corporation or Subsidiary Corporation of the Company.
In determining whether an individual is a Significant Shareholder, an individual
shall be treated as owning stock owned by certain relatives of the individual
and certain stock owned by corporations in which the individual is a
stockholder, partnerships in which the individual is a partner, and estates or
trusts of which the individual is a beneficiary, all as provided in Section
424(d) of the Code.
(t) "Stock" means the $.05 par value common stock of the Company.
2.2 Gender and Number. Except when otherwise indicated by the
context, any masculine terminology when used in this Plan also shall include the
feminine gender, and the definition of any term herein in the singular also
shall include the plural.
Article III.
Eligibility and Participation
3.1 Eligibility and Participation. All Employees are eligible to
-----------------------------
participate in this Plan and receive Incentive Stock Options and/or Nonstatutory
Options hereunder. All Consultants are eligible to participate in this Plan and
receive Nonstatutory Options hereunder. Optionees in the Plan shall be selected
by the Board from among those Employees and Consultants who, in the
3
<PAGE>
opinion of the Board, are in a position to contribute materially to the
Company's continued growth and development and to its long-term financial
success.
Article IV.
Administration
4.1 Administration. The Board shall be responsible for
--------------
administering the Plan.
The Board is authorized to interpret the Plan; to prescribe, amend,
and rescind rules and regulations relating to the Plan; to provide for
conditions and assurances deemed necessary or advisable to protect the interests
of the Company; and to make all other determinations necessary or advisable for
the administration of the Plan, but only to the extent not contrary to the
express provisions of the Plan. Determinations, interpretations, or other
actions made or taken by the Board, pursuant to the provisions of this Plan,
shall be final and binding and conclusive for all purposes and upon all persons.
At the discretion of the Board, this Plan may be administered by a
Committee which shall be a committee of at least two directors appointed from
time to time by the Board; provided, however, that with respect to any Options
granted to an individual who is also a Section 16 Insider, the Committee shall
consist of either the entire Board or a committee solely made up of at least two
directors (who need not be members of the Committee with respect to Options
granted to any other individuals) who are Non-Employee Directors, and all
authority and discretion shall be exercised by such Non-Employee Directors, and
all references herein to the "Committee" means such Non-Employee Directors
insofar as any actions or determinations of the Committee shall relate to or
affect Options made to or held by any Section 16 Insider. In selecting the
Committee, the Board shall also consider the benefits under Section 162(m) of
the Code of having a Committee composed of "outside directors" (as that term is
defined in the Code) for certain grants of Options to highly compensated
executives. Such Committee shall have full power and authority, subject to the
limitations of the Plan and any limitations imposed by the Board, to construe,
interpret and administer this Plan and to make determinations which shall be
final, conclusive and binding upon all persons, including, without limitation,
the Company, the stockholders, the directors and any persons having any
interests in any Options which may be granted under this Plan, and, by
resolution or resolutions providing for the creation and issuance of any such
Option, to fix the terms upon which, the time or times at or within which, and
the price or prices at which any such shares may be purchased from the Company
upon the exercise of such Option, which terms, time or times and price or prices
shall, in every case, be set forth or incorporated by reference in the
instrument or instruments evidencing such Option, and shall be consistent with
the provisions of this Plan.
The Board may from time to time remove members from, or add members
to, the Committee. The Board may terminate the Committee at any time. Vacancies
on the Committee, howsoever caused, shall be filled by the Board. The Committee
shall select one of its members as Chairman, and shall hold meetings at such
times and places as the Chairman may determine. A majority of the Committee at
which a quorum is present, or acts reduced to or approved in writing
4
<PAGE>
by all of the members of the Committee, shall be the valid acts of the
Committee. A quorum shall consist of two-thirds (2/3) of the members of the
Committee.
Where the Committee has been created by the Board, references
herein to actions to be taken by the Board shall be deemed to refer to the
Committee as well, except where limited by this Plan or by the Board.
The Board shall have all of the enumerated powers of the Committee,
but shall not be limited to such powers. No member of the Board or the
Committee shall be liable for any action or determination made in good faith
with respect to the Plan or any Option granted under it.
Article V.
Stock Subject to the Plan
5.1 Number. The total number of shares of Stock hereby made
------
available and reserved for issuance under the Plan shall be 2,000,000 shares.
The number of shares of Stock available for issuance hereunder shall
automatically be subject to increase (but not decrease) on January 1 of each
year beginning January 1, 2001, to an amount equal to:
(i) twenty percent of the total number of fully-diluted shares of
Stock of the Company (assuming the conversion of all outstanding preferred
stock, and the exercise of all vested and unvested options, warrants and
other convertible securities, whether or not such options, warrants or
other convertible securities are then subject to being exercised) as of
December 31 of the immediately preceding year (subject to adjustment under
Section 5.3);
less
(ii) as of December 31 of the immediately preceding year, the sum
of (x) with respect to the 1989 Stock Option Plan, the 1993 Stock Option
Plan and 1995 Stock Option Plan, (A) the number of shares as to which
options were outstanding on such date under such plans, (B) the number of
shares previously issued upon the exercise of options granted under such
plans, and (C) the number of shares as to which options remain available to
be granted on such date under such plans, plus (y) with respect to the 1995
Stock Grant and Salary Deferral Plan, the number of shares of restricted or
unrestricted stock that have been granted as of such date under such plan,
plus the number of shares of such stock that remain available to be granted
on such date under such plan;
provided, however, that no adjustment shall be made if it would result in a
reduction in the number of shares of Stock that were available for issuance
under this Plan immediately prior to such adjustment. Any or all shares of
Stock subject to the Plan may be issued in any combination of Incentive Stock
Options or Nonstatutory Options, and the amount of Stock subject to the Plan may
be increased from time to time in accordance with Article XII hereof.
Notwithstanding the above, the total number of shares of Stock issuable pursuant
to Incentive Stock Options may not be increased to more than 2,000,000 (other
than pursuant to anti-dilution adjustments provided in
5
<PAGE>
Section 5.3) without stockholder approval. The aggregate number of shares of
Stock available under this Plan shall be subject to adjustment as provided in
Section 5.3. The total number of shares of Stock may be authorized but unissued
shares of Stock, or shares acquired by purchase as directed by the Board from
time to time in its discretion, to be used for issuance upon exercise of Options
granted hereunder.
If Options are issued in respect of options to acquire stock of any
entity acquired, by merger or otherwise, by the Company (or any subsidiary of
the Company), to the extent that such issuance shall not be inconsistent with
the terms, limitations and conditions of Section 422 of the Code or Rule 16b-3
under the Exchange Act, the aggregate number of shares of Stock for which
Options may be granted hereunder shall automatically be increased by the number
of shares subject to the Options so issued; provided, however, that the
aggregate number of shares of Stock for which Options may be granted hereunder
shall automatically be decreased by the number of shares covered by any
unexercised portion of an Option so issued that has terminated for any reason,
and the shares subject to any such unexercised portion may not be optioned to
any other person.
5.2 Unused Stock. If an Option shall expire or terminate for any
------------
reason without having been exercised in full, the unpurchased shares of Stock
subject thereto shall (unless the Plan shall have terminated) become available
for other Options under the Plan.
5.3 Adjustment in Capitalization. In the event of any change in the
----------------------------
outstanding shares of Stock by reason of a stock dividend or split,
recapitalization, reclassification, or other similar corporate change, the
aggregate number of shares of Stock set forth in Section 5.1 shall be
appropriately adjusted by the Board, whose determination shall be conclusive;
provided, however, that fractional shares shall be rounded to the nearest whole
share. In any such case, the number and kind of shares that are subject to any
Option (including any Option outstanding after termination of employment) and
the option price per share shall be proportionately and appropriately adjusted
without any change in the aggregate option price to be paid therefor upon
exercise of the Option.
Article VI.
Duration of the Plan
6.1 Duration of the Plan. The Plan shall be in effect for ten years
--------------------
from the date of its adoption by the Board. Any Options outstanding at the end
of said period shall remain in effect in accordance with their terms. The Plan
shall terminate before the end of said period, if all Stock subject to it has
been purchased pursuant to the exercise of Options granted under the Plan.
Article VII.
Terms of Stock Options
7.1 Grant of Options. Subject to Section 5.1, Options may be granted
----------------
to Employees or Consultants at any time and from time to time as determined by
the Board; provided, however, that Consultants may receive only Nonstatutory
Options, and may not receive Incentive Stock Options. The Board shall have
complete discretion in determining the number of Options granted to each
Optionee. In making such determinations, the Board may take into account the
6
<PAGE>
nature of services rendered by such Employees or Consultants, their present and
potential contributions to the Company and its Subsidiary Corporations, and such
other factors as the Board in its discretion shall deem relevant. The Board
also shall determine whether an Option is to be an Incentive Stock Option or a
Nonstatutory Option.
The Board is expressly given the authority to issue amended or
replacement Options with respect to shares of Stock subject to an Option
previously granted hereunder. An amended Option amends the terms of an Option
previously granted and thereby supersedes the previous Option. A replacement
Option is similar to a new Option granted hereunder except that it provides that
it shall be forfeited to the extent that a previously granted Option is
exercised, or except that its issuance is conditioned upon the termination of a
previously granted Option.
7.2 $100,000 and Section 162(m) Limitations. Except as provided
---------------------------------------
below, the Board shall not grant an Incentive Stock Option to, or modify the
exercise provisions of outstanding Incentive Stock Options held by, any person
who, at the time the Incentive Stock Option is granted (or modified), would
thereby receive or hold any Incentive Stock Options of the Company (and any
Parent Corporation or Subsidiary Corporations of the Company), such that the
aggregate Fair Market Value (determined as of the respective dates of grant or
modification of each option) of the Stock with respect to which such Incentive
Stock Options are exercisable for the first time during any calendar year is in
excess of $100,000 (or such other limit as may be prescribed by the Code from
time to time); provided that the foregoing restriction on modification of
outstanding Incentive Stock Options shall not preclude the Board from modifying
an outstanding Incentive Stock Option if, as a result of such modification and
with the consent of the Optionee, such Option no longer constitutes an Incentive
Stock Option; and provided that, if the $100,000 limitation (or such other
limitation prescribed by the Code) described in this Section 7.2 is exceeded,
the Incentive Stock Option, the granting or modification of which resulted in
the exceeding of such limit, shall be treated as an Incentive Stock Option up to
the limitation and the excess shall be treated as a NonStatutory Option. No
individual may be granted, in any twelve-month period, Options under the Plan
which are exercisable with respect to more than 1,000,000 shares of Stock.
7.3 No Tandem Options. Where an Option granted under this Plan is
-----------------
intended to be an Incentive Stock Option, the Option shall not contain terms
pursuant to which the exercise of the Option would affect the Optionee's right
to exercise another Option, or vice versa, such that the Option intended to be
an Incentive Stock Option would be deemed a tandem stock option within the
meaning of the regulations under Section 422 of the Code.
7.4 Option Agreement; Terms and Conditions to Apply Unless Otherwise
----------------------------------------------------------------
Specified. As determined by the Board on the date of grant, each Option shall
- ---------
be evidenced by an Option agreement (the "Option Agreement") that includes the
nontransferability provisions required by Section 10.2 hereof and specifies:
whether the Option is an Incentive Stock Option or a Nonstatutory Option; the
Option price; the duration of the Option; the number of shares of Stock to which
the Option applies; any vesting or exercisability restrictions which the Board
may impose; in the case of an Incentive Stock Option, a provision implementing
the $100,000 Limitation; and any
7
<PAGE>
other terms or conditions which the Board may impose. All such terms and
conditions shall be determined by the Board at the time of grant of the Option.
If not otherwise specified by the Board, the following terms and
conditions shall apply to Options granted under the Plan:
(a) Term. The duration of the Option shall be ten (10) years from
the date of grant.
(b) Exercise of Option. Unless an Option is terminated as provided.
hereunder, an Optionee may exercise his Option for up to, but not in excess of,
the amounts of shares subject to the Option specified below, based on the
Optionee's number of years of continuous service with the Company or a
Subsidiary Corporation of the Company from the date on which the Option is
granted. In the case of an Optionee who is an Employee, continuous service shall
mean continuous employment; in the case of an Optionee who is a Consultant,
continuous service shall mean the continuous provision of consulting services.
In applying said limitations, the amount of shares, if any, previously purchased
by the Optionee under the Option shall be counted in determining the amount of
shares the Optionee can purchase at any time. The Optionee may exercise his
Option in the following amounts:
(i) After one year of such continuous services for up to but not in
excess of thirty-three and one-third percent (33 1/3%) of the shares originally
subject to the Option;
(ii) After two years of such continuous services, for up to but not
in excess of sixty-six and two-thirds percent (66 2/3%) of the shares originally
subject to the Option; and
(iii) At the expiration of the third year of such continuous
services the Option may be exercised at any time and from time to time within
its terms in whole or in part, but it shall not be exercisable after the
expiration of ten (10) years from the date on which it was granted.
The Board shall be free to specify terms and conditions other than
those set forth above, in its discretion.
All Option Agreements shall incorporate the provisions of this Plan
by reference, with certain provisions to apply depending upon whether the Option
Agreement applies to an Incentive Stock Option or to a Nonstatutory Option.
7.5 Option Price. No Incentive Stock Option granted pursuant to
------------
this Plan shall have an option price that is less than the Fair Market Value of
Stock on the date the Option is granted. Incentive Stock Options granted to
Significant Shareholders shall have an Option price of not less than 110 percent
of the Fair Market Value of Stock on the date of grant. The Option price
8
<PAGE>
for Nonstatutory Options shall be established by the Board and shall not be less
than eighty-five percent (85%) of the Fair Market Value of Stock on the date
this Option is granted.
7.6 Term of Options. Each Option shall expire at such time as the
---------------
Board shall determine when it is granted, provided however that no Option shall
be exercisable later than the tenth anniversary date of its grant. By its
terms, an Incentive Stock Option granted to a Significant Shareholder shall not
be exercisable after five years from the date of grant.
7.7 Exercise of Options. Options granted under the Plan shall be
-------------------
exercisable at such times and be subject to such restrictions and conditions as
the Board shall in each instance approve, which need not be the same for all
Optionees.
7.8 Payment. Payment for all shares of Stock shall be made at the
-------
time that an Option, or any part thereof, is exercised, and no shares shall be
issued until full payment therefor has been made. Payment shall be made (i) in
cash, or (ii) if acceptable to the Board, in Stock or in some other form;
provided, however, in the case of an Incentive Stock Option, that said other
form of payment does not prevent the Option from qualifying for treatment as an
"incentive stock option" within the meaning of the Code. Payment may also be
made, in the discretion of the Board, by delivery (including by FAX) to the
Company or its designated agent of an executed irrevocable option exercise form
together with irrevocable instructions to a broker-dealer to sell or margin a
sufficient portion of the shares and deliver the sale or margin loan proceeds
directly to the Company to pay for the exercise price.
Article VIII.
Stock and Stockholder Privileges
8.1 Issuance of Stock Certificates. As soon as practicable after
------------------------------
the receipt of written notice and payment, the Company shall deliver to the
Optionee or to a nominee of the Optionee a certificate or certificates for the
requisite number of shares of Stock.
8.2 Privileges of a Stockholder. An Optionee or any other
---------------------------
person entitled to exercise an Option under this Plan shall not have stockholder
privileges with respect to any Stock covered by the Option until the date of
issuance of a stock certificate for such Stock.
Article IX.
Termination of Employment or Services
9.1 Death. Unless provided otherwise for a Nonstatutory Option,
-----
if an Optionee's employment in the case of an Employee, or provision of services
as a Consultant, in the case of a Consultant, terminates by reason of death, the
Option may thereafter be exercised at any time prior to the expiration date of
the Option or within 12 months after the date of such death, whichever period is
the shorter, by the person or persons entitled to do so under the Optionee's
will or, if the Optionee shall fail to make a testamentary disposition of an
Option or shall die intestate, the Optionee's legal representative or
representatives. The Option shall be exercisable only to the extent that such
Option was exercisable as of the date of death.
9
<PAGE>
9.2 Termination Other Than For Cause Or Due to Death. Unless
------------------------------------------------
provided otherwise for a Nonstatutory Option, in the event of an Optionee's
termination of employment, in the case of an Employee, or termination of the
provision of services as a Consultant, in the case of a Consultant, other than
by reason of death, the Optionee may exercise such portion of his Option as was
exercisable by him at the date of such termination (the "Termination Date") at
any time within three (3) months of the Termination Date; provided, however,
that where the Optionee is an Employee or Consultant, and is terminated due to
disability within the meaning of Code (S)422, he may exercise such portion of
his Option as was exercisable by him on his Termination Date within one year of
his Termination Date. In any event, the Option cannot be exercised after the
expiration of the term of the Option. Options not exercised within the
applicable period specified above shall terminate.
In the case of an Employee, a change of duties or position within
the Company or an assignment of employment in a Subsidiary Corporation or Parent
Corporation of the Company, if any, or from such a corporation to the Company,
shall not be considered a termination of employment for purposes of this Plan.
The Option Agreements may contain such provisions as the Board shall approve
with reference to the effect of approved leaves of absence upon termination of
employment.
9.3 Termination for Cause. Unless provided otherwise for a
---------------------
Nonstatutory Option, in the event of an Optionee's termination of employment, in
the case of an Employee, or termination of the provision of services as a
Consultant, in the case of a Consultant, which termination is by the Company or
a Subsidiary Corporation for cause, any Option or Options held by him under the
Plan, to the extent not exercised before such termination, shall forthwith
terminate.
Article X.
Rights of Optionees
10.1 Service. Nothing in this Plan shall interfere with or limit in
-------
any way the right of the Company or a Subsidiary Corporation to terminate any
Employee's employment, or any Consultant's services, at any time, nor confer
upon any Employee any right to continue in the employ of the Company or a
Subsidiary Corporation, or upon any Consultant any right to continue to provide
services to the Company or a Subsidiary Corporation.
10.2 Nontransferability. All Options granted under this Plan shall
------------------
be nontransferable by the Optionee, other than by will or the laws of descent
and distribution, and shall be exercisable during the Optionee's lifetime only
by the Optionee.
Article XI.
Optionee-Employee's Transfer or Leave of Absence
11.1 Optionee-Employee's Transfer or Leave of Absence. For Plan
purposes--
10
<PAGE>
(a) A transfer of an Optionee who is an Employee from the Company
to Subsidiary Corporation or Parent Corporation, or from one such corporation to
another, or
(b) a leave of absence for such an Optionee (i) which is duly
authorized in writing by the Company or a Subsidiary Corporation, and (ii) if
the Optionee holds an Incentive Stock Option, which qualifies under the
applicable regulations under the Code which apply in the case of Incentive Stock
Options, shall not be deemed a termination of employment. However, under no
circumstances may an Optionee exercise an Option during any leave of absence,
unless authorized by the Board.
Article XII.
Amendment, Modification, and Termination of the Plan
12.1 Amendment, Modification, and Termination of the Plan. The
----------------------------------------------------
Board may at any time terminate, and from time to time may amend or modify the
Plan, provided, however, that no amendment, modification, or termination of the
Plan shall in any manner adversely affect any outstanding Option under the Plan
without the consent of the Optionee holding the Option. Notwithstanding the
foregoing, however, the Board (unless its actions are approved or ratified by
the stockholders of the Company within twelve months of the date that the Board
amends the Plan) may not amend the Plan to:
(a) increase the total number of shares of Stock issuable pursuant
to Incentive Stock Options under the Plan, except as contemplated in Section
5.3; or
(b) change the class of employees eligible to receive Incentive
Stock Options that may participate in the Plan.
Article XIII.
Acquisition, Merger, or Liquidation
13.1 Acquisition. In the event that an Acquisition occurs with
-----------
respect to the Company, the Company shall have the right, but not the
obligation, to cancel Options outstanding as of the effective date of
Acquisition, whether or not such Options are then exercisable, in return for
payment to the Optionees of an amount equal to a reasonable estimate of an
amount (hereinafter the "Spread") equal to the difference between the net amount
per share payable in the Acquisition, or as a result of the Acquisition, less
the exercise price of the Option. In estimating the Spread, appropriate
adjustments to give effect to the existence of the Options shall be made, such
as deeming the Options to have been exercised, with the Company receiving the
exercise price payable thereunder, and treating the shares receivable upon
exercise of the Options as being outstanding in determining the net amount per
share. For purposes of this section, an "Acquisition" shall mean any transaction
in which substantially all of the Company's assets are acquired or in which a
controlling amount of the Company's outstanding shares are acquired, in each
case by a single person or entity or an affiliated group of persons and/or
entities. For purposes of this Section a controlling amount shall mean more than
50% of the issued and outstanding shares of stock of the Company. The Company
shall have such right regardless of how the Acquisition is effectuated,
11
<PAGE>
whether by direct purchase, through a merger or similar corporate transaction,
or otherwise. In cases where the acquisition consists of the acquisition of
assets of the Company, the net amount per share shall be calculated on the basis
of the net amount receivable with respect to shares upon a distribution and
liquidation by the Company after giving effect to expenses and charges,
including but not limited to taxes, payable by the Company before the
liquidation can be completed.
Where the Company does not exercise its right under this Section 13.1
the remaining provisions of this Article XIII shall apply, to the extent
applicable.
13.2 Merger or Consolidation. Subject to any required action by the
-----------------------
stockholders, if the Company shall be the surviving corporation in any merger or
consolidation, any Option granted hereunder shall pertain to and apply to the
securities to which a holder of the number of shares of Stock subject to the
Option would have been entitled in such merger or consolidation.
13.3 Other Transactions. A dissolution or a liquidation of the
------------------
Company or a merger and consolidation in which the Company is not the surviving
corporation shall cause every Option outstanding hereunder to terminate as of
the effective date of such dissolution, liquidation, merger or consolidation.
However, the Optionee either (i) shall be offered a firm commitment whereby the
resulting or surviving corporation in a merger or consolidation will tender to
the Optionee an option (the "Substitute Option") to purchase its shares on terms
and conditions both as to number of shares and otherwise, which will
substantially preserve to the Optionee the rights and benefits of the Option
outstanding hereunder granted by the Company, or (ii) shall have the right
immediately prior to such dissolution, liquidation, merger, or consolidation to
exercise any unexercised Options whether or not then exercisable, subject to the
provisions of this Plan. The Board shall have absolute and uncontrolled
discretion to determine whether the Optionee has been offered a firm commitment
and whether the tendered Substitute Option will substantially preserve to the
Optionee the rights and benefits of the Option outstanding hereunder. In any
event, any Substitute Option for an Incentive Stock Option shall comply with the
requirements of Code Section 424(a).
Article XIV.
Securities Registration
14.1 Securities Registration. In the event that the Company shall
-----------------------
deem it necessary or desirable to register under the Securities Act of 1933, as
amended, or any other applicable statute, any Options or any Stock with respect
to which an Option may be or shall have been granted or exercised, or to qualify
any such Options or Stock under the Securities Act of 1933, as amended, or any
other statute, then the Optionee shall cooperate with the Company and take such
action as is necessary to permit registration or qualification of such Options
or Stock.
Unless the Company has determined that the following representation
is unnecessary, each person exercising an Option under the Plan may be required
by the Company, as a condition to the issuance of the shares pursuant to
exercise of the Option, to make a representation in writing (a) that he is
acquiring such shares for his own account for investment and not with a view to,
or for sale in connection with, the distribution of any part thereof, (b) that
before
12
<PAGE>
any transfer in connection with the resale of such shares, he will obtain
the written opinion of counsel for the Company, or other counsel acceptable to
the Company, that such shares may be transferred. The Company may also require
that the certificates representing such shares contain legends reflecting the
foregoing.
Article XV.
Tax Withholding
15.1 Tax Withholding. Whenever shares of Stock are to be issued in
---------------
satisfaction of Options exercised under this Plan, the Company shall have the
power to require the recipient of the Stock to remit to the Company an amount
sufficient to satisfy federal, state, and local withholding tax requirements.
Article XVI.
Indemnification
16.1 Indemnification. To the extent permitted by law, each person
---------------
who is or shall have been a member of the Board shall be indemnified and held
harmless by the Company against and from any loss, cost, liability, or expense
that may be imposed upon or reasonably incurred by him in connection with or
resulting from any claim, action, suit, or proceeding to which he may be a party
or in which he may be involved by reason of any action taken or failure to act
under the Plan and against and from any and all amounts paid by him in
settlement thereof, with the Company's approval, or paid by him in satisfaction
of judgment in any such action, suit, or proceeding against him, provided he
shall give the Company an opportunity, at its own expense, to handle and defend
the same before he undertakes to handle and defend it on his own behalf. The
foregoing right of indemnification shall not be exclusive of any other rights of
indemnification to which such persons may be entitled under the Company's
articles of incorporation or bylaws, as a matter of law, or otherwise, or any
power that the Company or any Subsidiary Corporation may have to indemnify them
or hold them harmless.
Article XVII.
Requirements of Law
17.1 Requirements of Law. The granting of Options and the issuance
-------------------
of shares of Stock upon the exercise of an Option shall be subject to all
applicable laws, rules, and regulations, and to such approvals by any
governmental agencies or national securities exchanges as may be required.
17.2 Governing Law. The Plan, and all agreements hereunder, shall
-------------
be construed in accordance with and governed by the laws of the State of
Georgia.
17.3 Section 16 Compliance. With respect to Section 16 Insiders and
---------------------
"highly-compensated" persons under Section 162(m) of the Code, transactions
under this Plan are intended to comply with all applicable conditions of Rule
16b-3 or its successors under the Exchange Act and with Section 162(m) of the
Code. To the extent any provision of the Plan or action by the
13
<PAGE>
Board fails to so comply, it shall be deemed void to the extent permitted by law
and deemed advisable by the Board. In addition, if necessary to comply with Rule
16b-3 with respect to any grant of an Option hereunder, and in addition to any
other vesting or holding period specified hereunder or in an applicable Option
Agreement, any Section 16 Insider acquiring an Option shall be required to hold
either the Option or the underlying shares of Stock obtained upon exercise of
the Option for a minimum of six months.
Article XVIII.
Effective Date of Plan
18.1 Effective Date. The Plan shall be effective on May 8, 2000,
--------------
the effective date of its adoption by the Board.
Article XIX.
Compliance with Code.
19.1 Compliance with Code. Incentive Stock Options granted
--------------------
hereunder are intended to qualify as "incentive stock options" under Code (S)
422. If any provision of this Plan is susceptible to more than one
interpretation, such interpretation shall be given thereto as is consistent with
Incentive Stock Options granted under this Plan being treated as "incentive
stock options" under the Code. In the event that the stockholders of the Company
do not approve the Plan by May 8, 2001, all Options granted pursuant to the Plan
shall be deemed to be Nonstatutory Options.
Article XX.
No Obligation to Exercise Option.
20.1 No Obligation to Exercise. The granting of an Option shall impose
-------------------------
no obligation upon the holder thereof to exercise such Option.
14
<PAGE>
APPENDIX B
----------
CERTIFICATE OF DESIGNATION, PREFERENCES
AND RIGHTS OF SERIES C 8% CONVERTIBLE
PREFERRED STOCK
-OF-
HEALTHWATCH, INC.
HealthWatch, Inc., a corporation organized and existing under the laws of
the State of Minnesota (the "Company"), by its President and Secretary, does
hereby certify that, pursuant to authority conferred upon the Board of Directors
by Article III of the Articles of Incorporation, as amended, of the Company,
authorizing a class of 1,000,000 shares of preferred stock of the Company, the
Board of Directors of the Company, by unanimous written consent dated December
23, 1999, has duly adopted resolutions providing for the issuance out of such
class of a series of up to 4,500 shares of Series C 8% Convertible Preferred
Stock at an issuance price of $100.00 per share (the "Original Purchase Price")
and setting forth the voting powers, designation, preferences and relative,
participating, optional and other special rights, and the qualifications,
limitations and restrictions thereof, which resolution is as follows:
RESOLVED, that pursuant to the authority vested in the Board of Directors
of the Company in accordance with the provisions of its Articles of
Incorporation, as amended, there be, and hereby is, created out of the class of
1,000,000 shares of preferred stock of the Company authorized in Article III of
its Articles of Incorporation, as amended, a series of preferred stock of the
Company with the following voting powers, designation, preferences and relative,
participating, optional and other special rights, and qualifications,
limitations and restrictions:
1. Designation and Number of Shares. 4,500 shares of preferred stock (the
--------------------------------
"Shares") are hereby designated as Series C 8% Convertible Preferred Stock (the
"Series C Preferred Stock").
2. Liquidation. Upon any liquidation, dissolution or winding up of the
-----------
Company, whether voluntary or involuntary ("Liquidation"), the holders of record
of the shares of the Series C Preferred Stock shall be entitled to receive,
before and in preference to any distribution or payment of assets of the Company
or the proceeds thereof may be made or set apart for the holders of Common Stock
of the Company, par value $.05 per share (the "Common Stock") or any other
security junior to the Series C Preferred Stock in respect of distributions upon
Liquidation out of the assets of the Company legally available for distribution
to its stockholders, an amount in cash equal to the Original Purchase Price per
share (subject to adjustment if the Series C Preferred Stock has been adjusted
pursuant to Paragraph 6 hereof) plus an amount equal to accrued and unpaid
dividends on each share of Series C Preferred Stock on the date fixed for the
distribution of assets of the Company (the "Liquidation Preference").
<PAGE>
3. Dividends. Commencing on the date of issuance (the "Issuance Date")
---------
until conversion, each issued and outstanding share of Series C Preferred Stock
shall entitle the holder of record thereof to receive, when, as and if declared
by the Board of Directors, out of any funds legally available therefor,
dividends at the rate of $8.00 per annum per share of Series C Preferred Stock
(the "Dividend Rate"), subject to adjustment as hereinafter set forth, payable
upon liquidation or conversion. Dividends per share shall be payable, at the
Company's option, either (i) in cash or (ii) in shares of Series C Preferred
Stock, subject to an in increase in the number of authorized shares of Series C
Preferred Stock by the Company's Board of Directors. In the event of a split or
subdivision of the outstanding shares of Series C Preferred Stock, or the
combination or the outstanding shares of Series C Preferred Stock, as the case
may be, the dividends provided for in this Section 3 shall automatically and
without any further action be decreased, in the case of a split or subdivision,
or increased, in the case of a combination, in proportion to the increase or
decrease in the number of shares of Series C Preferred Stock outstanding
immediately before such split, subdivision or combination.
4. Conversion Rights Each holder of record of shares of the Series C
-----------------
Preferred Stock shall have the right to convert all or any part of such holder's
share of Series C Preferred Stock into Common Stock as follows:
(A) Optional Conversion. Subject to and upon compliance with the
-------------------
provisions of this Section 4, the holder of any shares of Series C Preferred
Stock shall have the right at such holder's option, at any time or from time to
time, to convert any of such shares of Series C Preferred Stock into fully paid
and nonassessable shares of Common Stock at the Conversion Price (as defined in
Section (4)(c) below) in effect on the Conversion Date (as defined in Section
4(d) below) upon the terms hereinafter set forth.
(B) Automatic Conversion. Each outstanding share of Series C Preferred
--------------------
Stock shall automatically be converted, without any further act of the
Corporation or its stockholders, into fully paid and nonassessable shares of
Common Stock at the Conversion Price then in effect upon: (i) the closing of a
public offering or private placement of the Company's securities raising gross
proceeds in excess of $25 million at a per share price of more than $5.00 (a
"Qualified Offering"); or (ii) at such time as the closing bid price for the
Common Stock of the Company has equaled at least twice the Conversion Price for
a period of 20 consecutive trading days, provided that the Common Stock of the
Company is trading on a national securities exchange or the Nasdaq Small Cap or
National Market System, and the Conversion Shares are fully registered for
resale and not subject to any lock-up provisions.
(C) Conversion Price. Each share of the Series C Preferred Stock shall be
----------------
convertible into that number of fully paid and non-assessable shares of Common
Stock of the Company equal to the Original Purchase Price divided by the
conversion price in effect at the time of conversion (the "Conversion Price"),
determined as hereinafter provided. The Conversion Price shall initially be
$1.875 per share. The number of shares of Common Stock into which each share of
Preferred Stock is convertible is herein referred to as the "Conversion Rate."
The Conversion Price shall be subject to adjustment as set forth in Section 6
hereof.
(D) Mechanics of Conversion. Before any holder of Series C Preferred Stock
-----------------------
shall be entitled to convert the same into shares of Common Stock, such holder
shall surrender the
-2-
<PAGE>
certificate or certificates therefor, duly endorsed, at the office of the
Company or of any transfer agent for the Series C Preferred Stock, and shall
give written notice to the Company at its principal corporate office, of the
election to convert the same and shall state therein the name or names in which
the certificate or certificates for shares of Common Stock are to be issued. The
Company shall, as soon as practicable thereafter, issue and deliver at such
office to such holder of Series C Preferred Stock, or to the nominee or nominees
of such holder, a certificate or certificates for the number of shares of Common
Stock to which such holder shall be entitled as aforesaid. Conversion shall be
deemed to have been effected on the date when delivery of notice of an election
to convert and certificates for shares is made or on the date of the occurrence
of the event specified in Section 5(B), as the case may be, and such date is
referred to herein as the "Conversion Date." All Common Stock which may be
issued upon conversion of the Series C Preferred Stock will, upon issuance, be
duly issued, fully paid and non-assessable and free from all taxes, liens, and
charges with respect to the issuance thereof. At all times that any shares of
Series C Preferred Stock are outstanding, the Company shall have authorized and
shall have reserved for the purpose of issuance upon such conversion into Common
Stock of all Series C Preferred Stock, a sufficient number of shares of Common
Stock to provide for the conversion of all outstanding shares of Series C
Preferred Stock at the then effective Conversion Rate. Without limiting the
generality of the foregoing, if, at any time, the Conversion Price is decreased,
the number of shares of Common Stock authorized and reserved for issuance upon
the conversion of the Series C Preferred Stock shall be proportionately
increased.
(E) Conversion Price Adjustments. The Conversion Price shall be subject to
----------------------------
adjustment provisions of Section 6 below.
5. Priority.
--------
(A) The Series C Preferred Stock shall rank senior to the Company's Series
P Preferred Stock and shall rank pari passu with the Company's Series A
Preferred Stock with respect to dividend and/or liquidation rights. The Company
shall not create or authorize any other stock ranking senior to, or pari passu
with, the Series C Preferred Stock. So long as any shares of Series C Preferred
Stock shall be outstanding, no dividends, whether in cash or property, shall be
paid or declared, nor shall any other distribution be made, on the Common Stock
of the Company or any other security junior to the Series C Preferred Stock as
to dividend rights, unless all dividends on the Series C Preferred Stock for all
past quarterly dividend periods and the full dividends for the then current
semi-annual period shall have been paid or declared and duly provided for. The
provisions of this Section 5 shall not, however, apply to a dividend payable in
Common Stock or any other security of the Company junior to the Series C
Preferred Stock. If any dividend previously due on the Series C Preferred Stock
has not been paid in full, then no dividends shall be paid or declared upon any
shares of any class or series of stock of the Company ranking on a parity with
the Series C Preferred Stock in the payment of dividends for any period unless a
like proportionate dividend for the current period, ratably in proportion to the
respective annual dividend rates fixed thereupon, shall be paid upon or declared
for the Series C Preferred Stock then issued and outstanding.
(B) The Company may issue, in the future, without the consent of holders of
the Series C Preferred Stock, other series of preferred stock which rank junior
to the Series C Preferred Stock as to dividend and/or liquidation rights. In
accordance with Paragraph 7(C)
-3-
<PAGE>
hereof, the consent of the holders of two-thirds of the outstanding shares of
the Series C Preferred Stock is required for the issuance of any series of
preferred stock which is senior as to dividend and/or liquidation rights to the
Series C Preferred Stock.
6. Anti-Dilution Provisions. Subject to the provisions of Section l
------------------------
hereof, the Conversion Price in effect at any time and the number and kind of
securities issuable upon the conversion of the Series C Preferred Stock shall be
subject to adjustment from time to time upon the happening of certain events as
follows:
(A) In case the Company shall hereafter (i) declare a dividend or make a
distribution on its outstanding shares of Common Stock in shares of Common
Stock, (ii) subdivide or reclassify its outstanding shares of Common Stock into
a greater number of shares, or (iii) combine or reclassify its outstanding
shares of Common Stock into a smaller number of shares, the Conversion Price in
effect at the time of the record date for such dividend or distribution or of
the effective date of such subdivision, combination or reclassification shall be
adjusted so that it shall equal the price determined by multiplying the
Conversion Price by a fraction, the denominator of which shall be the number of
shares of Common Stock outstanding after giving effect to such action, and the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such action. Such adjustment shall be made successively
whenever any event listed above shall occur.
(B) In case the Company shall fix a record date for the issuance of rights
or warrants to all holders of its Common Stock entitling them to subscribe for
or purchase shares of Common Stock (or securities convertible into Common Stock)
at a price (the "Subscription Price") (or having a conversion price per share)
less than the current market price on such record date, the Conversion Price
shall be adjusted so that the same shall equal the price determined by
multiplying the Conversion Price in effect immediately prior to the date of such
issuance by a fraction, the numerator of which shall be the sum of the number of
shares of Common Stock outstanding on the record date mentioned below and the
number of additional shares of Common Stock which the aggregate offering price
of the total number of shares of Common Stock so offered (or the aggregate
conversion price of the convertible securities so offered) would purchase at
such current market price per share of the Common Stock, and the denominator of
which shall be the sum of the number of shares of Common Stock outstanding on
such record date and the number of additional shares of Common Stock offered for
subscription or purchase (or into which the convertible securities so offered
are convertible). Such adjustment shall be made successively whenever such
rights or warrants are issued and shall become effective immediately after the
record date for the determination of shareholders entitled to receive such
rights or warrants; and to the extent that shares of Common Stock are not
delivered (or securities convertible into Common Stock are not delivered) after
the expiration of such rights or warrants the Conversion Price shall be
readjusted to the Conversion Price which would then be in effect had the
adjustments made upon the issuance of such rights or warrants been made upon the
basis of delivery of only the number of shares of Common Stock (or securities
convertible into Common Stock) actually delivered.
(C) In case the Company shall hereafter distribute to the holders of its
Common Stock evidences of its indebtedness or assets (excluding cash dividends
or distributions and dividends or distributions referred to in Subsection (A)
above) or subscription rights or warrants (excluding
-4-
<PAGE>
those referred to in Subsection (B) above), then in each such case the
Conversion Price in effect thereafter shall be determined by multiplying the
Conversion Price in effect immediately prior thereto by a fraction, the
numerator of which shall be the total number of shares of Common Stock
outstanding multiplied by the current market price per share of Common Stock,
less the fair market value (as determined by the Company's Board of Directors)
of said assets or evidences of indebtedness so distributed or of such rights or
warrants, and the denominator of which shall be the total number of shares of
Common Stock outstanding multiplied by such current market price per share of
Common Stock. Such adjustment shall be made successively whenever such a record
date is fixed. Such adjustment shall be made whenever any such distribution is
made and shall become effective immediately after the record date for the
determination of shareholders entitled to receive such distribution.
(D) In case the Company shall hereafter issue shares of its Common Stock
(excluding shares issued (i) in any of the transactions described in Subsection
(A) above, (ii) upon exercise of options granted to the Company's officers,
directors, employees and consultants under a plan or plans adopted by the
Company's Board of Directors and approved by its shareholders, if such shares
would otherwise be included in this Subsection (D), (but only to the extent that
the aggregate number of shares excluded hereby and issued after the date hereof,
shall not exceed 20% of the Company's Common Stock outstanding, on a fully
diluted basis, at the time of any issuance), (iii) upon exercise of options,
warrants, convertible securities and convertible debentures outstanding as of
the final closing of the Private Placement, a Qualified Offering, or conversion
of the Shares, (iv) to shareholders of any corporation which merges into the
Company in proportion to their stock holdings of such corporation immediately
prior to such merger, upon such merger, (v) issued in a private placement
through Commonwealth Associates, L.P., as placement agent, or upon exercise or
conversion of any securities issued in or in connection with such a private
placement (including agent, consulting or advisory warrants), (vi) issued in a
private placement where the Offering Price (as defined below) is at least 90% of
the current market price, (vii) issued in a bona fide public offering pursuant
to a firm commitment underwriting, or (viii) issued in connection with an
acquisition of a business or technology which has been approved by a majority of
the Company's outside directors but only if no adjustment is required pursuant
to any other specific subsection of this Section 6 (without regard to Subsection
(I) below) with respect to the transaction giving rise to such rights) for a
consideration per share (the "Offering Price") less than the current market
price, the Conversion Price shall be adjusted immediately thereafter so that it
shall equal the price determined by multiplying the Conversion Price in effect
immediately prior thereto by a fraction, the numerator of which shall be the sum
of the number of shares of Common Stock outstanding immediately prior to the
issuance of such additional shares and the number of shares of Common Stock
which the aggregate consideration received for the issuance of such additional
shares would purchase at such current market price per share of Common Stock,
and the denominator of which shall be the number of shares of Common Stock
outstanding immediately after the issuance of such additional shares. Such
adjustment shall be made successively whenever such an issuance is made.
(E) In case the Company shall hereafter issue any securities convertible
into or exchangeable for its Common Stock (excluding securities issued in
transactions described in Subsections (B), (C) and (D)(i) through (viii) above)
for a consideration per share of Common Stock (the "Exchange Price") initially
deliverable upon conversion or exchange of such
-5-
<PAGE>
securities (determined as provided in Subsection (G) below) less than the
current market price, the Conversion Price shall be adjusted immediately
thereafter so that it shall equal the price determined by multiplying the
Conversion Price in effect immediately prior thereto by a fraction, the
numerator of which shall be the sum of the number of shares of Common Stock
outstanding immediately prior to the issuance of such securities and the number
of shares of Common Stock which the aggregate consideration received for such
securities would purchase at such current market price per share of Common
Stock, and the denominator of which shall be the sum of the number of shares of
Common Stock outstanding immediately prior to such issuance and the maximum
number of shares of Common Stock of the Company deliverable upon conversion of
or in exchange for such securities at the initial conversion or exchange price
or rate. Such adjustment shall be made successively whenever such an issuance is
made.
(F) Whenever the Conversion Price is adjusted pursuant to Subsections (A),
(B), (C), (D) and (E) above and (J) below or pursuant to Section 1(D) hereof,
the number of Conversion Shares issuable upon conversion of the Series C
Preferred Stock shall simultaneously be adjusted by multiplying the number of
Conversion Shares initially issuable upon conversion of the Series C Preferred
Stock by the Conversion Price in effect on the date hereof and dividing the
product so obtained by the Conversion Price, as adjusted.
(G) For purposes of any computation respecting consideration received
pursuant to Subsections (D) and (E) above and (J) below, the following shall
apply:
(a) in the case of the issuance of shares of Common Stock for cash,
the consideration shall be the amount of such cash, provided that in no
case shall any deduction be made for any commissions, discounts or other
expenses incurred by the Company for any underwriting of the issue or
otherwise in connection therewith;
(b) in the case of the issuance of shares of Common Stock for a
consideration in whole or in part other than cash, the consideration other
than cash shall be deemed to be the fair market value thereof as determined
in good faith by the Board of Directors of the Company (irrespective of the
accounting treatment thereof), whose determination shall be conclusive; and
(c) in the case of the issuance of securities convertible into or
exchangeable for shares of Common Stock, the aggregate consideration
received therefor shall be deemed to be the consideration received by the
Company for the issuance of such securities plus the additional minimum
consideration, if any, to be received by the Company upon the conversion or
exchange thereof (the consideration in each case to be determined in the
same manner as provided in clauses (A) and (B) of this Subsection (G)).
(H) For the purpose of any computation under Subsections (B), (C), (D) and
(E) above and (K) below, the current market price per share of Common Stock at
any date shall be determined in the manner set forth in Section 11 hereof except
that the current market price per share shall be deemed to be the higher of (i)
the average of the prices for 30 consecutive business days before such date or
(ii) the price on the business day immediately preceding such date.
-6-
<PAGE>
(I) No adjustment in the Conversion Price shall be required unless such
adjustment would require an increase or decrease of at least five cents ($0.05)
in such price; provided, however, that any adjustments which by reason of this
Subsection (I) are not required to be made shall be carried forward and taken
into account in any subsequent adjustment required to be made hereunder. All
calculations under this Section 6 shall be made to the nearest cent or to the
nearest one-hundredth of a share, as the case may be. Anything in this Section
6 to the contrary notwithstanding, the Company shall be entitled, but shall not
be required, to make such changes in the Conversion Price, in addition to those
required by this Section 6, as it shall determine, in its sole discretion, to be
advisable in order that any dividend or distribution in shares of Common Stock,
or any subdivision, reclassification or combination of Common Stock, hereafter
made by the Company shall not result in any Federal income tax liability to the
holders of Common Stock or securities convertible into Common Stock.
(J) Notwithstanding the provisions of this Section 6, in the event that the
Company shall at any time issue securities under Subsections (B), (D) or (E)
having an Offering Price, Subscription Price or Exchange Price less than the
Conversion Price, then the Conversion Price shall be immediately reset to equal
such lower Offering Price, Subscription Price or Exchange Price. Furthermore, in
the event that the average closing bid price of the Common Stock for the 20
consecutive trading days prior to the first anniversary of the final closing of
the Private Placement is less than the Conversion Price, the Conversion Price
shall be immediately reset to equal such average closing bid price.
(K) No adjustment under Subsections (B), (C), (D) or (E) shall be required
for issuances below the current market price if either (i) the current market
price is at least 300% of the Conversion Price then in effect and (ii) a
registration statement covering the Warrant Shares is in effect and remains in
effect for the 90 days after such issuance or Rule 144(k) under the Securities
Act of 1933, as amended (the "Act") is available for resale of all of the
Conversion Shares or the Company at the time of such issuance has less than
$100,000 in cash. Furthermore, no adjustment under Subsections (B), (C), (D),
(E) or (J) shall be required unless either (i) shareholders of the Company have
approved the terms of this Designation or (ii) such adjustments will not result
in a violation of any qualitative listing criteria of The Nasdaq Stock Market,
Inc.
(L) Whenever the Conversion Price is adjusted, as herein provided, the
Company shall promptly but no later than 10 days after any request for such an
adjustment by the Holder, cause a notice setting forth the adjusted Conversion
Price and adjusted number of Conversion Shares issuable upon exercise of each
share of Series C Preferred Stock, and, if requested, information describing
the transactions giving rise to such adjustments, to be mailed to the Holders at
their last addresses appearing in the Share Register, and shall cause a
certified copy thereof to be mailed to its transfer agent, if any. The Company
may retain a firm of independent certified public accountants selected by the
Board of Directors (who may be the regular accountants employed by the Company)
to make any computation required by this Section 6, and a certificate signed by
such firm shall be conclusive evidence of the correctness of such adjustment.
(M) In the event that at any time, as a result of an adjustment made
pursuant to Subsection (A) above, the Holders of the Series C Preferred Stock
thereafter shall become
-7-
<PAGE>
entitled to receive any shares of the Company, other than Common Stock,
thereafter the number of such other shares so receivable upon conversion of the
Series C Preferred Stock shall be subject to adjustment from time to time in a
manner and on terms as nearly equivalent as practicable to the provisions with
respect to the Common Stock contained in Subsections (A) to (J), inclusive
above.
7. Voting Rights.
-------------
(A) In addition to any other rights provided for herein or by law, the
holders of Series C Preferred Stock shall be entitled to vote, together with the
holders of Common Stock as one class, on all matters as to which holders of
Common Stock shall be entitled to vote, in the same manner and with the same
effect as such Common Stock holders. In any such vote each share of Series C
Preferred Stock shall entitle the holder thereof to the number of votes per
share that equals the number of whole shares of Common Stock into which each
such share of Series C Preferred Stock is then convertible.
(B) In the event that the holders of the Series C Preferred Stock are
required to vote as a class, the affirmative vote of holders of not less than
two-thirds of the outstanding shares of Series C Preferred Stock shall be
required to approve each such matter to be voted upon and if any matter is
approved by such requisite percentage of holders of Series C Preferred Stock,
such matter shall bind all holders of Series C Preferred Stock.
(C) In addition to the other voting rights provided, so long as at least
20% of the Shares outstanding on the final closing of the Private Placement
remain outstanding, at each annual meeting of the stockholders of the Company,
the holders of the Series C Preferred Stock, voting as a single class, shall be
entitled to elect one (1) director.
(D) So long as at least 20% of the Shares outstanding on the final closing
of the Private Placement remain outstanding, the consent of the holders of a
two-thirds of the then outstanding Series C Preferred Stock, voting as one
class, together with any other series of preferred stock then entitled to vote
on such matter, regardless of series, either expressed in writing or at a
meeting called for that purpose, shall be necessary to permit, effect or
validate the creation and issuance of any series of preferred stock of the
Company which is senior as to liquidation and/or dividend rights to the Series C
Preferred Stock.
(E) So long as at least 20% of the Shares outstanding on the final closing
of the Private Placement remain outstanding, the consent of two-thirds of the
holders of the then outstanding Series C Preferred Stock, voting as one class,
either expressed in writing or at a meeting called for that purpose, shall be
necessary to repeal, amend or otherwise change this Certificate of Designation,
Preferences and Rights or the Articles of Incorporation of the Company, as
amended, in a manner which would alter or change the powers, preferences, rights
privileges, restrictions and conditions of the Series C Preferred Stock so as to
adversely affect the Preferred Stock.
(F) Each share of the Series C Preferred Stock shall entitle the holder
thereof to one vote on all matters to be voted on by the holders of the Series C
Preferred Stock, as set forth above.
-8-
<PAGE>
8. Covenants of Company The Company covenants and agrees that, so long as
--------------------
the Shares are outstanding, it will perform the obligations set forth in this
Section 8:
(A) Taxes and Levies. The Company will promptly pay and discharge all
----------------
taxes, assessments, and governmental charges or levies imposed upon the Company
or upon its income and profits, or upon any of its property, before the same
shall become delinquent, as well as all claims for labor, materials and supplies
which, if unpaid, might become a lien or charge upon such properties or any part
thereof; provided, however, that the Company shall not be required to pay and
-------- -------
discharge any such tax, assessment, charge, levy or claim so long as the
validity thereof shall be contested in good faith by appropriate proceedings and
the Company shall set aside on its books adequate reserves in accordance with
generally accepted accounting principles ("GAAP") with respect to any such tax,
----
assessment, charge, levy or claim so contested;
(B) Maintenance of Existence. The Company will do or cause to be done all
------------------------
things reasonably necessary to preserve and keep in full force and effect its
corporate existence, rights and franchises and comply with all laws applicable
to the Company, except where the failure to comply would not have a material
adverse effect on the Company;
(C) Maintenance of Property. The Company will at all times maintain,
-----------------------
preserve, protect and keep its property used or useful in the conduct of its
business in good repair, working order and condition, and from time to time make
all needful and proper repairs, renewals, replacements and improvements thereto
as shall be reasonably required in the conduct of its business;
(D) Insurance. The Company will, to the extent necessary for the operation
---------
of its business, keep adequately insured by financially sound reputable
insurers, all property of a character usually insured by similar corporations
and carry such other insurance as is usually carried by similar corporations;
(E) Books and Records. The Company will at all times keep true and correct
-----------------
books, records and accounts reflecting all of its business affairs and
transactions in accordance with GAAP; and
(F) Notice of Certain Events. The Company will give prompt written notice
------------------------
(with a description in reasonable detail) to Commonwealth Associates, L.P. in
the event the Company shall:
(a) become insolvent or generally fail or be unable to pay, or admit
in writing its inability to pay, its debts as they become due;
(b) apply for, consent to, or acquiesce in, the appointment of a
trustee, receiver, sequestrator or other custodian for the Company or any of its
property, or make a general assignment for the benefit of creditors;
(iii) in the absence of such application, consent or acquiesce in,
permit or suffer to exist the appointment of a trustee, receiver, sequestrator
or other custodian for the Company or for any part of its property;
-9-
<PAGE>
(iv) permit or suffer to exist the commencement of any bankruptcy,
reorganization, debt arrangement or other case or proceeding under any
bankruptcy or insolvency law, or any dissolution, winding up or liquidation
proceeding, in respect of the Company, and, if such case or proceeding is not
commenced by the Company or converted to a voluntary case, such case or
proceeding shall be consented to or acquiesced in by the Company or shall result
in the entry of an order for relief; or
8. Miscellaneous.
-------------
(A) There is no sinking fund with respect to the Series C
Preferred Stock.
(B) The shares of the Series C Preferred Stock shall not have any
preferences, voting powers or relative, participating, optional, preemptive or
other special rights except as set forth above in this Certificate of
Designation, Preferences and Rights and in the Articles of Incorporation of the
Company.
(C) The holders of the Series C Preferred Stock shall be entitled to
receive all communications sent by the Company to the holders of the Common
Stock.
IN WITNESS WHEREOF, HealthWatch, Inc. has caused this Certificate to
be signed by its Chief Executive Officer, on this ____ day of March, 2000, and
such person hereby affirms under penalty of perjury that this Certificate is the
act and deed of HealthWatch, Inc. and that the facts stated herein are true and
correct.
HEALTHWATCH, INC.
By:________________________________
Paul W. Harrison, Chairman, President and
Chief Executive Officer
Attest:
_________________, Secretary
-10-
<PAGE>
APPENDIX C
----------
CERTIFICATE OF DESIGNATION, PREFERENCES
AND RIGHTS OF SERIES D 8% CONVERTIBLE
PREFERRED STOCK
-OF-
HEALTHWATCH, INC.
HealthWatch, Inc., a corporation organized and existing under the laws of
the State of Minnesota (the "Company"), by its President and Secretary, does
hereby certify that, pursuant to authority conferred upon the Board of Directors
by Article III of the Articles of Incorporation, as amended, of the Company,
authorizing a class of 1,000,000 shares of preferred stock of the Company, the
Board of Directors of the Company, by unanimous written consent dated February
7, 2000, has duly adopted resolutions providing for the issuance out of such
class of a series of up to 300,000 shares of Series D 8% Convertible Preferred
Stock at an issuance price of $100.00 per share (the "Original Purchase Price")
and setting forth the voting powers, designation, preferences and relative,
participating, optional and other special rights, and the qualifications,
limitations and restrictions thereof, which resolution is as follows:
RESOLVED, that pursuant to the authority vested in the Board of Directors
of the Company in accordance with the provisions of its Articles of
Incorporation, as amended, there be, and hereby is, created out of the class of
1,000,000 shares of preferred stock of the Company authorized in Article III of
its Articles of Incorporation, as amended, a series of preferred stock of the
Company with the following voting powers, designation, preferences and relative,
participating, optional and other special rights, and qualifications,
limitations and restrictions:
1. Designation and Number of Shares. 300,000 shares of preferred stock
--------------------------------
(the "Shares") are hereby designated as Series D 8% Convertible Preferred Stock
(the "Series D Preferred Stock").
2. Liquidation. Upon any liquidation, dissolution or winding up of the
-----------
Company, whether voluntary or involuntary ("Liquidation"), the holders of record
of the shares of the Series D Preferred Stock shall be entitled to receive,
before and in preference to any distribution or payment of assets of the Company
or the proceeds thereof may be made or set apart for the holders of Common Stock
of the Company, par value $.05 per share (the "Common Stock") or any other
security junior to the Series D Preferred Stock in respect of distributions upon
Liquidation out of the assets of the Company legally available for distribution
to its stockholders, an amount in cash equal to the Original Purchase Price per
share (subject to adjustment if the Series D Preferred Stock has been adjusted
pursuant to Paragraph 6 hereof) plus an amount equal to accrued and unpaid
dividends on each share of Series D Preferred Stock on the date fixed for the
distribution of assets of the Company (the "Liquidation Preference").
<PAGE>
3. Dividends. Commencing on the date of issuance (the "Issuance Date")
---------
until conversion, each issued and outstanding share of Series D Preferred Stock
shall entitle the holder of record thereof to receive, when, as and if declared
by the Board of Directors, out of any funds legally available therefor,
dividends at the rate of $8.00 per annum per share of Series D Preferred Stock
(the "Dividend Rate"), subject to adjustment as hereinafter set forth, payable
upon liquidation or conversion. Dividends per share shall be payable semi-
annually on 6/30 and 12/31 of each year, and shall be payable, at the Company's
option, either (i) in cash or (ii) in shares of Series D Preferred Stock,
subject to an in increase in the number of authorized shares of Series D
Preferred Stock by the Company's Board of Directors. In the event of a split or
subdivision of the outstanding shares of Series D Preferred Stock, or the
combination of the outstanding shares of Series D Preferred Stock, as the case
may be, the dividends provided for in this Section 3 shall automatically and
without any further action be decreased, in the case of a split or subdivision,
or increased, in the case of a combination, in proportion to the increase or
decrease in the number of shares of Series D Preferred Stock outstanding
immediately before such split, subdivision or combination.
4. Conversion Rights Each holder of record of shares of the Series D
-----------------
Preferred Stock shall have the right to convert all or any part of such holder's
share of Series D Preferred Stock into Common Stock as follows:
(A) Optional Conversion. Subject to and upon compliance with the
-------------------
provisions of this Section 4, the holder of any shares of Series D Preferred
Stock shall have the right at such holder's option, at any time or from time to
time, to convert any of such shares of Series D Preferred Stock into fully paid
and nonassessable shares of Common Stock at the Conversion Price (as defined in
Section (4)(c) below) in effect on the Conversion Date (as defined in Section
4(d) below) upon the terms hereinafter set forth.
(B) Automatic Conversion. Each outstanding share of Series D Preferred
--------------------
Stock shall automatically be converted, without any further act of the
Corporation or its stockholders, into fully paid and nonassessable shares of
Common Stock at the Conversion Price then in effect upon: (i) the closing of a
public offering or private placement of the Company's securities raising gross
proceeds in excess of $25 million at a per share price of more than $10.50(a
"Qualified Offering"); or (ii) at such time as the closing bid price for the
Common Stock of the Company has equaled at least twice the Conversion Price for
a period of 20 consecutive trading days, provided that the Common Stock of the
Company is trading on a national securities exchange or the Nasdaq Small Cap
Market or National Market System, and the Conversion Shares are covered by an
effective registration statement relating to the resale of such securities and
not subject to any lock-up provisions.
(C) Conversion Price. Each share of the Series D Preferred Stock shall be
----------------
convertible into that number of fully paid and non-assessable shares of Common
Stock of the Company equal to the Original Purchase Price divided by the
conversion price in effect at the time of conversion (the "Conversion Price"),
determined as hereinafter provided. The Conversion Price shall initially be
$3.50 per share. The number of shares of Common Stock into which each share of
Series D Preferred Stock is convertible is herein referred to as the "Conversion
Rate." The Conversion Price shall be subject to adjustment as set forth in
Section 6 hereof.
-2-
<PAGE>
(D) Mechanics of Conversion. Before any holder of Series D Preferred Stock
-----------------------
shall be entitled to convert the same into shares of Common Stock, such holder
shall surrender the certificate or certificates therefor, duly endorsed, at the
office of the Company or of any transfer agent for the Series D Preferred Stock,
and shall give written notice to the Company at its principal corporate office,
of the election to convert the same and shall state therein the name or names in
which the certificate or certificates for shares of Common Stock are to be
issued. The Company shall, as soon as practicable thereafter, issue and deliver
at such office to such holder of Series D Preferred Stock, or to the nominee or
nominees of such holder, a certificate or certificates for the number of shares
of Common Stock to which such holder shall be entitled as aforesaid. Conversion
shall be deemed to have been effected on the date when delivery of notice of an
election to convert and certificates for shares is made or on the date of the
occurrence of the event specified in Section 5(B), as the case may be, and such
date is referred to herein as the "Conversion Date." All Common Stock which may
be issued upon conversion of the Series D Preferred Stock will, upon issuance,
be duly issued, fully paid and non-assessable and free from all taxes, liens,
and charges with respect to the issuance thereof. At all times that any shares
of Series D Preferred Stock are outstanding, the Company shall have authorized
and shall have reserved for the purpose of issuance upon such conversion into
Common Stock of all Series D Preferred Stock, a sufficient number of shares of
Common Stock to provide for the conversion of all outstanding shares of Series D
Preferred Stock at the then effective Conversion Rate. Without limiting the
generality of the foregoing, if, at any time, the Conversion Price is decreased,
the number of shares of Common Stock authorized and reserved for issuance upon
the conversion of the Series D Preferred Stock shall be proportionately
increased.
(E) Conversion Price Adjustments. The Conversion Price shall be subject to
----------------------------
adjustment provisions of Section 6 below.
5. Priority.
--------
(A) The Series D Preferred Stock shall rank senior to the Company's Series
P Preferred Stock and shall rank pari passu with the Company's Series A
Preferred Stock and Series C Preferred Stock with respect to dividend and/or
liquidation rights. The Company shall not create or authorize any other stock
ranking senior to, or pari passu with, the Series D Preferred Stock. So long as
any shares of Series D Preferred Stock shall be outstanding, no dividends,
whether in cash or property, shall be paid or declared, nor shall any other
distribution be made, on the Common Stock of the Company or any other security
junior to the Series D Preferred Stock as to dividend rights, unless all
dividends on the Series D Preferred Stock for all past dividend periods and the
full dividends for the then current semi-annual period shall have been paid or
declared and duly provided for. The provisions of this Section 5 shall not,
however, apply to a dividend payable in Common Stock or any other security of
the Company junior to the Series D Preferred Stock. If any dividend previously
due on the Series D Preferred Stock has not been paid in full, then no dividends
shall be paid or declared upon any shares of any class or series of stock of the
Company ranking on a parity with the Series D Preferred Stock in the payment of
dividends for any period unless a like proportionate dividend for the current
period, ratably in proportion to the respective annual dividend rates fixed
thereupon, shall be paid upon or declared for the Series D Preferred Stock then
issued and outstanding.
-3-
<PAGE>
(B) The Company may issue, in the future, without the consent of holders of
the Series D Preferred Stock, other series of preferred stock which rank junior
to the Series D Preferred Stock as to dividend and/or liquidation rights. In
accordance with Paragraph 7(C) hereof, the consent of the holders of two-thirds
of the outstanding shares of the Series D Preferred Stock is required for the
issuance of any series of preferred stock which is senior as to dividend and/or
liquidation rights to the Series D Preferred Stock.
6. Anti-Dilution Provisions. The Conversion Price in effect at any time
------------------------
and the number and kind of securities issuable upon the conversion of the Series
D Preferred Stock shall be subject to adjustment from time to time upon the
happening of certain events as follows:
(A) In case the Company shall hereafter (i) declare a dividend or make a
distribution on its outstanding shares of Common Stock in shares of Common
Stock, (ii) subdivide or reclassify its outstanding shares of Common Stock into
a greater number of shares, or (iii) combine or reclassify its outstanding
shares of Common Stock into a smaller number of shares, the Conversion Price in
effect at the time of the record date for such dividend or distribution or of
the effective date of such subdivision, combination or reclassification shall be
adjusted so that it shall equal the price determined by multiplying the
Conversion Price by a fraction, the denominator of which shall be the number of
shares of Common Stock outstanding after giving effect to such action, and the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such action. Such adjustment shall be made successively
whenever any event listed above shall occur.
(B) In case the Company shall fix a record date for the issuance of rights
or warrants to all holders of its Common Stock entitling them to subscribe for
or purchase shares of Common Stock (or securities convertible into Common Stock)
at a price (the "Subscription Price") (or having a conversion price per share)
less than the current market price on such record date, the Conversion Price
shall be adjusted so that the same shall equal the price determined by
multiplying the Conversion Price in effect immediately prior to the date of such
issuance by a fraction, the numerator of which shall be the sum of the number of
shares of Common Stock outstanding on the record date mentioned below and the
number of additional shares of Common Stock which the aggregate offering price
of the total number of shares of Common Stock so offered (or the aggregate
conversion price of the convertible securities so offered) would purchase at
such current market price per share of the Common Stock, and the denominator of
which shall be the sum of the number of shares of Common Stock outstanding on
such record date and the number of additional shares of Common Stock offered for
subscription or purchase (or into which the convertible securities so offered
are convertible). Such adjustment shall be made successively whenever such
rights or warrants are issued and shall become effective immediately after the
record date for the determination of shareholders entitled to receive such
rights or warrants; and to the extent that shares of Common Stock are not
delivered (or securities convertible into Common Stock are not delivered) after
the expiration of such rights or warrants the Conversion Price shall be
readjusted to the Conversion Price which would then be in effect had the
adjustments made upon the issuance of such rights or warrants been made upon the
basis of delivery of only the number of shares of Common Stock (or securities
convertible into Common Stock) actually delivered.
-4-
<PAGE>
(C) In case the Company shall hereafter distribute to the holders of its
Common Stock evidences of its indebtedness or assets (excluding cash dividends
or distributions and dividends or distributions referred to in Subsection (A)
above) or subscription rights or warrants (excluding those referred to in
Subsection (B) above), then in each such case the Conversion Price in effect
thereafter shall be determined by multiplying the Conversion Price in effect
immediately prior thereto by a fraction, the numerator of which shall be the
total number of shares of Common Stock outstanding multiplied by the current
market price per share of Common Stock, less the fair market value (as
determined by the Company's Board of Directors) of said assets or evidences of
indebtedness so distributed or of such rights or warrants, and the denominator
of which shall be the total number of shares of Common Stock outstanding
multiplied by such current market price per share of Common Stock. Such
adjustment shall be made successively whenever such a record date is fixed.
Such adjustment shall be made whenever any such distribution is made and shall
become effective immediately after the record date for the determination of
shareholders entitled to receive such distribution.
(D) In case the Company shall hereafter issue shares of its Common Stock
(excluding shares issued (i) in any of the transactions described in Subsection
(A) above, (ii) upon exercise of options granted to the Company's officers,
directors, employees and consultants under a plan or plans adopted by the
Company's Board of Directors and approved by its shareholders, if such shares
would otherwise be included in this Subsection (D), (but only to the extent that
the aggregate number of shares excluded hereby and issued after the date hereof,
shall not exceed 20% of the Company's Common Stock outstanding, on a fully
diluted basis, at the time of any issuance), (iii) upon exercise of options,
warrants, convertible securities, including the shares, and convertible
debentures outstanding as of the first date upon which a share of Series D
Preferred Stock is issued or conversion of the Shares, (iv) to shareholders of
any corporation which merges into the Company in proportion to their stock
holdings of such corporation immediately prior to such merger, upon such merger,
(v) issued in a private placement through Commonwealth Associates, L.P., as
placement agent, or upon exercise or conversion of any securities issued in or
in connection with such a private placement (including agent, consulting or
advisory warrants), (vi) issued in a private placement where the Offering Price
(as defined below) is at least 90% of the current market price, (vii) issued in
a bona fide public offering pursuant to a firm commitment underwriting, or
(viii) issued in connection with an acquisition of a business or technology
which has been approved by a majority of the Company's outside directors but
only if no adjustment is required pursuant to any other specific subsection of
this Section 6 (without regard to Subsection (I) below) with respect to the
transaction giving rise to such rights) for a consideration per share (the
"Offering Price") less than the current market price, the Conversion Price shall
be adjusted immediately thereafter so that it shall equal the price determined
by multiplying the Conversion Price in effect immediately prior thereto by a
fraction, the numerator of which shall be the sum of the number of shares of
Common Stock outstanding immediately prior to the issuance of such additional
shares and the number of shares of Common Stock which the aggregate
consideration received for the issuance of such additional shares would purchase
at such current market price per share of Common Stock, and the denominator of
which shall be the number of shares of Common Stock outstanding immediately
after the issuance of such additional shares. Such adjustment shall be made
successively whenever such an issuance is made.
-5-
<PAGE>
(E) In case the Company shall hereafter issue any securities convertible
into or exchangeable for its Common Stock (excluding securities issued in
transactions described in Subsections (B), (C) and (D)(i) through (viii) above)
where the consideration per share of Common Stock (the "Exchange Price")
initially deliverable upon conversion or exchange of such securities (determined
as provided in Subsection (G) below) plus any consideration received for any
such securities divided by the number of shares of Common Stock issuable upon
exercise or conversion thereof is less than the current market price, the
Conversion Price shall be adjusted immediately thereafter so that it shall equal
the price determined by multiplying the Conversion Price in effect immediately
prior thereto by a fraction, the numerator of which shall be the sum of the
number of shares of Common Stock outstanding immediately prior to the issuance
of such securities and the number of shares of Common Stock which the aggregate
consideration received for such securities would purchase at such current market
price per share of Common Stock, and the denominator of which shall be the sum
of the number of shares of Common Stock outstanding immediately prior to such
issuance and the maximum number of shares of Common Stock of the Company
deliverable upon conversion of or in exchange for such securities at the initial
conversion or exchange price or rate. Such adjustment shall be made
successively whenever such an issuance is made.
(F) Whenever the Conversion Price is adjusted pursuant to Subsections (A),
(B), (C), (D) and (E) above and (J) below or pursuant to Section 1(D) hereof,
the number of Conversion Shares issuable upon conversion of the Series D
Preferred Stock shall simultaneously be adjusted by multiplying the number of
Conversion Shares initially issuable upon conversion of the Series D Preferred
Stock by the Conversion Price in effect on the date hereof and dividing the
product so obtained by the Conversion Price, as adjusted.
(G) For purposes of any computation respecting consideration received
pursuant to Subsections (D) and (E) above and (J) below, the following shall
apply:
(a) in the case of the issuance of shares of Common Stock for cash,
the consideration shall be the amount of such cash, provided that in no
case shall any deduction be made for any commissions, discounts or other
expenses incurred by the Company for any underwriting of the issue or
otherwise in connection therewith;
(b) in the case of the issuance of shares of Common Stock for a
consideration in whole or in part other than cash, the consideration other
than cash shall be deemed to be the fair market value thereof as determined
in good faith by the Board of Directors of the Company (irrespective of the
accounting treatment thereof), whose determination shall be conclusive; and
(c) in the case of the issuance of securities convertible into or
exchangeable for shares of Common Stock, the aggregate consideration
received therefor shall be deemed to be the consideration received by the
Company for the issuance of such securities plus the additional minimum
consideration, if any, to be received by the Company upon the conversion or
exchange thereof (the consideration in each case to be determined in the
same manner as provided in clauses (a) and (b) of this Subsection (G)).
-6-
<PAGE>
(H) For the purpose of any computation under Subsections (B), (C), (D) and
(E) above and (J) below, the current market price per share of Common Stock at
any date shall be determined in the manner set forth in Section 9 hereof except
that the current market price per share shall be deemed to be the higher of (i)
the average of the prices for 30 consecutive business days before such date or
(ii) the price on the business day immediately preceding such date.
(I) No adjustment in the Conversion Price shall be required unless such
adjustment would require an increase or decrease of at least five cents ($0.05)
in such price; provided, however, that any adjustments which by reason of this
Subsection (I) are not required to be made shall be carried forward and taken
into account in any subsequent adjustment required to be made hereunder. All
calculations under this Section 6 shall be made to the nearest cent or to the
nearest one-hundredth of a share, as the case may be. Anything in this Section
6 to the contrary notwithstanding, the Company shall be entitled, but shall not
be required, to make such changes in the Conversion Price, in addition to those
required by this Section 6, as it shall determine, in its sole discretion, to be
advisable in order that any dividend or distribution in shares of Common Stock,
or any subdivision, reclassification or combination of Common Stock, hereafter
made by the Company shall not result in any Federal income tax liability to the
holders of Common Stock or securities convertible into Common Stock.
(J) In addition to and in lieu of the other provisions of this Section 6,
in the event that the Company shall at any time issue securities under
Subsections (B), (D) or (E) having an Offering Price, Subscription Price or
Exchange Price less than the Conversion Price (whether initially or due to
provisions in such securities requiring price reductions as a result of anti-
dilution, adjustments, the passage of time, "discount to market" or similar
provisions), then the Conversion Price shall be immediately reset to equal such
lower Offering Price, Subscription Price or Exchange Price.
(K) No adjustment under Subsections (B), (C), (D) or (E) shall be required
for issuances below the current market price if either (i)A the current market
price is at least 300% of the Conversion Price then in effect and (B) a
registration statement covering the Conversion Shares is in effect and remains
in effect for the 90 days after such issuance or Rule 144(k) under the
Securities Act of 1933, as amended (the "Act") is available for resale of all of
the Conversion Shares or (ii) the Company at the time of such issuance has less
than $100,000 in cash. Furthermore, no adjustment under Subsections (B), (C),
(D), (E) or (J) shall be required unless either (x) shareholders of the Company
have approved the terms of this Designation or (y) such adjustments will not
result in a violation of any qualitative listing criteria of The Nasdaq Stock
Market, Inc.
(L) Whenever the Conversion Price is adjusted, as herein provided, the
Company shall promptly but no later than 10 days after any request for such an
adjustment by the Holder, cause a notice setting forth the adjusted Conversion
Price and adjusted number of Conversion Shares issuable upon exercise of each
share of Series D Preferred Stock, and, if requested, information describing the
transactions giving rise to such adjustments, to be mailed to the Series D
Preferred Stock holders at their last addresses appearing in the Share Register,
and shall cause a certified copy thereof to be mailed to its transfer agent, if
any. The Company may retain a firm of independent certified public accountants
selected by the Board of Directors (who may be the regular accountants employed
by the Company) to make any computation required by this
-7-
<PAGE>
Section 6, and a certificate signed by such firm shall be conclusive evidence of
the correctness of such adjustment.
(M) In the event that at any time, as a result of an adjustment made
pursuant to Subsection (A) above, the holders of the Series D Preferred Stock
thereafter shall become entitled to receive any shares of the Company, other
than Common Stock, thereafter the number of such other shares so receivable upon
conversion of the Series D Preferred Stock shall be subject to adjustment from
time to time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Common Stock contained in Subsections (A) to (J),
inclusive above.
7. Voting Rights.
-------------
(A) In addition to any other rights provided for herein or by law, the
holders of Series D Preferred Stock shall be entitled to vote, together with the
holders of Common Stock as one class, on all matters as to which holders of
Common Stock shall be entitled to vote, in the same manner and with the same
effect as such Common Stock holders. In any such vote each share of Series D
Preferred Stock shall entitle the holder thereof to the number of votes per
share that equals the number of whole shares of Common Stock into which each
such share of Series D Preferred Stock is then convertible.
(B) In the event that the holders of the Series D Preferred Stock are
required to vote as a class, the affirmative vote of holders of not less than
two-thirds of the outstanding shares of Series D Preferred Stock shall be
required to approve each such matter to be voted upon and if any matter is
approved by such requisite percentage of holders of Series D Preferred Stock,
such matter shall bind all holders of Series D Preferred Stock.
(C) In addition to the other voting rights provided, so long as at least
20% of the Shares outstanding on the final closing of the offering of Series D
Preferred Stock remain outstanding, at each annual meeting of the stockholders
of the Company, the holders of the Series D Preferred Stock, voting as a single
class, shall be entitled to elect one (1) director.
(D) So long as at least 20% of the Shares outstanding on the final closing
of the offering of Series D Preferred Stock remain outstanding, the consent of
the holders of two-thirds of the then outstanding Series D Preferred Stock,
voting as one class, together with any other series of preferred stock then
entitled to vote on such matter, regardless of series, either expressed in
writing or at a meeting called for that purpose, shall be necessary to permit,
effect or validate the creation and issuance of any series of preferred stock of
the Company which is senior as to liquidation and/or dividend rights to the
Series D Preferred Stock.
(E) So long as at least 20% of the Shares outstanding on the final closing
of the offering of Series D Preferred Stock remain outstanding, the consent of
the holders of two-thirds of the then outstanding Series D Preferred Stock,
voting as one class, either expressed in writing or at a meeting called for that
purpose, shall be necessary to repeal, amend or otherwise change this
Certificate of Designation, Preferences and Rights or the Articles of
Incorporation of the Company, as amended, in a manner which would alter or
change the powers, preferences, rights
-8-
<PAGE>
privileges, restrictions and conditions of the Series D Preferred Stock so as to
adversely affect the Series D Preferred Stock.
(F) Each share of the Series D Preferred Stock shall entitle the holder
thereof to one vote on all matters to be voted on by the holders of the Series D
Preferred Stock, as set forth above.
8. Covenants of Company The Company covenants and agrees that, so long as
--------------------
the Shares are outstanding, it will perform the obligations set forth in this
Section 8:
(A) Taxes and Levies. The Company will promptly pay and discharge all
----------------
taxes, assessments, and governmental charges or levies imposed upon the Company
or upon its income and profits, or upon any of its property, before the same
shall become delinquent, as well as all claims for labor, materials and supplies
which, if unpaid, might become a lien or charge upon such properties or any part
thereof; provided, however, that the Company shall not be required to pay and
-------- -------
discharge any such tax, assessment, charge, levy or claim so long as the
validity thereof shall be contested in good faith by appropriate proceedings and
the Company shall set aside on its books adequate reserves in accordance with
generally accepted accounting principles ("GAAP") with respect to any such tax,
----
assessment, charge, levy or claim so contested;
(B) Maintenance of Existence. The Company will do or cause to be done all
------------------------
things reasonably necessary to preserve and keep in full force and effect its
corporate existence, rights and franchises and comply with all laws applicable
to the Company, except where the failure to comply would not have a material
adverse effect on the Company;
(C) Maintenance of Property. The Company will at all times maintain,
-----------------------
preserve, protect and keep its property used or useful in the conduct of its
business in good repair, working order and condition, and from time to time make
all needful and proper repairs, renewals, replacements and improvements thereto
as shall be reasonably required in the conduct of its business;
(D) Insurance. The Company will, to the extent necessary for the operation
---------
of its business, keep adequately insured by financially sound reputable
insurers, all property of a character usually insured by similar corporations
and carry such other insurance as is usually carried by similar corporations;
(E) Books and Records. The Company will at all times keep true and correct
-----------------
books, records and accounts reflecting all of its business affairs and
transactions in accordance with GAAP; and
(F) Notice of Certain Events. The Company will give prompt written notice
------------------------
(with a description in reasonable detail) to Commonwealth Associates, L.P. in
the event the Company shall:
(a) become insolvent or generally fail or be unable to pay, or admit in
writing its inability to pay, its debts as they become due;
-9-
<PAGE>
(b) apply for, consent to, or acquiesce in, the appointment of a trustee,
receiver, sequestrator or other custodian for the Company or any of its
property, or make a general assignment for the benefit of creditors;
(c) in the absence of such application, consent or acquiesce in, permit or
suffer to exist the appointment of a trustee, receiver, sequestrator or
other custodian for the Company or for any part of its property;
(d) permit or suffer to exist the commencement of any bankruptcy,
reorganization, debt arrangement or other case or proceeding under any
bankruptcy or insolvency law, or any dissolution, winding up or liquidation
proceeding, in respect of the Company, and, if such case or proceeding is
not commenced by the Company or converted to a voluntary case, such case or
proceeding shall be consented to or acquiesced in by the Company or shall
result in the entry of an order for relief.
9. Fractional Shares. No fractional shares or scrips representing
-----------------
fractional shares shall be issued upon the conversion of the Series D Preferred
Stock. With respect to any fraction of a share called for upon any conversion
hereof, the Company shall pay to the Holder an amount in cash equal to such
fraction multiplied by the current market value of a share, determined as
follows:
(A) If the Common Stock is listed on a national securities exchange or
admitted to unlisted trading privileges on such exchange or listed for trading
on the Nasdaq National Market, the current market value shall be the last
reported sale price of the Common Stock on such exchange or market on the last
business day prior to the date of the conversion of the Series D Preferred Stock
or if no such sale is made on such day, the average of the closing bid and asked
prices for such day on such exchange or market; or
(B) If the Common Stock is not so listed or admitted to unlisted trading
privileges, but is traded on the Nasdaq Smallcap Market, the current market
value shall be the average of the closing bid and asked prices for such day on
such market and if the Common Stock is not so traded, the current market value
shall be the mean of the last reported bid and asked prices by the NASD
Electronic Bulletin Board on the last business day prior to the date of the
conversion of the Series D Preferred Stock; or
(C) If the Common Stock is not so listed or admitted to unlisted trading
privileges and bid and asked prices are not so reported, the current market
value shall be an amount, not less than book value thereof as at the end of the
most recent fiscal year of the Company ending prior to the date of the
conversion of the Series D Preferred Stock, determined in such reasonable manner
as may be prescribed by the Board of Directors if the Company.
10. Miscellaneous.
-------------
(A) There is no sinking fund with respect to the Series D Preferred Stock.
(B) The shares of the Series D Preferred Stock shall not have any
preferences, voting powers or relative, participating, optional, preemptive or
other special rights except as set forth
-10-
<PAGE>
above in this Certificate of Designation, Preferences and Rights and in the
Articles of Incorporation of the Company.
(C) The holders of the Series D Preferred Stock shall be entitled to
receive all communications sent by the Company to the holders of the Common
Stock.
-11-
<PAGE>
IN WITNESS WHEREOF, HealthWatch, Inc. has caused this Certificate to be
signed by its Chief Executive Officer, on this ____ day of March, 2000, and such
person hereby affirms under penalty of perjury that this Certificate is the act
and deed of HealthWatch, Inc. and that the facts stated herein are true and
correct.
HEALTHWATCH, INC.
By:________________________________
Paul W. Harrison, Chairman, President and
Chief Executive Officer
Attest:
_________________, Secretary
-12-
<PAGE>
APPENDIX D
----------
WARRANT AGREEMENT
AGREEMENT, dated as of this ____ day of March, 2000, by and among
HEALTHWATCH, INC., a Minnesota corporation (the "Company"), CORPORATE STOCK
TRANSFER, INC. (the "Warrant Agent"), and COMMONWEALTH ASSOCIATES, L.P., a New
York limited partnership ("Commonwealth" or "Placement Agent").
W I T N E S S E T H
-------------------
WHEREAS, in connection with a private placement (the "Private Placement")
of (i) a minimum of 50 units and a maximum of 100 units (with an additional 100
units available in the case of an over-subscription) ("Units"), each Unit
consisting of (A) 1,000 shares of Series D 8% Convertible Preferred Stock (the
"Preferred Shares") and (B) 7142 redeemable common stock purchase warrants (the
"Warrants"), each Warrant exercisable to purchase one share of the Company's
common stock, $.05 par value (the "Common Stock"), and (ii) the issuance to the
Placement Agent of options to purchase Preferred Shares and Warrants in an
amount equal to 20% of the Preferred Shares and Warrants sold in the Private
Placement, the Company will issue up to 1,714,200 Warrants (assuming exercise in
full of the over-subscription option); and
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing to so act, in connection with the
issuance, registration, transfer, exchange and redemption of the Warrants, the
issuance of certificates representing the Warrants, the exercise of the
Warrants, and the rights of the holders thereof;
NOW THEREFORE, in consideration of the premises and the mutual agreements
hereinafter set forth and for the purpose of defining the terms and provisions
of the Warrants and the certificates representing the Warrants and the
respective rights and obligations thereunder of the Company, the holders of
certificates representing the Warrants and the Warrant Agent, the parties hereto
agree as follows:
SECTION 1. DEFINITIONS. As used herein, the following terms shall have the
following meanings, unless the context shall otherwise require:
(a) "Common Stock" shall mean stock of the Company of any class,
whether now or hereafter authorized, which has the right to participate in
the distributions of earnings and assets of the Company without limit as to
amount or percentage, which at the date hereof consists of 10,000,000
authorized shares of Common Stock, $.05 par value.
(b) "Corporate Office" shall mean the office of the Warrant Agent (or
its successor) at which at any particular time its principal business shall
be administered, which office is located at 3200 Cherry Creek Drive South,
Suite 430, Denver, Colorado 80209.
(c) "Exercise Date" shall mean, as to any Warrant, the date on which
the Warrant Agent shall have received both (a) the Warrant Certificate
representing such Warrant,
<PAGE>
with the exercise form thereon duly executed by the Registered Holder
thereof or his attorney duly authorized in writing, and (b) payment in
cash, or by official bank or certified check made payable to the Company,
of an amount in lawful money of the United States of America equal to the
Exercise Price.
(d) "Exercise Price" shall mean the purchase price to be paid upon
exercise of each Warrant in accordance with the terms hereof, which price
shall be $3.50 per share subject to adjustment from time to time pursuant
to the provisions of Section 8 or Section 9(b) hereof, subject to the
Company's right to reduce the Exercise Price upon notice to all
warrantholders.
(e) "Initial Warrant Exercise Date" shall mean March 21, 2000 [the
initial closing of the Private Placement].
(f) "Qualified Offering" shall mean a public offering or a private
placement of the Company's securities raising gross proceeds in excess of
$25,000,000, where the offering price per share is at least $10.50.
(g) "Registered Holder" shall mean the person in whose name any
certificate representing Warrants shall be registered on the books
maintained by the Warrant Agent pursuant to Section 6.
(h) "Redemption Price" shall mean the price at which the Company may,
at its option in accordance with the terms hereof, redeem the Warrants,
which price shall be $0.05 per Warrant.
(i) "Transfer Agent" shall mean Corporate Stock Transfer (Denver, CO),
as the Company's transfer agent, or its authorized successor, as such.
(j) "Warrant Expiration Date" shall mean 5:00 P.M. (New York time) on
March 21, 2005 or, with respect to Warrants which are outstanding as of the
applicable Redemption Date (as defined in Section 9), the Redemption Date,
whichever is earlier; provided that if such date shall in the State of New
York be a holiday or a day on which banks are authorized to close, then
5:00 P.M. (New York time) on the next following day which in the State of
New York is not a holiday or a day on which banks are authorized to close.
Upon notice to all warrantholders the Company shall have the right to
extend the Warrant Expiration Date.
(k) "Warrant Shares" shall mean the shares of Common Stock deliverable
upon exercise of the Warrants, as adjusted from time to time.
SECTION 2. WARRANTS AND ISSUANCE OF WARRANT CERTIFICATES.
(a) A Warrant shall initially entitle the Registered Holder of the
Warrant Certificate representing such Warrant to purchase one share of
Common Stock upon the exercise thereof, in accordance with the terms
hereof, subject to modification and adjustment as provided in Section 8.
2
<PAGE>
(b) From time to time, up to the Warrant Expiration Date, the Transfer
Agent shall execute and deliver stock certificates in required whole number
denominations representing up to an aggregate of 1,714,200 shares of Common
Stock (assuming the exercise in full of the over-subscription option),
subject to adjustment as described herein, upon the exercise of Warrants in
accordance with this Agreement.
(c) From time to time, up to the Warrant Expiration Date, the Warrant
Agent shall execute and deliver Warrant Certificates in required whole
number denominations to the persons entitled thereto in connection with any
transfer or exchange permitted under this Agreement; provided that no
Warrant Certificates shall be issued except: (i) those initially issued
hereunder; (ii) those issued on or after the Initial Warrant Exercise Date
upon the exercise of fewer than all Warrants represented by any Warrant
Certificate to evidence any unexercised Warrants held by the exercising
Registered Holder; (iii) those issued upon any transfer or exchange
pursuant to Section 6; (iv) those issued in replacement of lost, stolen,
destroyed or mutilated Warrant Certificates pursuant to Section 7; and (v)
at the option of the Company, in such form as may be approved by the its
Board of Directors to reflect (a) any adjustment or change in the Exercise
Price or the number of shares of Common Stock purchasable upon exercise of
the Warrants made pursuant to Section 8 hereof and (b) other modifications
approved in accordance with Section 17 hereof.
SECTION 3. FORM AND EXECUTION OF WARRANT CERTIFICATES.
(a) The Warrant Certificates shall be substantially in the form annexed
hereto as Exhibit A (the provisions of which are hereby incorporated
herein) and may have such letters, numbers or other marks of identification
or designation and such legends, summaries or endorsements printed,
lithographed, engraved or typed thereon as the Company may deem appropriate
and as are not inconsistent with the provisions of this Agreement, or as
may be required to comply with any law or with any rule or regulation made
pursuant thereto or with any rule or regulation of any stock exchange on
which the Warrants may be listed, or to conform to usage. The Warrant
Certificates shall be dated the date of issuance thereof (whether upon
initial issuance, transfer, exchange or in lieu of mutilated, lost, stolen,
or destroyed Warrant Certificates) and issued in registered form. Warrants
shall be numbered serially with the letters PPW.
(b) Warrant Certificates shall be executed on behalf of the Company by
its Chairman of the Board, Chief Executive Officer, President or any Vice
President and by its Chief Financial Officer, Secretary or an Assistant
Secretary, by manual signatures or by facsimile signatures printed thereon,
and shall have imprinted thereon a facsimile of the Company's seal. In case
any officer of the Company who shall have signed any of the Warrant
Certificates shall cease to be such officer of the Company before the date
of issuance of the Warrant Certificates and issue and delivery thereof,
such Warrant Certificates may nevertheless be issued and delivered with the
same force and effect as though the person who signed such Warrant
Certificates had not ceased to be such officer of the Company. After
execution by the Company, Warrant Certificates shall be delivered by the
Warrant Agent to the Registered Holder.
3
<PAGE>
SECTION 4. EXERCISE.
(a) Each Warrant may be exercised by the Registered Holder thereof at
any time on or after the Initial Exercise Date, but not after the Warrant
Expiration Date, upon the terms and subject to the conditions set forth
herein and in the applicable Warrant Certificate. A Warrant shall be deemed
to have been exercised immediately prior to the close of business on the
Exercise Date and the person entitled to receive the securities deliverable
upon such exercise shall be treated for all purposes as the holder upon
exercise thereof as of the close of business on the Exercise Date. As soon
as practicable on or after the Exercise Date the Warrant Agent shall
deposit the proceeds received from the exercise of a Warrant, and promptly
after clearance of checks received in payment of the Exercise Price
pursuant to such Warrants, cause to be issued and delivered by the Transfer
Agent, to the person or persons entitled to receive the same, a certificate
or certificates for the securities deliverable upon such exercise (plus a
certificate for any remaining unexercised Warrants of the Registered
Holder). Notwithstanding the foregoing, in the case of payment made in the
form of a check drawn on an account of Commonwealth or such other
investment banks and brokerage houses as the Company shall approve,
certificates shall immediately be issued without any delay. Upon the
exercise of any Warrant and clearance of the funds received, the Warrant
Agent shall promptly remit the payment received for the Warrant to the
Company or as the Company may direct in writing.
(b) The Registered Holder may, at its option, exchange this Warrant on
a cashless basis, in whole or in part (a "Warrant Exchange"), into the
number of Warrant Shares determined in accordance with this Section (4)(b),
by surrendering the Warrant Certificate at the principal office of the
Warrant Agent, accompanied by a notice stating such Registered Holder's
intent to effect such exchange, the number of Warrant Shares to be
exchanged and the date on which the Registered Holder requests that such
Warrant Exchange occur (the "Notice of Exchange"). The Warrant Exchange
shall take place on the date specified in the Notice of Exchange or, if
later, the date the Notice of Exchange is received by the Warrant Agent
(the "Exchange Date"). Certificates for the shares issuable upon such
Warrant Exchange and, if applicable, a new warrant of like tenor evidencing
the balance of the shares remaining subject to such Warrant, shall be
issued as of the Exchange Date and delivered to the Registered Holder
within seven (7) days following the Exchange Date. In connection with any
Warrant Exchange, a Warrant shall represent the right to subscribe for and
acquire the number of Warrant Shares (rounded to the next highest integer)
equal to (i) the number of Warrant Shares specified by the Registered
Holder in its Notice of Exchange (the "Total Number") less (ii) the number
of Warrant Shares equal to the quotient obtained by dividing (A) the
product of the Total Number and the existing Exercise Price by (B) the
current market value of a share of Common Stock. Current market value shall
have the meaning set forth Section 11(a) hereof, except that for purposes
hereof, the date of exercise, as used in such Section 11(a) hereof, shall
mean the Exchange Date.
4
<PAGE>
SECTION 5. RESERVATION OF SHARES; LISTING; PAYMENT OF TAXES; ETC.
(a) The Company covenants that it will at all times reserve and keep
available out of its authorized Common Stock, solely for the purpose of
issue upon exercise of Warrants, such number of shares of Common Stock as
shall then be issuable upon the exercise of all outstanding Warrants. The
Company covenants that all shares of Common Stock which shall be issuable
upon exercise of the Warrants and payment of the Exercise Price shall, at
the time of delivery, be duly and validly issued, fully paid, nonassessable
and free from all taxes, liens and charges with respect to the issue
thereof (other than those which the Company shall promptly pay or
discharge).
(b) The Company will use reasonable efforts to obtain appropriate
approvals or registrations under state "blue sky" securities laws with
respect to the exercise of the Warrants; provided, however, that the
Company shall not be obligated to file any general consent to service of
process or qualify as a foreign corporation in any jurisdiction. With
respect to any such securities laws, however, Warrants may not be exercised
by, or shares of Common Stock issued to, any Registered Holder in any state
in which such exercise would be unlawful.
(c) The Company shall pay all documentary, stamp or similar taxes and
other governmental charges that may be imposed with respect to the issuance
of Warrants, or the issuance or delivery of any shares upon exercise of the
Warrants; provided, however, that if the shares of Common Stock are to be
delivered in a name other than the name of the Registered Holder of the
Warrant Certificate representing any Warrant being exercised, then no such
delivery shall be made unless the person requesting the same has paid to
the Warrant Agent the amount of transfer taxes or charges incident thereto,
if any.
(d) The Warrant Agent is hereby irrevocably authorized to requisition
the Company's Transfer Agent from time to time for certificates
representing shares of Common Stock required upon exercise of the Warrants,
and the Company will authorize the Transfer Agent to comply with all such
proper requisitions.
SECTION 6. EXCHANGE AND REGISTRATION OF TRANSFER. Subject to the
restrictions on transfer contained in the Warrant Certificates and the
Subscription Agreements between the Company and the purchasers of Units:
(a) Warrant Certificates may be exchanged for other Warrant
Certificates representing an equal aggregate number of Warrants of the same
class or may be transferred in whole or in part. Warrant Certificates to be
exchanged shall be surrendered to the Warrant Agent at its Corporate
Office, and upon satisfaction of the terms and provisions hereof, the
Company shall execute, and the Warrant Agent shall countersign, issue and
deliver in exchange therefor the Warrant Certificate or Certificates which
the Registered Holder making the exchange shall be entitled to receive.
(b) The Warrant Agent shall keep at its office books in which, subject
to such reasonable regulations as it may prescribe, it shall register
Warrant Certificates and the
5
<PAGE>
transfer thereof in accordance with its regular practice. Upon due
presentment for registration of transfer of any Warrant Certificate at its
office, the Company shall execute and the Warrant Agent shall issue and
deliver to the transferee or transferees a new Warrant Certificate or
Certificates representing an equal aggregate number of Warrants.
(c) With respect to all Warrant Certificates presented for registration
of transfer, or for exchange or exercise, the subscription form on the
reverse thereof shall be duly endorsed, or be accompanied by a written
instrument or instruments of transfer and subscription, in form
satisfactory to the Company, duly executed by the Registered Holder or his
attorney-in-fact duly authorized in writing.
(d) The Company may require payment by such holder of a sum sufficient
to cover any tax or other governmental charge that may be imposed in
connection therewith.
(e) All Warrant Certificates surrendered for exercise or for exchange
in case of mutilated Warrant Certificates shall be promptly canceled by the
Warrant Agent and thereafter retained by the Warrant Agent until
termination of this Agreement or resignation of the Warrant Agent, or, with
the prior written consent of Commonwealth, disposed of or destroyed, at the
direction of the Company.
(f) Prior to due presentment for registration of transfer thereof, the
Company and the Warrant Agent may deem and treat the Registered Holder of
any Warrant Certificate as the absolute owner thereof and of each Warrant
represented thereby (notwithstanding any notations of ownership or writing
thereon made by anyone other than a duly authorized officer of the Company
or the Warrant Agent) for all purposes and shall not be affected by any
notice to the contrary.
SECTION 7. LOSS OR MUTILATION. Upon receipt by the Company and the Warrant
Agent of evidence satisfactory to them of the ownership of and loss, theft,
destruction or mutilation of any Warrant Certificate and (in case of loss, theft
or destruction) of indemnity satisfactory to them, and (in the case of
mutilation) upon surrender and cancellation thereof, the Company shall execute
and the Warrant Agent shall (in the absence of notice to the Company and/or
Warrant Agent that the Warrant Certificate has been acquired by a bonafide
purchaser) countersign and deliver to the Registered Holder in lieu thereof a
new Warrant Certificate of like tenor representing an equal aggregate number of
Warrants. Applicants for a substitute Warrant Certificate shall comply with such
other reasonable regulations and pay such other reasonable charges as the
Warrant Agent may prescribe.
SECTION 8. ANTI-DILUTION PROVISIONS. The Exercise Price in effect at any
time and the number and kind of securities purchasable upon the exercise of the
Warrants shall be subject to adjustment from time to time upon the happening of
certain events as follows:
(a) In case the Company shall hereafter (i) declare a dividend or make
a distribution on its outstanding shares of Common Stock in shares of
Common Stock, (ii) subdivide or reclassify its outstanding shares of Common
Stock into a greater number of shares, or (iii) combine or reclassify its
outstanding shares of Common Stock into a smaller number of shares, the
Exercise Price in effect at the time of the record date for
6
<PAGE>
such dividend or distribution or of the effective date of such subdivision,
combination or reclassification shall be adjusted so that it shall equal
the price determined by multiplying the Exercise Price by a fraction, the
denominator of which shall be the number of shares of Common Stock
outstanding after giving effect to such action, and the numerator of which
shall be the number of shares of Common Stock outstanding immediately prior
to such action. Such adjustment shall be made successively whenever any
event listed above shall occur.
(b) In case the Company shall fix a record date for the issuance of
rights or warrants to all holders of its Common Stock entitling them to
subscribe for or purchase shares of Common Stock (or securities convertible
into Common Stock) at a price (the "Subscription Price") (or having a
conversion price per share) less than the current market price on such
record date, the Exercise Price shall be adjusted so that the same shall
equal the price determined by multiplying the Exercise Price in effect
immediately prior to the date of such issuance by a fraction, the numerator
of which shall be the sum of the number of shares of Common Stock
outstanding on the record date mentioned below and the number of additional
shares of Common Stock which the aggregate offering price of the total
number of shares of Common Stock so offered (or the aggregate conversion
price of the convertible securities so offered) would purchase at such
current market price per share of the Common Stock, and the denominator of
which shall be the sum of the number of shares of Common Stock outstanding
on such record date and the number of additional shares of Common Stock
offered for subscription or purchase (or into which the convertible
securities so offered are convertible). Such adjustment shall be made
successively whenever such rights or warrants are issued and shall become
effective immediately after the record date for the determination of
shareholders entitled to receive such rights or warrants; and to the extent
that shares of Common Stock are not delivered (or securities convertible
into Common Stock are not delivered) after the expiration of such rights or
warrants the Exercise Price shall be readjusted to the Exercise Price which
would then be in effect had the adjustments made upon the issuance of such
rights or warrants been made upon the basis of delivery of only the number
of shares of Common Stock (or securities convertible into Common Stock)
actually delivered.
(c) In case the Company shall hereafter distribute to the holders of
its Common Stock evidences of its indebtedness or assets (excluding cash
dividends or distributions and dividends or distributions referred to in
Subsection (a) above) or subscription rights or warrants (excluding those
referred to in Subsection (b) above), then in each such case the Exercise
Price in effect thereafter shall be determined by multiplying the Exercise
Price in effect immediately prior thereto by a fraction, the numerator of
which shall be the total number of shares of Common Stock outstanding
multiplied by the current market price per share of Common Stock, less the
fair market value (as determined by the Company's Board of Directors) of
said assets or evidences of indebtedness so distributed or of such rights
or warrants, and the denominator of which shall be the total number of
shares of Common Stock outstanding multiplied by such current market price
per share of Common Stock. Such adjustment shall be made successively
whenever such a record date is fixed. Such adjustment shall be made
whenever any such distribution is made and shall become effective
immediately after the record date for the determination of shareholders
entitled to receive such distribution.
7
<PAGE>
(d) In case the Company shall hereafter issue shares of its Common
Stock (excluding shares issued (i) in any of the transactions described in
Subsection (a) above, (ii) upon exercise of options granted to the
Company's officers, directors, employees and consultants under a plan or
plans adopted by the Company's Board of Directors and approved by its
shareholders, if such shares would otherwise be included in this Subsection
(d), (but only to the extent that the aggregate number of shares excluded
hereby and issued after the date hereof, shall not exceed 20% of the
Company's Common Stock outstanding, on a fully diluted basis, at the time
of any issuance), (iii) upon exercise of options, warrants (including the
Warrants), convertible securities and convertible debentures outstanding as
of the final closing of the Private Placement, a Qualified Offering, (iv)
to shareholders of any corporation which merges into the Company in
proportion to their stock holdings of such corporation immediately prior to
such merger, upon such merger, (v) issued in a private placement through
Commonwealth, as placement agent, or upon exercise or conversion of any
securities issued in or in connection with such a private placement
(including agent, consulting or advisory warrants), (vi) issued in a
private placement where the Offering Price (as defined below) is at least
90% of the current market price, (vii) issued in a bona fide public
offering pursuant to a firm commitment underwriting, or (viii) issued in
connection with an acquisition of a business or technology which has been
approved by a majority of the Company's outside directors but only if no
adjustment is required pursuant to any other specific subsection of this
Section 8 (without regard to Subsection (i) below) with respect to the
transaction giving rise to such rights) for a consideration per share (the
"Offering Price") less than the current market price, the Exercise Price
shall be adjusted immediately thereafter so that it shall equal the price
determined by multiplying the Exercise Price in effect immediately prior
thereto by a fraction, the numerator of which shall be the sum of the
number of shares of Common Stock outstanding immediately prior to the
issuance of such additional shares and the number of shares of Common Stock
which the aggregate consideration received for the issuance of such
additional shares would purchase at such current market price per share of
Common Stock, and the denominator of which shall be the number of shares of
Common Stock outstanding immediately after the issuance of such additional
shares. Such adjustment shall be made successively whenever such an
issuance is made.
(e) In case the Company shall hereafter issue any securities
convertible into or exchangeable for its Common Stock (excluding securities
issued in transactions described in Subsections (b), (c) and (d)(i) through
(viii) above) for a consideration per share of Common Stock (the "Exchange
Price") initially deliverable upon conversion or exchange of such
securities (determined as provided in Subsection (g) below) plus any
consideration received for any such securities divided by the number of
shares of Common Stock issuable upon exercise or conversion thereof less
than the current market price, the Exercise Price shall be adjusted
immediately thereafter so that it shall equal the price determined by
multiplying the Exercise Price in effect immediately prior thereto by a
fraction, the numerator of which shall be the sum of the number of shares
of Common Stock outstanding immediately prior to the issuance of such
securities and the number of shares of Common Stock which the aggregate
consideration received for such securities would purchase at such current
market price per share of Common Stock, and the denominator of which shall
be the sum of the number of shares of Common Stock
8
<PAGE>
outstanding immediately prior to such issuance and the maximum number of
shares of Common Stock of the Company deliverable upon conversion of or in
exchange for such securities at the initial conversion or exchange price or
rate. Such adjustment shall be made successively whenever such an issuance
is made.
(f) Whenever the Exercise Price payable upon exercise of each Warrant
is adjusted pursuant to Subsections (a), (b), (c), (d) and (e) above and
(j) below, the number of Shares purchasable upon exercise of this Warrant
shall simultaneously be adjusted by multiplying the number of Shares
initially issuable upon exercise of this Warrant by the Exercise Price in
effect on the date hereof and dividing the product so obtained by the
Exercise Price, as adjusted.
(g) For purposes of any computation respecting consideration received
pursuant to Subsections (d) and (e) above and (j) below, the following
shall apply:
(A) in the case of the issuance of shares of Common Stock for cash,
the consideration shall be the amount of such cash, provided that in no
case shall any deduction be made for any commissions, discounts or other
expenses incurred by the Company for any underwriting of the issue or
otherwise in connection therewith;
(B) in the case of the issuance of shares of Common Stock for a
consideration in whole or in part other than cash, the consideration other
than cash shall be deemed to be the fair market value thereof as determined
in good faith by the Board of Directors of the Company (irrespective of the
accounting treatment thereof), whose determination shall be conclusive; and
(C) in the case of the issuance of securities convertible into or
exchangeable for shares of Common Stock, the aggregate consideration
received therefor shall be deemed to be the consideration received by the
Company for the issuance of such securities plus the additional minimum
consideration, if any, to be received by the Company upon the conversion or
exchange thereof (the consideration in each case to be determined in the
same manner as provided in clauses (A) and (B) of this Subsection (g)).
(h) For the purpose of any computation under Subsections (b), (c), (d)
and (e) above and (j) and (k) below, the current market price per share of
Common Stock at any date shall be determined in the manner set forth in
Section 11 hereof except that the current market price per share shall be
deemed to be the higher of (i) the average of the prices for 30 consecutive
business days before such date or (ii) the price on the business day
immediately preceding such date.
(i) No adjustment in the Exercise Price shall be required unless such
adjustment would require an increase or decrease of at least five cents
($0.05) in such price; provided, however, that any adjustments which by
reason of this Subsection (i) are not required to be made shall be carried
forward and taken into account in any subsequent adjustment required to be
made hereunder. All calculations under this Section 8 shall be made to the
nearest cent or to the nearest one-hundredth of a share, as the case may
be.
9
<PAGE>
Anything in this Section 8 to the contrary notwithstanding, the Company
shall be entitled, but shall not be required, to make such changes in the
Exercise Price, in addition to those required by this Section 8, as it
shall determine, in its sole discretion, to be advisable in order that any
dividend or distribution in shares of Common Stock, or any subdivision,
reclassification or combination of Common Stock, hereafter made by the
Company shall not result in any Federal income tax liability to the holders
of Common Stock or securities convertible into Common Stock (including
Warrants).
(j) In addition to and lieu of the provisions of this Section 8, in the
event that the Company shall, at any time during the period that the Holder
is subject to a lock-up agreement, issue securities under Subsections (b),
(d) or (e) having an Offering Price, Subscription Price or Exchange Price
less than the Exercise Price (whether initially or due to provisions in
such securities requiring price reductions as a result of anti-dilution
adjustments, the passage of time, "discount to market" or similar
provisions), then the Exercise Price shall be immediately reset to equal
such lower Offering Price, Subscription Price or Exchange Price.
(k) No adjustment under Subsections (b), (c), (d) or (e) shall be
required for issuances below the current market price if either: (i) (A)
the current market price is at least 300% of the Exercise Price then in
effect and (B) a registration statement covering the Warrant Shares is in
effect and remains in effect for the 90 days after such issuance or Rule
144(k) under the Securities Act of 1933, as amended (the "Act") is
available for resale of all of the Warrant Shares; or (ii) the Company at
the time of such issuance has less than $100,000 in cash. Furthermore, no
adjustment under Subsections (b), (c), (d), (e) or (j) hereof shall be
required unless either (x) shareholders of the Company have approved the
terms of this Warrant Agreement or (y) such adjustments will not result in
a violation of any qualitative listing criteria of The Nasdaq Stock Market,
Inc. In the event neither (x) nor (y) occurs, the number of shares
purchasable upon exercise of this Warrant shall double without any further
action on the part of the Company or the Holder so that the Warrants will
be exercisable for an aggregate of 3,428,400 shares of Common Stock at a
price of $3.50 per share (assuming the exercise in full of the over-
subscription option).
(l) Whenever the Exercise Price is adjusted, as herein provided, the
Company shall promptly but no later than 10 days after any request for such
an adjustment by the Holder, cause a notice setting forth the adjusted
Exercise Price and adjusted number of Shares issuable upon exercise of each
Warrant, and, if requested, information describing the transactions giving
rise to such adjustments, to be mailed to the Holders at their last
addresses appearing in the Warrant Register, and shall cause a certified
copy thereof to be mailed to the Warrant Agent and its transfer agent, if
any. The Company may retain a firm of independent certified public
accountants selected by the Board of Directors (who may be the regular
accountants employed by the Company) to make any computation required by
this Section 8, and a certificate signed by such firm shall be conclusive
evidence of the correctness of such adjustment.
(m) In the event that at any time, as a result of an adjustment made
pursuant to Subsection (a) above, the Holder of this Warrant thereafter
shall become entitled to
10
<PAGE>
receive any shares of the Company, other than Common Stock, thereafter the
number of such other shares so receivable upon exercise of this Warrant
shall be subject to adjustment from time to time in a manner and on terms
as nearly equivalent as practicable to the provisions with respect to the
Common Stock contained in Subsections (a) to (j), inclusive above.
(n) Irrespective of any adjustments in the Exercise Price or the number
or kind of shares purchasable upon exercise of this Warrant, Warrants
theretofore or thereafter issued may continue to express the same price and
number and kind of shares as are stated in the similar Warrants initially
issuable pursuant to this Agreement.
SECTION 9. REDEMPTION.
(a) On not less than 30 days' written notice (the "Redemption Notice")
to Registered Holders of the Warrants being redeemed, the Warrants may be
redeemed, at the option of the Company, at a redemption price of $0.05 per
Warrant (the "Redemption Price"), provided (i) the market price (determined
in accordance with Section 11 hereof) shall exceed 300% of the then current
Exercise Price (the "Target Price") for the 20 consecutive trading days
ending on the fifth trading day prior to the date of the Redemption Notice
(the "Target Period"), subject to adjustment as set forth in Section 9(g)
hereof, (ii) a registration statement covering the Warrant Shares filed
under the Act has been declared effective and remains effective on the date
fixed for redemption of the Warrants (the "Redemption Date") and (iii) the
Holders are not subject to any lock-up provisions with respect to the sale
or transfer of the Warrants or Warrant Shares.
(b) The Company shall have the option, and, upon written request of
Commonwealth and the Committee (as defined in Section 17 hereof), shall be
obligated to redeem the Warrants at the Redemption Price, on not less than
10 days' written notice in the event that at any time prior to December 21,
2000 [nine months from the Initial Closing] the market price (determined in
accordance with Section 11 hereof) shall equal the Target Price, subject to
adjustment as set forth in Section 9(g) hereof, for the Target Period and
the Company does not have an effective registration statement covering the
Warrant Shares; provided, however, in such event, the Exercise Price,
solely for purposes of the cashless exercise provisions of Section 4(b)
hereof, shall be reduced to a price equal to 10% of the current market
value (determined in accordance with Section 4(b) hereof). No reduction in
the Exercise Price for purposes of a cashless exercise under this Section
9(b) shall be made unless either (x) shareholders of the Company have
approved the terms of this Warrant Agreement or (y) such adjustments will
not result in a violation of any qualitative listing criteria of The Nasdaq
Stock Market, Inc.
(c) If the conditions set forth in Section 9(a) or (b) are met, and the
Company desires to exercise its right to redeem the Warrants, it shall mail
a Redemption Notice to each of the Registered Holders of the Warrants to be
redeemed, first class, postage prepaid, not later than the thirtieth day
before the date fixed for redemption, at their last address as shall appear
on the records maintained pursuant to Section 6(b). Any notice mailed in
the manner provided herein shall be conclusively presumed to have been duly
given whether or not the Registered Holder receives such notice.
11
<PAGE>
(d) The Redemption Notice shall specify (i) the redemption price, (ii)
the Redemption Date, (iii) the place where the Warrant Certificates shall
be delivered and the redemption price paid, and (iv) that the right to
exercise the Warrant shall terminate at 5:00 P.M. (New York time) on the
business day immediately preceding the Redemption Date. No failure to mail
such notice nor any defect therein or in the mailing thereof shall affect
the validity of the proceedings for such redemption except as to a
Registered Holder (a) to whom notice was not mailed or (b) whose notice was
defective. An affidavit of the Warrant Agent or of the Secretary or an
Assistant Secretary of the Company that notice of redemption has been
mailed shall, in the absence of fraud, be prima facie evidence of the facts
stated therein.
(e) Any right to exercise a Warrant shall terminate at 5:00 P.M. (New
York time) on the business day immediately preceding the Redemption Date.
On and after the Redemption Date, Registered Holders of the Warrants shall
have no further rights except to receive, upon surrender of the Warrant,
the Redemption Price.
(f) From and after the Redemption Date, the Company shall, at the place
specified in the Redemption Notice, upon presentation and surrender to the
Company by or on behalf of the Registered Holder thereof of one or more
Warrant Certificates evidencing Warrants to be redeemed, deliver or cause
to be delivered to or upon the written order of such Registered Holder a
sum in cash equal to the Redemption Price of each such Warrant. From and
after the Redemption Date and upon the deposit or setting aside by the
Company of a sum sufficient to redeem all the Warrants called for
redemption, such Warrants shall expire and become void and all rights
hereunder and under the Warrant Certificates, except the right to receive
payment of the Redemption Price, shall cease.
(g) If the shares of the Company's Common Stock are subdivided or
combined into a greater or smaller number of shares of Common Stock, the
Target Price shall be proportionally adjusted by the ratio which the total
number of shares of Common Stock outstanding immediately prior to such
event bears to the total number of shares of Common Stock to be outstanding
immediately after such event.
SECTION 10. REGISTRATION UNDER THE SECURITIES ACT OF 1933. The Company
agrees to register the Warrant Shares for resale under the Securities Act of
1933, as amended (the "Act") on the terms and subject to the conditions set
forth in Article IV of the Subscription Agreement between the Company and each
of the investors in the Private Placement.
SECTION 11. FRACTIONAL WARRANTS AND FRACTIONAL SHARES.
(a) If the number of shares of Common Stock purchasable upon the
exercise of each Warrant is adjusted pursuant to Section 8 hereof, the
Company shall nevertheless not be required to issue fractions of shares,
upon exercise of the Warrants or otherwise, or to distribute certificates
that evidence fractional shares. With respect to any fraction of a share
called for upon any exercise hereof, the Company shall pay to the Holder an
12
<PAGE>
amount in cash equal to such fraction multiplied by the current market
value of such fractional share, determined as follows:
(A) If the Common Stock is listed on a national securities exchange
or admitted to unlisted trading privileges on such exchange or listed
for trading on the Nasdaq National Market, the current market value
shall be the last reported sale price of the Common Stock on such
exchange or market on the last business day prior to the date of
exercise of this Warrant or if no such sale is made on such day, the
average of the closing bid and asked prices for such day on such
exchange or market; or
(B) If the Common Stock is not so listed or admitted to unlisted
trading privileges, but is traded on the Nasdaq SmallCap Market, the
current market value shall be the average of the closing bid and asked
prices for such day on such market and if the Common Stock is not so
traded, the current market value shall be the mean of the last reported
bid and asked prices reported by the NASD Electronic Bulletin Board on
the last business day prior to the date of the exercise of this
Warrant; or
(C) If the Common Stock is not so listed or admitted to unlisted
trading privileges and bid and asked prices are not so reported, the
current market value shall be an amount, not less than book value
thereof as at the end of the most recent fiscal year of the Company
ending prior to the date of the exercise of the Warrant, determined in
such reasonable manner as may be prescribed by the Board of Directors
of the Company.
SECTION 12. WARRANT HOLDERS NOT DEEMED STOCKHOLDERS. No holder of Warrants
shall, as such, be entitled to vote or to receive dividends or be deemed the
holder of Common Stock that may at any time be issuable upon exercise of such
Warrants for any purpose whatsoever, nor shall anything contained herein be
construed to confer upon the holder of Warrants, as such, any of the rights of a
stockholder of the Company or any right to vote for the election of directors or
upon any matter submitted to stockholders at any meeting thereof, or to give or
withhold consent to any corporate action (whether upon any recapitalization,
issue or reclassification of stock, change of par value or change of stock to no
par value, consolidation, merger or conveyance or otherwise), or to receive
notice of meetings, or to receive dividends or subscription rights, until such
Holder shall have exercised such Warrants and been issued shares of Common Stock
in accordance with the provisions hereof.
SECTION 13. RIGHTS OF ACTION. All rights of action with respect to this
Agreement are vested in the respective Registered Holders of the Warrants, and
any Registered Holder of a Warrant, without consent of the Warrant Agent or of
the holder of any other Warrant, may, on his own behalf and for his own benefit,
enforce against the Company his right to exercise his Warrants for the purchase
of shares of Common Stock in the manner provided in the Warrant Certificate and
this Agreement.
SECTION 14. AGREEMENT OF WARRANT HOLDERS. Every holder of a Warrant, by his
acceptance thereof, consents and agrees with the Company, the Warrant Agent and
every other holder of a Warrant that:
13
<PAGE>
(a) The Warrants are transferable only on the registry books of the
Warrant Agent by the Registered Holder thereof in person or by his attorney
duly authorized in writing and only if the Warrant Certificates
representing such Warrants are surrendered at the office of the Warrant
Agent, duly endorsed or accompanied by a proper instrument of transfer
satisfactory to the Warrant Agent and the Company in their sole discretion,
together with payment of any applicable transfer taxes; and
(b) The Company may deem and treat the person in whose name the Warrant
Certificate is registered as the holder and as the absolute, true and
lawful owner of the Warrants represented thereby for all purposes, and the
Company shall not be affected by any notice or knowledge to the contrary,
except as otherwise expressly provided in Section 7 hereof.
SECTION 15. CANCELLATION OF WARRANT CERTIFICATES. If the Company shall
purchase or acquire any Warrant or Warrants, the Warrant Certificate or Warrant
Certificates evidencing the same shall thereupon be canceled by it and retired.
The Warrant Agent shall also cancel Common Stock following exercise of any or
all of the Warrants represented thereby or delivered to it for transfer,
splitup, combination or exchange.
SECTION 16. CONCERNING THE WARRANT AGENT.
(a) The Warrant Agent acts hereunder as agent and in a ministerial
capacity for the Company, and its duties shall be determined solely by the
provisions hereof. The Warrant Agent shall not, by issuing and delivering
Warrant Certificates or by any other act hereunder be deemed to make any
representations as to the validity, value or authorization of the Warrant
Certificates or the Warrants represented thereby or of any securities or
other property delivered upon exercise of any Warrant or whether any stock
issued upon exercise of any Warrant is fully paid and nonassessable.
(b) The Warrant Agent shall account promptly to the Company with
respect to Warrants exercised and concurrently pay the Company, as provided
in Section 4, all moneys received by the Warrant Agent upon the exercise of
such Warrants. The Warrant Agent shall, upon request of the Company from
time to time, deliver to the Company such complete reports of registered
ownership of the Warrants and such complete records of transactions with
respect to the Warrants and the shares of Common Stock as the Company may
request. The Warrant Agent shall also make available to the Company and
Commonwealth for inspection by their agents or employees, from time to time
as either of them may request, such original books of accounts and record
(including original Warrant Certificates surrendered to the Warrant Agent
upon exercise of Warrants) as may be maintained by the Warrant Agent in
connection with the issuance and exercise of Warrants hereunder, such
inspections to occur at the Warrant Agent's office as specified in Section
18, during normal business hours.
(c) The Warrant Agent shall not at any time be under any duty or
responsibility to any holder of Warrant Certificates to make or cause to be
made any adjustment of the Exercise Price provided in this Agreement, or to
determine whether any fact exists which may require any such adjustments,
or with respect to the nature or extent of any such
14
<PAGE>
adjustment, when made, or with respect to the method employed in making the
same. It shall not (i) be liable for any recital or statement of facts
contained herein or for any action taken, suffered or omitted by it in
reliance on any Warrant Certificate or other document or instrument
believed by it in good faith to be genuine and to have been signed or
presented by the proper party or parties, (ii) be responsible for any
failure on the part of the Company to comply with any of its covenants and
obligations contained in this Agreement or in any Warrant Certificate, or
(iii) be liable for any act or omission in connection with this Agreement
except for its own negligence or willful misconduct.
The Warrant Agent may at any time consult with counsel satisfactory to it (who
may be counsel for the Company) and shall incur no liability or responsibility
for any action taken, suffered or omitted by it in good faith in accordance with
the opinion or advice of such counsel.
(d) Any notice, statement, instruction, request, direction, order or
demand of the Company shall be sufficiently evidenced by an instrument
signed by the Chairman of the Board, Chief Executive Officer, President,
any Vice President, its Secretary, or Assistant Secretary, (unless other
evidence in respect thereof is herein specifically prescribed). The Warrant
Agent shall not be liable for any action taken, suffered or omitted by it
in accordance with such notice, statement, instruction, request, direction,
order or demand believed by it to be genuine.
(e) The Company agrees to pay the Warrant Agent reasonable compensation
for its services hereunder and to reimburse it for its reasonable expenses
hereunder; it further agrees to indemnify the Warrant Agent and save it
harmless against any and all losses, expenses and liabilities, including
judgments, costs and counsel fees, for anything done or omitted by the
Warrant Agent in the execution of its duties and powers hereunder except
losses, expenses and liabilities arising as a result of the Warrant Agent's
negligence or willful misconduct.
(f) The Warrant Agent may resign its duties and be discharged from all
further duties and liabilities hereunder (except liabilities arising as a
result of the Warrant Agent's own negligence or willful misconduct), after
giving 30 days' prior written notice to the Company. At least 15 days prior
to the date such resignation is to become effective, the Warrant Agent
shall cause a copy of such notice of resignation to be mailed to the
Registered Holder of each Warrant Certificate at the Company's expense.
Upon such resignation, or any inability of the Warrant Agent to act as such
hereunder, the Company shall appoint a new warrant agent in writing. If the
Company shall fail to make such appointment within a period of 15 days
after it has been notified in writing of such resignation by the resigning
Warrant Agent, then the Registered Holder of any Warrant Certificate may
apply to any court of competent jurisdiction for the appointment of a new
warrant agent. Any new warrant agent, whether appointed by the Company or
by such a court, shall be a bank or trust company having a capital and
surplus, as shown by its last published report to its stockholders, of not
less than $10,000,000 or a stock transfer company. After acceptance in
writing of such appointment by the new warrant agent is received by the
Company, such new warrant agent shall be vested with the same powers,
rights, duties and responsibilities as if it had been originally named
herein as the Warrant Agent, without any further assurance, conveyance, act
or deed; but if for any reason it
15
<PAGE>
shall be necessary or expedient to execute and deliver any further
assurance, conveyance, act or deed, the same shall be done at the expense
of the Company and shall be legally and validly executed and delivered by
the resigning Warrant Agent. Not later than the effective date of any such
appointment the Company shall file notice thereof with the resigning
Warrant Agent and shall forthwith cause a copy of such notice to be mailed
to the Registered Holder of each Warrant Certificate.
(g) Any corporation into which the Warrant Agent or any new warrant
agent may be converted or merged or any corporation resulting from any
consolidation to which the Warrant Agent or any new warrant agent shall be
a party or any corporation succeeding to the trust business of the Warrant
Agent shall be a successor warrant agent under this Agreement without any
further act, provided that such corporation is eligible for appointment as
successor to the Warrant Agent under the provisions of the preceding
paragraph. Any such successor warrant agent shall promptly cause notice of
its succession as warrant agent to be mailed to the Company and to the
Registered Holder of each Warrant Certificate.
(h) The Warrant Agent, its subsidiaries and affiliates, and any of its
or their officers or directors, may buy and hold or sell Warrants or other
securities of the Company and otherwise deal with the Company in the same
manner and to the same extent and with like effects as though it were not
Warrant Agent. Nothing herein shall preclude the Warrant Agent from acting
in any other capacity for the Company or for any other legal entity.
SECTION 17. MODIFICATION OF AGREEMENT. Subject to the provisions of Section
4(b), the parties hereto may by supplemental agreement make any changes or
corrections in this Agreement (i) that it shall deem appropriate to cure any
ambiguity or to correct any defective or inconsistent provision or manifest
mistake or error herein contained; (ii) to reflect an increase in the number of
Warrants which are to be governed by this Agreement resulting from an increase
in the size of the Private Placement; (iii) to reflect an increase in the number
of Warrants which are to be governed by this Agreement resulting from the
conversion of warrants issued to Commonwealth or its designees in connection
with the Private Placement; or (iv) that it may deem necessary or desirable and
which shall not adversely affect the interests of the holders of Warrant
Certificates; provided, however, that this Agreement shall not otherwise be
modified, supplemented or altered in any respect except with the consent in
writing of the Company, Commonwealth and a committee to be designated by
Commonwealth whose members hold in the aggregate not less than 20% of the
outstanding Warrants (the "Committee"); provided, however, that no such
amendment, modification or waiver which would decrease the number of the
securities purchasable upon the exercise of any Warrant, or increase in the
Exercise Price therefor (other than as a result of the waiver or modification of
any anti-dilution provisions contained in Section 8 hereof), shall be made
without the consent in writing of the holders of not less than 50% of the
outstanding Warrants.
SECTION 18. NOTICES. All notices, requests, consents and other
communications hereunder shall be in writing and shall be deemed to have been
made when delivered or mailed first class registered or certified mail, postage
prepaid as follows: if to the Registered Holder of a Warrant Certificate, at the
address of such holder as shown on the registry books maintained by
16
<PAGE>
the Warrant Agent; if to the Company, 3525 Piedmont Road, 7 Piedmont Center,
Suite 300, Atlanta, Georgia 30350, Att: Paul Harrison; if to the Warrant Agent,
at its Corporate Office and if to Commonwealth, at Commonwealth Associates, 830
Third Avenue, New York, New York 10022, Attention: Carl Kleidman.
SECTION 19. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York, without
reference to principles of conflict of laws.
SECTION 20. BINDING EFFECT. This Agreement shall be binding upon and inure
to the benefit of the Company and the Warrant Agent (and their respective
successors and assigns) and the holders from time to time of Warrant
Certificates. Nothing in this Agreement is intended or shall be construed to
confer upon any other person any right, remedy or claim, in equity or at law, or
to impose upon any other person any duty, liability or obligation.
SECTION 21. TERMINATION. This Agreement shall terminate on the earlier to
occur of (i) the close of business on the Expiration Date of all the Warrants;
or (ii) the date upon which all Warrants have been exercised or redeemed.
SECTION 22. COUNTERPARTS. This Agreement may be executed in several
counterparts, which taken together shall constitute a single document.
17
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
HEALTHWATCH, INC.
By:
----------------------------------------
Name: Paul W. Harrison
Title: Chairman and Chief Executive
Officer
CORPORATE STOCK TRANSFER, INC.
By:
----------------------------------------
Name:
Title:
COMMONWEALTH ASSOCIATES, L.P.
By:
----------------------------------------
Commonwealth Associates
Management Company, Inc.,
its general partner
By:
----------------------------------------
Name: Joseph Wynne
Title: Chief Financial Officer
18
<PAGE>
THIS WARRANT AND ANY SHARES OF COMMON STOCK ISSUABLE UPON ITS EXERCISE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE
TRANSFERRED UNTIL (1) A REGISTRATION STATEMENT UNDER THE ACT SHALL HAVE BECOME
EFFECTIVE WITH RESPECT THERETO, OR (2) RECEIPT BY THE ISSUER OF AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO THE ISSUER TO THE EFFECT THAT REGISTRATION
UNDER THE ACT IS NOT REQUIRED IN CONNECTION WITH SUCH PROPOSED TRANSFER NOR IS
SUCH TRANSFER IN VIOLATION OF ANY APPLICABLE STATE SECURITIES LAWS.
No. PPW _____ ________ Warrants
VOID AFTER MARCH __, 2005
WARRANT CERTIFICATE FOR PURCHASE
OF COMMON STOCK
HEALTHWATCH, INC.
This certifies that FOR VALUE RECEIVED ________________________ or
registered assigns (the "Registered Holder") is the owner of the number of
Warrants ("Warrants") specified above. Each Warrant initially entitles the
Registered Holder to purchase, subject to the terms and conditions set forth in
this Certificate and the Warrant Agreement (as hereinafter defined), one fully
paid and nonassessable share of common stock, $.05 par value ("Common Stock") of
HealthWatch, Inc., a Minnesota corporation (the "Company") at any time
commencing on the Initial Exercise Date and prior to the Expiration Date (both
as hereinafter defined), upon the presentation and surrender of this Warrant
Certificate with the Subscription Form on the reverse hereof duly executed, at
the corporate office of Corporate Stock Transfer, Inc., as Warrant Agent, or its
successor (the "Warrant Agent"), accompanied by payment of an amount equal to
$3.50 for each Warrant (the "Exercise Price") in lawful money of the United
States of America in cash or by official bank or certified check made payable to
HealthWatch, Inc.. The Company may, at its election, reduce the Exercise Price.
This Warrant Certificate and each Warrant represented hereby are issued
pursuant to and are subject in all respects to the terms and conditions set
forth in the Warrant Agreement (the "Warrant Agreement"), dated March 21, 2000
by and among the Company, the Warrant Agent and Commonwealth Associates, L.P.
In the event of certain contingencies provided for in the Warrant
Agreement, the Exercise Price or the number of shares of Common Stock subject to
purchase upon the exercise of each Warrant represented hereby are subject to
modification or adjustment.
Each Warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional shares of Common Stock will be issued. In
the case of the exercise of less than all the Warrants represented hereby, the
Company shall cancel this Warrant Certificate upon the
19
<PAGE>
surrender hereof and shall execute and deliver a new Warrant Certificate or
Warrant Certificates of like tenor, which the Warrant Agent shall countersign,
for the balance of such Warrants.
The term "Initial Exercise Date" shall mean March 21, 2000.
The term "Expiration Date" shall mean 5:00 P.M. (New York time) on March
21, 2005. If such date shall in the State of New York be a holiday or a day on
which the banks are authorized to close, then the Expiration Date shall mean
5:00 P.M. (New York time) the next following day which in the State of New York
is not a holiday or a day on which banks are authorized to close. The Company
may, at its election, extend the Expiration Date.
This Warrant Certificate is exchangeable, upon the surrender hereof by the
Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Warrants, each of such new Warrant Certificates to represent
such number of Warrants as shall be designated by such Registered Holder at the
time of such surrender. Upon due presentment with any tax or other governmental
charge imposed in connection therewith, for registration of transfer of this
Warrant Certificate at such office, a new Warrant Certificate or Warrant
Certificates representing an equal aggregate number of Warrants will be issued
to the transferee in exchange therefor, subject to the limitations provided in
the Warrant Agreement.
Prior to the exercise of any Warrant represented hereby, the Registered
Holder shall not be entitled to any of the rights of a stockholder of the
Company, including, without limitation, the right to vote or to receive
dividends or other distributions, and shall not be entitled to receive any
notice of any proceedings of the Company, except as provided in the Warrant
Agreement.
The Warrants represented hereby may be redeemed at the option of the
Company, at a redemption price of $.05 per Warrant at any time, provided the
Market Price (as defined in the Warrant Agreement) for the Common Stock shall
exceed 300% of the then current Exercise Price (the "Target Price") for the 20
consecutive trading days ending on the fifth trading day prior to the date of
the notice of redemption (the "Target Period") and subject to adjustment as set
forth in the Warrant Agreement and a registration statement covering the Warrant
Shares filed under the Securities Act of 1933, as amended, has been declared
effective and remains effective on the date fixed for redemption of the
Warrants. Notice of redemption shall be given not later than the thirtieth day
before the date fixed for redemption, all as provided in the Warrant Agreement.
The Warrants represented hereby are also subject to redemption on 10 days'
notice if the Common Stock achieves the Target Price for the Target Period prior
to December 21, 2000 and there is no effective registration statement covering
the resale of the Warrant Shares on the terms and subject to the conditions set
forth in the Warrant Agreement. On and after the date fixed for redemption, the
Registered Holder shall have no rights with respect to the Warrants represented
hereby except to receive the $.05 per Warrant upon surrender of this Warrant
Certificate.
Prior to due presentment for registration of transfer hereof, the Company
may deem and treat the Registered Holder as the absolute owner hereof and of
each Warrant represented hereby (notwithstanding any notations of ownership or
writing hereon made by anyone other than a duly
20
<PAGE>
authorized officer of the Company) for all purposes and shall not be affected by
any notice to the contrary.
This Warrant Certificate shall be governed by and construed in accordance
with the laws of the State of New York.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed, manually or in facsimile by two of its officers thereunto duly
authorized and a facsimile of its corporate seal to be imprinted hereon.
HEALTHWATCH, INC.
Dated: March 21, 2000
By: ____________________________________
Name: Paul W. Harrison
Title: President and Chief Executive
Officer
By: ____________________________________
Name:
Title:
[seal]
21
<PAGE>
SUBSCRIPTION FORM
To Be Executed by the Registered Holder
in Order to Exercise Warrants
The undersigned Registered Holder hereby irrevocably elects to exercise
Warrants represented by this Warrant Certificate, and to purchase the securities
issuable upon the exercise of such Warrants, and requests that certificates for
such securities shall be issued in the name of
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER
-------------------
-------------------
-------------------
-------------------
[please print or type name and address]
and be delivered to
-------------------
-------------------
-------------------
-------------------
[please print or type name and address]
and if such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, that a new Warrant Certificate for the balance of such
Warrants be registered in the name of, and delivered to, the Registered Holder
at the address stated below.
Dated: ______________________
______________________
______________________
______________________
Address
______________________
Taxpayer Identification Number
- --------------------------------
Signature Guaranteed
22
<PAGE>
ASSIGNMENT
To Be Executed by the Registered Holder
in Order to Assign Warrants
FOR VALUE RECEIVED, ____________________ hereby sells, assigns and transfers
unto
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER
-------------------
-------------------
-------------------
-------------------
[please print or type name and address]
_________________________ of the Warrants represented by this Warrant
Certificate, and hereby irrevocably constitutes and appoints
____________________________________ _______________________________ Attorney to
transfer this Warrant Certificate on the books of the Company, with full power
of substitution in the premises.
Dated: ____________________
X___________________________
Signature Guaranteed
____________________________
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE
GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (A BANK, STOCKBROKER, SAVINGS
AND LOAN ASSOCIATION OR CREDIT UNION WITH MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM) PURSUANT TO RULE 17Ad-15 OF THE SECURITIES EXCHANGE
ACT OF 1934.
23
<PAGE>
APPENDIX E
----------
AMENDED AND RESTATED
CERTIFICATE OF THE DESIGNATION,
PREFERENCES, RIGHTS AND LIMITATIONS OF THE
SERIES P PREFERRED STOCK OF
HEALTHWATCH, INC.
HealthWatch, Inc., a corporation organized and existing under the Minnesota
Business Corporation Act (the "Corporation"), does hereby certify that, pursuant
to authority conferred upon the Board of Directors by the Articles of
Incorporation, as amended, of the Corporation, said Board of Directors, acting
by unanimous consent effective as of the __th day of March, 2000, duly adopted
a Resolution providing for the amendment to the Certificate of Designation,
Preferences, Rights and Limitations of the Series P Preferred Stock, which
Resolution is as follows:
"RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors of this Corporation in accordance with the provisions of its
Articles of Incorporation, as amended, and in accordance with the consent of a
majority of the holders of the Series P Preferred Stock given at a special
meeting of the Series P Preferred Stock Shareholders on March 21, 2000, the
Certificate of the Designation, Preferences, Rights and Limitations of the
Series P Preferred Stock, which have a stated value of Ten Dollars ($10.00) per
share ("Stated Value") (hereinafter referred to as the "Series P Preferred
Stock"), is hereby amended and restated, in its entirety, as follows:
1. Dividends
(a) Subject to the following, the holders of shares of Series P Preferred Stock
shall be entitled to receive dividends at the rate of 8% per annum of the
Stated Value (as adjusted for any stock dividends, combinations or splits
with respect to such shares) from the date of issuance to until such shares
shall be converted into the Corporations Common Stock in accordance with
Section 4 hereof. Such dividends shall commence upon issuance and shall be
payable in preference to any dividend to any shares of Common Stock, and
shall be cumulative. Dividends earned after February 1, 1999 shall be paid
semi-annually on June 30 and December 31, commencing June 30, 1999, and in
every case shall be paid to holders of record as of the close of business
five business days before the dividend payment date. Dividends shall be
paid in cash or, at the option of the Corporation, in shares of the
Corporation's Common Stock, the value of such stock for the purpose of any
such payment to be equal to the average five-day closing bid price for the
Common Stock for the five-day period immediately preceding the record date
for such payment.
(b) No dividends (other than those payable solely in the Common
<PAGE>
Stock of the Corporation) shall be paid on any shares of Common Stock of
the Corporation during any fiscal year of the Corporation until dividends
on the Series P Preferred Stock shall have been paid or declared and set
apart during that fiscal year and any prior year in which dividends
accumulated but remain unpaid. Following any such payment or declaration,
the holders of any shares of Common Stock shall be entitled to receive
dividends, payable out of funds legally available therefor, when, as and if
declared by the Board of Directors.
In the event the Corporation shall declare a distribution payable in
securities of other persons, evidences of indebtedness issued by the Corporation
or other persons, assets (excluding cash dividends) or options or rights to
purchase any such securities or evidences of indebtedness, then, in each such
case the holders of the Series P Preferred Stock shall be entitled to a
proportionate share of any such distribution as though the holders of the Series
P Preferred Stock were the holders of the number of shares of Common Stock of
the Corporation into which their shares of Series P Preferred Stock were then
convertible as of the record date (assuming for this provision that there was no
limitation on the right of conversion of the Series P Preferred Stock) fixed for
the determination of the holders of Common Stock of the Corporation entitled to
receive such distribution.
2. Liquidation Preference
(a) In the event of any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, the holders of the Series P
Preferred Stock shall be entitled to receive, prior and in preference to
any distribution of any of the assets or surplus funds of the Corporation
to the holders of shares of Common Stock by reason of their ownership
thereof, the amount of $10.00 per share (as adjusted for any stock
dividends, combinations or splits with respect to such shares), plus all
accrued or declared but unpaid dividends on such shares for each share of
Series P Preferred Stock then held by them. If upon the occurrence of such
events, the assets and funds thus distributed among the holders of the
Series P Preferred Stock shall be insufficient to permit the payment to
such holders of the full aforesaid preferential amount, then the entire
assets and funds of the Corporation legally available for distribution
shall be distributed ratably among the holders of the Series P Preferred
Stock and holders of any other shares of Preferred Stock of the Corporation
in proportion to the preferential amount each such holder is otherwise
entitled to receive.
(b) After payment to the holders of the Series P Preferred Stock of the amounts
set forth in Section 2(a) above, and the payment to the holders of any
other series of Preferred Stock of the Corporation of any liquidation
preferences for such additional series of Preferred Stock, the entire
remaining assets and funds of the Corporation legally available for
distribution, if any, shall be distributed among the holders of the Common
Stock in proportion to the shares of Common Stock then held by them.
<PAGE>
(c) Whenever the distribution provided for in this Section 2 shall be payable
in securities or property other than cash, the value of such distribution
shall be the fair market value of such securities or other property as
determined in good faith by the Board of Directors.
3. Voting Rights
Unless and except to the extent otherwise required by law, the holders of
the Series P Preferred Stock shall have no voting power; provided that if any
dividends on the Series P Preferred Stock declared by the Board of Directors in
accordance with Section 1 hereof have not been paid for a period of one year or
more, the holders of Series P Preferred Stock shall, until such dividends have
been paid, be entitled, with the holders of the Common Stock, voting as a class,
to vote or act by written consent for the election of directors, with the number
of votes per share of Series P Preferred Stock in such election to be equal to
ten shares of Common Stock (as adjusted for any stock dividends, combinations or
splits with respect to such shares). Unless and except to the extent otherwise
required by law, the holders of the Series P Preferred Stock shall have no right
to vote as a class with respect to any matter. Should the Series P Preferred
Stock be entitled to vote on any matter pursuant to a requirement of law, each
holder of such stock shall be entitled to one vote in respect to each share of
such stock held of record in respect to such matter, unless some other vote is
required by law.
4. Conversion of Series P Preferred Stock into Common Stock
(a) Subject to the following conversion rights being approved by the holders of
a majority of a quorum of the shares of the Corporation's Common Stock and
the provisions of this Section 4, the holder of record of any share or
shares of Series P Preferred Stock and the Corporation shall have the
right, at his or its option, as the case may be, at any time after
issuance, to convert or to cause the conversion of each said share or
shares of Series P Preferred Stock into ten (10) (as adjusted for any stock
dividends, combinations or splits with respect to such shares) fully-paid
and non-assessable shares of Common Stock, $.01 par value (herein referred
to as "Common Stock"), of the Corporation. The Corporation shall not be
required to issue fractional shares in connection with the conversion of
any of the Series P Preferred Stock and shall, in lieu thereof, pay to the
holder requesting conversion, an amount equal to the value (determined by
the Corporation's Board of Directors) of such fractional share.
(b) Any holder of a share or shares of Series P Preferred Stock desiring to
convert such Series P Preferred Stock into Common Stock, shall surrender
the certificate or certificates representing the share or shares of Series
P Preferred Stock so to be converted, duly endorsed (if required by the
Corporation) to the Corporation or in blank, at the office of any Transfer
Agent for the Series P Preferred Stock (or such other place as may be
designated by the Corporation), and shall give written notice to the
Corporation at said office that he elects to convert the same as provided
above, and setting forth the name or names (with the
<PAGE>
address or addresses) in which the shares of Common Stock are to be issued.
(c) Conversion of Series P Preferred Stock shall be subject to the following
additional terms and provisions:
(1) As promptly as practicable after the surrender for conversion of any Series
P Preferred Stock, the Corporation shall deliver or cause to be delivered
at the principal office of the Transfer Agent for the Series P Preferred
Stock (or such other place as may be designated by the Corporation), to or
upon the written order of the holder of such Series P Preferred Stock,
certificates representing the shares of Common Stock issuable upon such
conversion issued in such name or names as such holder may direct. Shares
of the Series P Preferred Stock shall be deemed to have been converted as
of the close of business on the date of the surrender of the Series P
Preferred Stock for conversion, as provided above, and the rights of the
holders of such Series P Preferred Stock shall cease at such time, and the
person or persons in whose name or names the certificates for such shares
are to be issued shall be treated for all purposes as having become the
record holder or holders of such Common Stock at such time; provided,
however, that any such surrender on any date when the stock transfer books
of the Corporation shall be closed shall constitute the person or persons
in whose name or names the certificate for such shares are to be issued as
the record holder or holders thereof for all purposes at the close of
business on the next succeeding day on which such stock transfer books are
open.
(2) The Corporation shall pay all dividends accrued on the shares of Series P
Preferred Stock surrendered for conversion, such payment to be made in
cash, or at the option of the Corporation, in shares of the Corporation's
Common Stock, the value of such stock to be determined as set forth in
Section 1(a) hereof.
(3) The Corporation shall at all times reserve and keep available solely for
the purpose of issuance upon conversion of Series P Preferred Stock, as
herein provided, such number of shares of Common Stock as shall be issuable
upon the conversion of all outstanding Series P Preferred Stock.
(4) Prior to March 31, 2000, the holders of Series P Preferred Stock shall not
be entitled to convert nor shall the Corporation have the right to require
conversion of the Series P Preferred Stock held by such holders to the
extent that such conversion would result in such holders beneficially
owning (as determined in accordance with Section 13(d) of the Securities
Exchange Act of 1934 and the Rules thereunder) in the aggregate in excess
of forty-five percent (45%) of the then issued and
<PAGE>
outstanding shares of the Corporation's Common Stock.
(d) The issuance of certificates for shares of Common Stock upon conversion of
the Series P Preferred Stock shall be made without charge for any tax in
respect of such issuance. However, if any certificate is to be issued in a
name other than that of the holder of record of the Series P Preferred
Stock so converted, the person or persons requesting the issuance thereof
shall pay to the Corporation the amount of any tax which may be payable in
respect of any transfer involved in such issuance, or shall establish to
the satisfaction of the Corporation that such tax has been paid or is not
due and payable.
5. General
(a) In the event that the Corporation shall at any time prior to conversion
either (a) subdivide the outstanding shares of Common Stock into a greater
number of shares, (b) combine the outstanding shares of Common Stock into a
smaller number of shares, (c) change the outstanding shares of Common Stock
into the same or a given number of shares of any other class or classes of
stock, (d) declare on or in respect of the Common Stock a dividend payable
in shares or other securities of the Corporation, then the holders of the
Series P Preferred Stock shall be entitled to receive the same number of
shares or other securities of the Corporation, or shall be entitled to
subscribe for and purchase at the same price that the shares or securities
are offered to holders of Common Stock, the number of such shares or the
amount of such securities as will represent the same proportion of the
outstanding Common Stock prior to such increase or decrease as they would
have been entitled to receive or subscribe for, as the case may be, had
they been holders of the number of shares of Common Stock into which their
shares of Series P Preferred Stock were convertible on the record date
(assuming for the purposes of this provision that there was no limitation
on the right of conversion of the Series P Preferred Stock) for any such
dividend or subscription. The Board of Directors shall determine what
adjustments shall be made in the Stated Value in order to appropriately
reflect and account for any such change.
(b) In the event the Corporation at any time while any of the shares of Series
P Preferred Stock are outstanding shall be consolidated with or merged into
any other corporation or corporations, or shall sell or lease all or
substantially all of its property and business as an entirety, lawful
provision shall be made as part of the terms of such consolidation, merger,
sale, or lease so that the holder of any shares of Series P Preferred Stock
may thereafter receive in lieu of such shares of Common Stock otherwise
issuable to him upon conversion of his shares of Series P Preferred Stock
(assuming for the purpose of this provision that there was no limitation on
the right of conversion of the Series P Preferred Stock), but at the
conversion rate which would otherwise be in effect at the time of
conversion as hereinbefore provided, the same kind and amount of securities
or assets as may be issuable, distributable, or payable upon such
consolidation, merger, sale, or lease,
<PAGE>
with respect to shares of Common Stock of the Corporation. The Board of
Directors shall determine what adjustments shall be made in the Stated
Value in order to appropriately reflect and account for any such change.
(c) Nothing herein shall be deemed to require the Corporation in the event of
any such subdivision, combination, reclassification, recapitalization,
consolidation, merger or sale of assets, or liquidation, dissolution or
winding up, to issue or distribute fractional interests in shares of
capital stock or any other security of the Corporation or another issuer,
and the Corporation may make such arrangements as the Board of Directors of
the Corporation shall approve with respect to any such event for settlement
in lieu of issuance of a fractional interest in a share of capital stock or
other security of the Corporation or another issuer to any holder of the
Series P Preferred Stock.
(d) The shares of Series P Preferred Stock shall not be subject to the
operation of a purchase, retirement or sinking fund.
(e) The issuance of additional shares of Series P Preferred Stock shall not be
subject to any restrictions as to issuance, nor shall the holders of the
Series P Preferred Stock be entitled to any restriction with respect to the
issuance of shares of any other series of the Corporation's Common Stock or
Preferred Stock, or as to the powers, preferences or rights of any such
other series; provided that no series of additional shares of Preferred
Stock shall have any liquidation or other similar rights in preference to
the Series P Preferred Stock."
IN WITNESS WHEREOF, I have hereunto subscribed my hand this __th day of
April, 2000.
HEALTHWATCH, INC.
By: /s/ Paul W. Harrison
Paul W. Harrison, Chairman of the
Board of Directors
<PAGE>
FORM OF PROXY
HEALTHWATCH, INC.
The undersigned hereby appoints Paul W. Harrison and Marilyn May, or either
one of them, with full power of substitution, as proxy for the undersigned, to
vote all shares of: [check all that apply] (i) Common Stock; (ii) Series C 8%
Convertible Preferred Stock; or (iii) Series D 8% Convertible Preferred Stock of
HealthWatch, Inc. owned of record by the undersigned, with all powers the
undersigned would have if personally present at the Annual Meeting of
Stockholders of HealthWatch, Inc. to be held on June 23, 2000, at The W Atlanta
At Perimeter Center Hotel, 111 Perimeter Center West NE, Atlanta, Georgia 30346
and any adjournments thereof for the following purposes:
1. FOR ______ AGAINST ______ ABSTAIN FROM ______ the proposed Amendment to
the Articles of Incorporation as described in Item 1 of the notice of said
meeting.
2. FOR ______ AGAINST ______ ABSTAIN FROM _______ the proposed approval of
the HealthWatch, Inc. 2000 Stock Option Plan described in Item 2 of the notice
of said meeting.
3. FOR ______ AGAINST ______ ABSTAIN FROM ______ the proposed ratification
and approval of certain anti-dilution provisions contained in the Certificates
of Designation for the Series C Preferred and Series D Preferred Stock and in
certain warrants described in Item 3 of the notice of said meeting.
4. FOR ______ AGAINST ______ ABSTAIN FROM ______ the proposed ratification
and approval of the shares of Common Stock that may be issued upon conversion of
the Company's outstanding Series P Preferred Stock as described in Item 4 of the
notice of said meeting.
5. (a) FOR ALL NOMINEES ______ WITHHOLD ALL NOMINEES _____ for election,
by the holders of Common Stock, of Paul W. Harrison.
Instructions: To withhold authority to vote for any individual nominee,
place an X in the box on the left and strike a line through the nominees name
listed above.
(b) FOR ALL NOMINEES ______ WITHHOLD ALL NOMINEES _____ for election, by
the holders of Series C Preferred Stock, of Sheldon Misher.
Instructions: To withhold authority to vote for any individual nominee,
place an X in the box on the left and strike a line through the nominees name
listed above.
(c) FOR ALL NOMINEES ______ WITHHOLD ALL NOMINEES _____ for election, by
the holders of Series D Preferred Stock, of Robert Priddy.
Instructions: To withhold authority to vote for any individual nominee,
place an X in the box on the left and strike a line through the nominees name
listed above.
<PAGE>
6. To transact such other business as may properly come before the
meeting.
THIS PROXY WILL BE VOTED "FOR" PROPOSALS 1, 2, 3, 4 AND 5 IF NO INSTRUCTION
TO THE CONTRARY IS INDICATED OR IF NO INSTRUCTION IS GIVEN.
THIS PROXY IS BEING SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
HEALTHWATCH, INC.
Dated:______________, 2000
___________________________________________
Signature
Print Name:________________________________
Address:___________________________________
___________________________________________
Number of Common Shares Voted:_____________
Number of Series C Shares Voted:___________
Number of Series D Shares Voted:___________
Please mark, date and sign this Proxy and deliver it to any of the above-named
proxies if you do not plan to attend the Annual Meeting.
