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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended Commission File Number
- ------------------------------ ----------------------
March 31, 2000 0-11476
HEALTHWATCH, INC.
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(Exact Name of Small Business Issuer as Specified in Its Charter)
Minnesota 84-0916792
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
3525 Piedmont Road, 7 Piedmont Center Suite 300, Atlanta, GA 30305
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(Address of Principal Executive Offices)
(404) 262-0181
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(Issuer's Telephone Number, Including Area Code)
N/A
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(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
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Number of registrant's common shares outstanding at April 30, 2000
2,147,218
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Transitional Small Business Disclosure Format (check one)
Yes No X
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HEALTHWATCH, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
MARCH 31, 2000
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ASSETS
Current Assets
Cash $ 4,807,402
Accounts Receivable, net of allowance for
doubtful accounts of $19,845 45,176
Inventory 62,612
Due from Halis, Inc. 396,456
Other Current Assets 37,051
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Total current assets 5,348,697
Marketable equity securities - related party 1,311,451
Property and equipment, net 9,443
Intangible assets, net 1,135,436
Other assets 30,610
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Total Assets $ 7,835,637
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of Credit $ 500,000
Accounts payable 143,640
Accrued compensation and payroll taxes 13,161
Other accrued expenses - related parties 5,106
Other accrued expenses - unrelated parties 281,880
Deferred revenue 23,415
Current portion of debentures payable -
unrelated parties 25,000
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Total liabilities $ 992,203
Shareholders' Equity
Cumulative preferred stock, 1,000,000 shares
authorized, par value $.05 per share;
Series A, 2,600 shares issued and outstanding $ 130
Series P, 66,886 shares issued and outstanding 3,344
Series C, 4,000 shares issued and outstanding 200
Series D, 54,080 shares issued and outstanding 2,704
Common stock, $.05 par value; 10,000,000 shares
authorized, 2,142,751 issued and outstanding 107,137
Additional paid-in capital 28,283,425
Accumulated deficit $(21,553,506)
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Total shareholders' equity 6,843,434
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Total liabilities and shareholders' equity $ 7,835,637
============
(The accompanying notes are an integral part of these statements)
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HEALTHWATCH, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
Three Months Ended March 31,
2000 1999
----------------------------
Product sales $ 157,451 $ 314,145
Product cost of sales 26,279 162,844
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Gross profit 131,172 151,301
Operating costs and expenses:
Selling, general and administrative 440,029 260,951
Depreciation and amortization 85,413 91,372
Research and development 27,077 113,619
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Total operating costs and expenses 552,519 465,942
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Loss from continuing operations (421,347) (314,641)
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Other income (expense):
Equity in earnings of subsidiary (227,417) 7,808
Interest expense (6,850) (17,933)
Other income (expense) - -
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Total other income (expense) (234,266) (10,125)
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Net loss $(655,613) $(324,766)
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Net loss per share
$ (0.34) $ (0.61)
========= =========
Weighted average number of shares
outstanding 1,951,467 534,650*
========= =========
* Adjusted for 1 for 5 split
(The accompanying notes are an integral part of these statements.)
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HEALTHWATCH, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
Nine Months Ended March 31,
2000 1999
------------------------------
Product sales $ 479,916 $ 976,022
Product cost of sales 146,741 614,843
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Gross profit 333,175 361,179
Operating costs and expenses:
Selling, general and administrative 1,233,321 854,905
Depreciation and amortization 255,884 242,944
Research and development 93,881 167,566
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Total operating costs and expenses 1,583,086 1,265,415
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Loss from continuing operations (1,249,911) (904,236)
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Other income (expense):
Equity in earnings of subsidiary (458,220) 103,721
Interest expense (24,455) (50,624)
Other income (expense) 165,405 1,173
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Total other income (expense) (317,269) (54,270)
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Net loss $(1,567,180) $ (849,966)
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Net loss per share $ (1.17) $ (1.64)
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Weighted average number of shares
outstanding 1,339,112 518,094*
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* Adjusted for 1 for 5 split
(The accompanying notes are an integral part of these statements.)
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CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000
AND MARCH 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
2000 1999
----------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (655,614) $(324,766)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 85,413 91,372
Provision for bad debt - -
Equity in earnings of subsidiary 227,417 (7,808)
Issuance of stock for services 56,250 -
Decrease (increase) in assets:
Accounts receivable (15,891) 829
Inventory 1,138 11,215
Receivables - related parties (16,905)
Other current assets (29,221) (10,418)
Other assets (687)
Increase (decrease) in liabilities:
Accounts payable (3,658) (201,617)
Accrued expenses - related parties (55,332) (62,042)
Accrued expenses - unrelated parties (41,000) 222,610
Deferred revenue (4,068) 10,727
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Net cash used in operating activities (434,566) (287,490)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property & equipment - -
Decrease (increase) in note receivable - related party (335,712) (57,741)
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Net cash provided by (used in) investing activities (335,712) (57,741)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (repayment) of line of credit 500,000
Proceeds (repayment) of debentures payable (13,000)
Net proceeds (costs) of issuance of common stock 425,000
Net proceeds (costs) of issuance of preferred stock 4,828,200 -
Net proceeds from exercise of warrants 26,178 -
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Net cash provided by financing activities 5,354,378 412,000
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Increase (decrease) in cash 4,584,100 66,769
Cash - beginning of period 223,302 37,514
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Cash - end of period $4,807,402 $ 104,283
========== =========
</TABLE>
(The accompanying notes are an integral part of these statements)
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CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 2000
AND MARCH 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended March 31,
2000 1999
---------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,567,180) $(849,966)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 255,884 242,944
Provision for bad debt (6,465) -
Equity in earnings of subsidiary 458,220 (103,721)
Issuance of stock for services 217,874 -
Write-off of accrued expenses (165,405) -
Decrease (increase) in assets:
Accounts receivable 59,197 92,432
Inventory 21,252 93,965
Receivables - related parties (16,905)
Other current assets (27,120) (20,952)
Other assets 3,400 574
Increase (decrease) in liabilities:
Accounts payable 6,918 (232,660)
Accrued expenses - related parties (840) (151,608)
Accrued expenses - unrelated parties 26,750 32,949
Deferred revenue (5,115) (2,728)
Debentures payable - -
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Net cash used in operating activities (722,630) (915,676)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property & equipment - (1,590)
Decrease (increase) in note receivable - related party (246,092) (157,741)
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Net cash provided by (used in) investing activities (246,092) (159,331)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (repayment) of line of credit 500,000 -
Net proceeds (repayment) of debentures payable (100,000)
Net proceeds (costs) of issuance of common stock 50,000 425,000
Net proceeds (costs) of issuance of preferred stock 5,178,200 -
Net proceeds from exercise of warrants 26,178 -
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Net cash provided by financing activities 5,754,378 325,000
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Increase (decrease) in cash 4,785,656 (750,007)
Cash - beginning of period 21,746 854,290
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Cash - end of period $ 4,807,402 $ 104,283
=========== =========
</TABLE>
(The accompanying notes are an integral part of these statements.)
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HEALTHWATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2000
(UNAUDITED)
PRINCIPLES OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-QSB. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of the Company's financial position as of March 31, 2000, and its
results of operations and cash flows for the three months and nine months then
ended have been included. However, operating results for the interim periods
noted are not necessary indicative of the results that may be expected for the
year ending June 30, 2000. This report should be read in conjunction with the
Company's Financial Statements and Notes thereto contained in the Company's
annual report on Form 10-KSB for the year ended June 30, 1999.
MANAGEMENT'S OPERATING PLANS
HealthWatch has been in business for over a decade, but its information
technology business is still relatively new. Prior to fiscal year 1998,
HealthWatch was primarily in the business of manufacturing and selling medical
devices and related supplies. In 1997, management decided to phase out of the
medical device business and focus its energies on developing an information
technology business. The Company still provides maintenance support to a
number of customers who purchased medical devices in the past which are covered
under maintenance support agreements.
On October 1, 1998, as part of the transformation, the Company acquired Paul
Harrison Enterprises, Inc. ("PHE"). PHE owned the Merad Technology, a
sophisticated virtual software application utility that utilizes an advanced
multi-media object and relational database which creates knowledge objects that
can be used and reused in a virtually unlimited number of combinations to
provide efficient applications that can be accessed and processed in both an
Internet and Intranet environment (the "Merad Technology"). During fiscal 1998,
the Company had obtained a license from Merad Corporation ("Merad"), a
subsidiary then of PHE, for use of the Merad Technology and retained Merad to
develop proprietary software technology which was to be used to expand the
Company's product offerings to include products and services specially focused
on monitoring, capturing and managing medical information at the point of care.
The acquisition of PHE, which was a significant shareholder of Halis, Inc.
("Halis"), also increased the Company's ownership of the common stock of Halis,
a healthcare IT company, to approximately 19% of Halis outstanding shares of
common stock. On January 29, 1999, the Company acquired an additional 1,824,645
shares of Halis' common stock by converting $157,741 owed by Halis to the
Company pursuant to a debenture, bringing its interest in the Halis common stock
to approximately 22% and allowed it to account for its investment in Halis under
the equity method of accounting.
Halis, based in Atlanta, Georgia, supplies information technology and services
focused on the healthcare industry. Utilizing advanced healthcare models and
information technology, Halis has
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developed the HES System, which incorporates the Merad Technology, a single
system which integrates all of the major functions needed by clinics, hospitals,
healthcare practices, payors, long-term care facilities, laboratories,
pharmacies and home healthcare facilities.
In the PHE acquisition, the Shareholders of PHE received 66,886 shares of the
Company's Series P Preferred Stock, stated value $10.00 per share. Subject to
prior approval by the Company's common shareholders, the Series P Preferred
Stock 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 25,018 of the Series P Preferred Stock. All of the Series P
Preferred Stock is non-voting. The Series P Preferred Stock originally contained
a cumulative dividend feature of 12% which adjusts to a maximum of 24% if the
shares are not granted the right to convert by certain target dates. In
addition to the issuance of the Series P Preferred Stock, the PHE shareholders
shall be paid additional consideration based on the percentage of the revenues
that the Company receives in connection with the sale of software developed
utilizing the Merad Technology, up to a maximum of $7 million, and certain PHE
shareholders received options for approximately 625,000 shares of the Company's
common stock with an exercise price of $.96 per share in exchange for previously
outstanding options of PHE. Of the outstanding options issued in the PHE
acquisition, 116,667 (adjusted for December 1999 reverse split) were issued to
Paul W. Harrison. The PHE shareholders as a group, earned $94,437 in additional
consideration for the fiscal year ended June 30, 1999 and the $20,285 nine month
period ended March 31, 2000, of which 50% is due in cash and the balance in
common stock of the Company. During the three month period ended December 31,
1999, the PHE shareholders were issued 142,087 of common stock in exchange for
$53,283, which represented 50% of the additional consideration earned through
September 30, 1999. Additionally, during the three month period ended March 31,
2000, the PHE shareholders were paid $55,334 in cash. The outstanding balance
due to the PHE shareholders at March 31, 2000 is $6,107.
In connection with the private placement of the Company's Series D 8%
Convertible Preferred Stock during March 2000, the holders of Series P Preferred
Stock agreed to amend the Certificate of Designation, Rights and Limitations of
the Series P Preferred Stock. The amendments included a retroactive adjustment
to the cumulative dividend from the graduated dividend ranging between 12% and
24% to an 8% cumulative dividend from the date of issuance until the shares are
converted into common stock. The holders of Series P Preferred Stock also agreed
to allow the Company to pay the dividends in cash or stock, at the Company's
option. In addition, Paul W. Harrison, President, Chief Executive Officer and
Chairman of the Board of the Company, and David M. Engert, Chief Operating
Officer of the Company, agreed to waive any rights to payment of the additional
consideration and terminated the Consideration Agreement effective as of April
25, 2000.
As part of the Company's business plan, management is in the process of
identifying strategic acquisition candidates in the systems integration and
support area that will enhance the Company's ability to develop its information
management business. The first such candidate is Halis. On March 8, 2000, the
Company and Halis executed a letter of intent which set forth the initial terms
pursuant to which Halis will merge with and into a wholly owned subsidiary of
the Company. HealthWatch and Halis have operated under a Business Collaboration
Agreement (the "Collaboration Agreement") since October 1997. Under the
Collaboration Agreement, HealthWatch received a non-exclusive right to market
Halis' Healthcare Enterprise System (the "HES System") and receive a commission
on any sales that HealthWatch makes. Management believes that the merger with
Halis is an important step in developing its information management business.
The merger with HealthWatch is especially attractive to the Company because of
the HES System and
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the long term operating relationship and common management between the two
companies (Paul W. Harrison is President, Chief Executive Officer and Chairman
of the Board of both companies).
The Halis merger letter of intent provides for the issuance of shares of
HealthWatch common stock to Halis shareholders in exchange for all outstanding
stock of Halis. Each share of Halis common stock will be entitled to receive
that number of shares equal to $.33 divided by the average closing price of
HealthWatch's common stock for the ten trading days immediately preceding the
closing of the merger. As of March 31, 2000, Halis had outstanding 57,317,222
shares of common stock, of which 10,763,655 are owned by HealthWatch. Completion
of the merger is conditioned upon certain events such as execution of a
definitive merger agreement, approval by both companies' shareholders and
directors, obtaining any required governmental and regulatory approvals and the
absence of any material adverse changes in Halis' business or operations. The
letter of intent also contains a financing option under which HealthWatch 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. The letter of
intent also provides that, once HealthWatch 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 HealthWatch exercise
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 HealthWatch would own
in the aggregate approximately 50% of Halis' common stock.
During the month of April 2000, HealthWatch exercised the initial financing
option to purchase 5,000,000 shares of Halis common stock for the total price of
$1,000,000.
In order to provide the financing needed to implement the Company's business
plan, which includes additional investment in research and development and
marketing and advertising of its existing products, including the Merad
Technology, along with acquisition of strategic partners, such as Halis, the
Company has undertaken a private placement of its Series D 8% Convertible
Preferred Stock ("Series D Preferred Stock"). The terms of the offering provide
for a minimum offering of 50 Units for $5,000,000 and a maximum offering of 100
Units for $10,000,000, with a over-allotment of 100 Units for an additional
$10,000,000. The offering price for each Unit is $100,000. Each "Unit" consists
of 1,000 shares of Series D Preferred Stock and five year warrants to purchase
25% of the shares of Common Stock into which the Series D Preferred Stock is
initially convertible. During March 2000, HealthWatch closed on the issuance of
54,080 shares of Series D Preferred Stock raising gross proceeds of
approximately $5.4 Million. In early May 2000, the Company closed on an
additional 20,050 shares of Series D Preferred Stock raising approximately $2
Million.
NET INCOME (LOSS) PER SHARE
The net income (loss) per share was computed based on the weighted average
number of shares outstanding during the periods without taking into effect
outstanding options and warrants.
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INVENTORY
Inventory consisted of the following at March 31, 2000 and June 30, 1999:
3/31/00 6/30/99
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Raw materials $62,612 $59,000
Work in process - -
Finished goods - 24,864
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$62,612 $83,864
DEBENTURES PAYABLE
During the three months ended March 31, 2000, the debenture holders converted
$455,000 of their debentures and related accrued interest of $139,357 into
316,990 shares of common stock of the Company. As of March 31, 2000, only
$25,000 of the debentures remained outstanding. Debentures payable accrue
interest at a annual rate of 10%, payable quarterly. The debentures matured on
March 1, 1998, and are currently in default as to the payment of principal and
past due interest. The debentures could be converted, at the option of the
holder, at a conversion rate of one share of the Company's common stock for
every $70.00 of debentures, plus interest, converted. During fiscal 1999, the
Company repaid $100,000 of the principal amount of the debentures due. During
the nine month period ended March 31, 2000, the Company did not pay any
principal or interest on the debentures. As of March 31, 2000, $7,918 in accrued
but unpaid interest is outstanding on the debentures. The Company will attempt
to reach an agreement with the remaining holder of $25,000 of debentures prior
to the end of the current quarter in an effort to resolve the amounts
outstanding or otherwise bring the debentures out of their default status.
SUPPLEMENTAL SCHEDULE OF NON-CASH OPERATING, INVESTING AND FINANCING ACTIVITIES
During fiscal 1999, the Company received 1,824,645 of common stock of Halis in
exchange for a 6% convertible debenture and subsequent advances totaling
$157,741. The conversion brought the Company's total investment in Halis to
approximately 22% of Halis outstanding common stock at that time. As a result of
this stock acquisition, the Company converted its accounting for this long-term
investment to the equity method. Under generally accepted accounting principles,
the change is considered a change in accounting principles and requires the
Company to recalculate and restate the carrying value of investment as if the
investment was accounted for under the equity method as of the date of its
initial acquisition.
During the three and nine months ended March 31, 2000, the Company issued stock
for current services of $56,250 and $217,874 of which $37,500 and $117,500 was
issued to Paul W. Harrison, HealthWatch's Chairman and CEO. Additionally, Mr.
Harrison converted $65,000 of loans payable into 173,333 shares of common stock
during the three months ended December 31, 1999. Accrued liabilities of $151,250
and $371,620 for professional and consulting fees were converted into 80,667 and
872,707 shares of common stock during the three and nine months ended March 31,
2000. The debenture holders converted $455,000 and related accrued interest of
$139,356 into 316,900 shares
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of common stock of the Company. Additionally, during the three and nine months
ended March 31, 2000, the Company's Series A Preferred shareholders converted
9,000 and 1,087,000 preferred shares into 23,667 and 3,579,928 shares of common
stock in accordance with the Series A Certificate of Designation, Rights and
Preferences.
SUBSEQUENT EVENTS
In accordance with the terms of the Halis merger letter of intent dated March 8,
2000, the Company exercised its financing option to purchase 5,000,000 shares of
Halis common stock for the total price of $1,000,000. The Company now has an
option to purchase an additional 25,000,000 shares of Halis common stock for an
additional investment of $5,000,000.
In May 2000, the Company closed on an additional 20,050 shares of Series D
Preferred Stock raising approximately $2 Million. This increased the total
number of Series D Preferred Stock issued and outstanding to 74,130, which
represents an investment in the Company of approximately $7.4 Million.
INVESTMENT IN HALIS COMMON STOCK; HALIS BUSINESS COLLABORATION
As of March 31, 2000, the Company held 10,763,655 shares of the common stock of
Halis, representing approximately 21% of the total outstanding shares. The
Company does not hold the Halis shares for trading purposes, but rather holds
them for long-term investment purposes. During fiscal 1999, the Company acquired
an additional 1,824,645 shares of Halis common stock increasing its ownership
interest in Halis to its present holdings. Consequently, until this additional
acquisition, the Company reflected its interest in Halis at cost, but now is
required by generally accepted accounting principles to account for its
investment in Halis on the equity method of accounting, thereby reflecting its
portion of Halis' earnings or losses in the Company's income statement with a
corollary adjustment to its investment account. Additionally, the Company was
required to recalculate and restate the carrying value of its investment as if
the investment was accounted for under the equity method as of the date of its
initial acquisition. The Company's change in method to the equity method is
considered a change in accounting principle. The cumulative effect of changing
to the new accounting principle on the amount of retained earnings at the
beginning of the fiscal year is required to be reported in net income of the
period of change. Due to the Company's determination that a decline in market
value at June 30, 1998 was other than temporary, and the related unrealized loss
of $1,824,605 was included in net income for the year ended June 30, 1998, the
Company did not restate the value of the shares held at June 30, 1998 above the
fair market value at that date of $318,708. Hence, there is no cumulative
effect of an accounting change reported in the Company's statement of
operations. Subsequent increases in the carrying value of the investment
related to additional shares being acquired in October 1998 and January 1999 as
discussed above. The company's share of Halis' net loss for the three-and nine
month periods ended March 31, 2000 was $227,417 and $458,220, respectively.
Due to the accounting change taking place in the third quarter of fiscal 1999,
the Company was required to restate its operating results for each of the
interim periods since the close of its prior
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fiscal year. The change was to decrease the net loss for the quarter ended
September 30, 1998 by $319,287, decrease the net loss for the quarter ended
December 31, 1998 by $112,898 and decrease the net loss for the quarter ended
March 31, 1999 by $7,808. The change in net income at the time of the change to
the equity method was an increase of $432,185. The increase is the result of
recording the Company's share of Halis' net income of $103,721 and the reversal
of a $336,272 write down of the investment to fair market value during the
quarter ended September 30, 1998.
At March 31, 2000, the calculated value exceeds the carrying value by $369,831.
In management's opinion, the previous decline was temporary in nature, and
therefore, no adjustment was necessary to the carrying value as a result of the
use of the equity method of accounting. Additionally the carrying value of the
Halis investment under the equity method exceeded the 21% equity in the
underlying assets of Halis at the date of conversion to the equity method by
$1,845,329. This excess is being amortized on the straight line method over 10
years, or $184,533 per year.
FORWARD-LOOKING STATEMENTS
This Form 10-QSB contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act and Section 21E of the Securities and
Exchange Act of 1934, as amended, which are intended to be covered by the safe
harbors created thereby. These statements include the plans and objectives of
the Company for future operations. The forward-looking statements included
herein are based on current expectations that involve numerous risks and
uncertainties. The Company's plans and objectives are based on the assumption
that the Company's entry into the healthcare industry will be successful, that
competitive conditions within the healthcare industry will not change materially
or adversely, and that there will be no material adverse change in the Company's
operations or business. Assumptions relating to the foregoing involve judgments
with respect to, among other things, future economic, competitive and market
conditions, as well as future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the control of the
Company. Although the Company believes that the assumptions underlying the
forward-looking statements included herein are reasonable, the inclusion of such
information should not be regarded as a representation by the Company, or any
other person, that the objectives and plans of the Company will be achieved.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
During fiscal 2000, the Company continued efforts to develop proprietary
technology utilizing Merad and to market, as a reseller, Halis' Healthcare
Enterprise System to the Company's customers. The Company expects to continue to
expand its collaborative efforts with Halis and to expand its efforts to market
the Halis healthcare enterprise system to the Company's customer base. The
Company also intends to explore the possibility of developing information
systems utilizing the Merad technology for other information intensive
industries, such as financial services, insurance and real estate.
The Company has incurred significant operating losses during the past several
years and at June 30, 1999 had an accumulated deficit of $19,986,327. The
Company will require additional debt or equity capital to sustain operations and
to continue its business development efforts. The report of the Company's
independent public accountants for the years ended June 30, 1999 and 1998,
contained a paragraph noting substantial doubt regarding the Company's ability
to continue as a going concern.
Total assets at March 31, 2000 were $7,835,637, representing an increase of
$4,287,665 from June 30, 1999. Cash and Due from Halis, Inc. represented
$4,785,656 and $246,092, respectively, of the increase. The increase was offset
by amortization of intangible assets and a decrease in value in the Halis
investment, under the equity method, of $222,246 and $458,220, respectively.
Other decreases include accounts receivable of $52,732 and inventory of $21,252.
Current liabilities decreased by $651,666 from $1,643,869 at June 30, 1999 to
$992,203 at March 31, 2000. The decrease is primarily attributable to the
conversion of accrued expenses and shareholder loans totaling $469,028 into
common stock of the Company, the conversion of debentures and related accrued
interest of $455,000 and 139,356 into common stock of the Company, and the
write-off of a previously recorded $165,000 liability. These decreases are
offset by borrowing against the Company's line of credit of $500,000.
Shareholders' equity increased from $1,904,103 at June 30, 1999 to $6,843,434 at
March 31, 2000,
-12-
<PAGE>
an increase of $4,939,331. This increase is attributable to: (1) the issuance of
892,707 shares of common stock for services valued at $539,495; (2) conversion
of $65,000 in shareholder loans for the issuance of 173,333 shares of common
stock; (3) conversion of $53,283 of additional consideration due to former PHE
shareholders for 142,087 shares of common stock; (4) conversion of debentures
and accrued interest of $594,356 into 316,990 shares of common stock of the
Company; (5) exercise of warrants for the issuance of 51,800 shares on common
stock for $26,178; and (6) net proceeds of $50,000, $375,000 and $4,803,200 from
the issuance of 142,858 shares of common stock, 4,000 shares of Series C
convertible preferred stock and 54,080 shares of Series D convertible preferred
stock, respectively. An offsetting decrease is attributable to a net loss for
the nine month period of $1,567,180.
RESULTS OF OPERATIONS
Revenues declined by $156,694 and $496,106, or 49.9% and 50.8%, for the three
and nine month periods ended March 31, 2000, respectively, when compared to
similar periods in 1999. The decline in revenue is primarily due to the
Company's continued shift from a product driven supply company to a software
information technology company. The Company recognized $12,213 and $21,665 in
royalties from Halis for the three and nine month periods ended March 31, 2000,
respectively, under its 10% royalty agreement with Halis for sales of the HES
System. Such royalties are included in product sales.
Gross profit was 83.3% and 69.4% for the three and nine month periods ended
March 31, 2000, respectively, as compared to 48.2% and 37.0% for the same
periods in 1999. The increase in gross profit percentage is due primarily to
greatly reduced manufacturing overhead expenses, the mature nature of the
Company's remaining product lines, previous write-downs of slow moving inventory
to lower of cost or market and a general shift from product sales to service and
support.
Selling, general and administrative expenses increased by $179,078 and $378,416
for the three and nine month periods ended March 31, 2000, respectively, from
the comparable 1999 periods due to increased consulting and professional fees.
Depreciation and amortization decreased by $5,959 for the three months ended,
and increased by $18,899 for the nine months ended March 31, 2000, as compared
to the same 1999 periods as a result of additional amortization associated with
the Company's October 1, 1999 acquisition of the Merad Technology and related
current period amortization. Research and development costs decreased by
$86,542 and $73,685 for the three and nine month periods ended March 31, 2000,
as compared with the same 1999 periods due to the Company's shift from a product
driven supply company to a software information technology company.
During fiscal year ended June 30, 1999, the Company changed its method of
accounting for its investment in Halis to the equity method from the available-
for-sale fair value method because it acquired additional interests bringing its
ownership interest in Halis to approximately 21%. For the three and nine month
periods ended March 31, 2000, the Company recognized losses from its investment
in Halis of $227,417 and $458,220, respectively. For the same 1999 periods, the
Company recognized income of $7,808 and $103,721. During the three month period
ended December 31, 1999, the Company determined that a liability of
approximately $165,000 from the early 1990's related to a previously acquired,
inactive subsidiary, was no longer appropriate. The Company has received no
communication from the creditor and management believes that the Company never
will. Such amount is recorded as miscellaneous income in the accompanying
-13-
<PAGE>
consolidated statements of operations.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, the Company had $4,807,402 of cash. During the three and
nine month periods ended March 31, 2000, operating activities consumed $434,566
and $722,630 of cash as compared to $287,490 and $915,676 for the same periods
in 1999. The increase in cash used in operations for the three months ended
March 31, 2000 are the result of increased consulting and professional fees. The
primary reason for the decrease in cash used in operations for the nine months
ended March 31, 2000 are reductions in inventory and accounts receivable due the
Company's shift from a product driven supply company to a software information
technology company.
Due to the Company's operating losses, it has been required to raise additional
equity capital to fund its operations. Capital expenditures during this period
have been virtually nonexistent. Since the beginning of fiscal 2000, the
Company has raised $5,254,378 through the sale of 142,858 shares of its common
stock, 4,000 shares of its Series C convertible preferred stock, 54,080 shares
of its Series D convertible preferred stock, and the exercise of warrants for
65,761 shares of common stock. During fiscal 2000, the Company's Series A
preferred shareholders, converted 1,096,000 shares of Series A preferred stock
into 3,579,928 shares of common stock in accordance with the conversion rights
under the Series A preferred stock. Additionally, the Company received a
$2,000,000 line of credit, of which $500,000 was borrowed during the three
months ended March 31, 2000.
The Company's 10% Convertible Secured Debentures in the principal amount of
$480,000 were due and payable on March 1, 1998. During the three months ended
March 31, 2000, the debenture holders converted $455,000 and $139,356 in related
accrued interest into 316,990 shares of company common stock. At March 31,
2000, only $25,000 of the debentures remained outstanding.
Due the Company's success in raising additional capital through the private
placement of its securities, management has begun to implement its business
plan, which includes securing the additional personnel needed to manage the
marketing and advertising of its products, additional investment in research and
development and the acquisition of strategic partners needed to grow the
Company's revenues. During the quarter ended March 31, 2000, HealthWatch was
hired a Chief Operating Officer with an expertise in the healthcare information
technology industry to assist the Company's marketing and development of its
products. In addition, the Company entered into a letter of intent to merge
with Halis, Inc., an information technology company which has developed
transaction processing application for the healthcare industry. HealthWatch and
Halis have a long history with each other, as HealthWatch is the largest Halis
shareholder and Paul W. Harrison is the President, Chief Executive Officer and
Chairman of both companies. Management believes that securing the business
contacts and application products of Halis, specifically the HES System, will
provide HealthWatch with a key element needed to succeed in the development of
its information technology business
-14-
<PAGE>
PART II.
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the nine month period ended March 31, 2000, the Company issued a total of
3,579,928 shares of common stock upon conversion of 1,096,000 shares of the
Series A Preferred Stock. During the nine month period ended March 31, 2000, the
Company issued 1,757,403 shares of common stock, 892,707 of which was in lieu of
services, 142,087 in connection with the PHE acquisition, 173,333 in exchange
for shareholder loans and 142,858 in a private placement of securities. The
Company also issued 4,000 shares of Series C Cumulative Preferred Stock in
exchange for net proceeds of $375,000. Additionally, the Company issued 54,080
shares of Series D Cumulative Preferred Stock in exchange for net proceeds of
$4,803,220. The Company issued the securities without registration under the
Securities Act of 1933, as amended, in reliance upon an exemption from the
registration requirements of such Act contained in Section 4(2) thereof. All of
the foregoing securities were acquired for investment purposes.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
On March 1, 1998, $580,000 principal amount of the Company's 10% Secured
Convertible Debentures ("Debentures") were due and payable. The Company was
unable to pay the Debentures in accordance with their terms and the Company
obtained no further extension of the maturity date from the holders. During
fiscal 1999, $100,000 in principal of the Debentures was paid to the holders
thereof. The Debentures are convertible by the holders thereof into shares of
common stock of the Company. In January and February 2000, the Debenture holders
converted $455,000 of their Debentures and related accrued interest of $139,357
into 316,990 shares of common stock of the Company. As of March 31, 2000, only
$25,000 of the Debentures remain outstanding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On March 21, 2000, the Company called a special meeting of the holders of the
Company's Series P Preferred Stock. The purpose of the meeting was to consider
and vote upon two amendments to the Certificate of Designation, Preferences,
Rights and Limitations of the Series P Preferred Stock of HealthWatch, Inc. (the
"Certificate of Designation"), two amendments to the Stockholders' Agent
Agreement dated October 1, 1998, to ratify and consent to the issuance of the
Series C 8% Convertible Preferred Stock and consent to the issuance of the
Series D 8% Convertible Preferred Stock.
The first amendment to the Certificate of Designation changed the dividend rate
on the Series P Preferred Stock from a rate of 12% that escalated to 24% per
annum to a rate of 8% retroactive to the date of issuance. The second amendment
changed the provision of the Certificate of Designation that provided that the
dividends are payable in cash or shares of common stock at the option of the
Series P stockholders to allow the dividends to be paid in cash or common stock
at the
-15-
<PAGE>
option of the Company.
The first amendment to the Stockholders' Agent Agreement extended the
Restriction Period from eighteen months to twenty- four months. The original
Restriction Period ran from November 1, 1998 to April 30, 2000. The amended
Restriction Period would run from November 1, 1998 to November 1, 2000. The
second amendment to the Stockholders' Agent Agreement changed the limit on the
number of shares that may be sold during the Restriction Period from 100,000
during any 30 day period to 20,000 during any 30 day period.
The four proposals to amend the Certificate of Designation and Stockholders'
Agent Agreement were approved by a majority of the holders of Series P Preferred
Stock in attendance at the meeting or represented by proxy at the meeting. A
total of 62.565 votes were cast for the proposals and 2.1596 votes were cast
against the proposals.
The proposals to ratify and consent to the issuance of the Series C 8%
Convertible Preferred Stock and consent to the issuance of the Series D 8%
Convertible Preferred Stock.were approved by a majority of the holders of Series
P Preferred Stock in attendance at the meeting or represented by proxy at the
meeting. A total of 65.4981 votes were cast for the proposals and 1.5055 votes
were cast against the proposals and 1.0383 abstained from the vote.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS. The following exhibits are filed with or incorporated by
reference into this report:
3.1 Articles of Incorporation, as amended, of the Company /1/
3.2 Bylaws, as amended, of the Company /2/
4.1 Specimen form of the Company's Common Stock certificate /2/
4.2 HealthWatch, Inc. Stock Option Plan of 1989 /3/
4.3 Form of Incentive Stock Option Agreement /3/
4.4 Form of Non-statutory Stock Option Agreement /3/
4.5 HealthWatch, Inc. Stock Option Plan of 1993 /4/
4.6 HealthWatch, Inc. Stock Option Plan of 1996 /5/
4.7 HealthWatch, Inc. 1995 Stock Grant and Salary Deferral Plan /5/
4.8 Subscription and Purchase Agreement dated as of the 14th day of August 1992
between the Company and the Purchasers of the Company's 10% convertible
senior debentures due 1997 (including as an appendix thereto the form of
the debenture certificate) /6/
-16-
<PAGE>
4.9 Subscription and Purchase Agreement between HealthWatch, Inc. and Halis,
Inc. /7/
4.10 Certificate of the Designation, Preferences, Rights and Limitations of the
6% Series A Convertible Preferred Stock of HealthWatch, Inc. /10/
4.11 Certificate of the Designation, Preferences, Rights and Limitations of the
Series P Preferred Stock of HealthWatch, Inc. /10/
10.1 Business Collaboration Agreement dated as of October 10, 1997 between the
Company and Halis, Inc. /8/
10.2 License and Software Development Agreement dated as of October 10, 1997
between the Company and Merad Corporation /8/
10.3 Consulting Agreement dated as of October 10, 1997 among the Company, Paul
Harrison Enterprises, Inc. and Paul Harrison /8/
10.5 Agreement and Plan of Merger dated as of September 30, 1998 among
HealthWatch, Inc., Merad Software, Inc. and Paul Harrison Enterprises, Inc.
/9/
99.2 Certificate of the Designation, Preferences, Rights and Limitations of the
Series C 8% Convertible Preferred Stock of HealthWatch, Inc. /12/
99.3 Certificate of the Designation, Preferences, Rights and Limitations of the
Series D 8% Convertible Preferred Stock of HealthWatch, Inc. /12/
99.4 Letter of Intent between HealthWatch, Inc. and Halis, Inc. dated March 8,
2000 /13/
27.1 Financial Data Schedule (for SEC use only).
(b) REPORTS ON FORM 8-K. The following reports on Form 8-K were filed during
the quarter ended March 31, 2000.
10.8 Press Release stating that HealthWatch, Inc. had raised net proceeds of
approximately $4.8 Million from sale of its securities. /12/
/1/ Incorporated herein by reference to the Company's Annual Report, Form 10-K,
for the year ended June 30, 1990, File No, 0-11476.
/2/ Incorporated herein by reference to Registration Statement, Form S-18 (File
No. 2-85688D).
/3/ Incorporated herein by reference to Registration Statement S-2 (File No.
33-42831).
/4/ Incorporated herein by reference to the Company's Annual Report Form 10-KSB,
for the year ended June 30, 1994(File No. 0-11476).
-17-
<PAGE>
/5/ Incorporated herein by reference to the Company's Annual Report Form 10-
KSB, for the year ended June 30, 1996 (File No. 0-11476).
/6/ Incorporated herein by reference to Registration Statement SB-2 (File No.
33-73462).
/7/ Incorporated herein by reference to the Company's Annual Report Form 10-
KSB, for the year ended June 30, 1997 (File No. 0-11476).
/8/ Incorporated herein by reference to the Company's Quarterly Report
Form 10QSB, for the quarter ended December 31, 1997.
/9/ Incorporated herein by reference to the Company's Report, Form 8-K, dated
October 1, 1998.
/10/ Incorporated herein by reference to the Company's Annual Report Form 10-KSB
for the year ended June 30, 1998 (File No. 0-11476).
/11/ Incorporated herein by reference to the Company's Report, Form 8-K, dated
December 28, 1999.
/12/ Incorporated herein by reference to the Company's Report, Form 8-K, dated
March 21, 2000
/13/ Filed herewith.
-18-
<PAGE>
SIGNATURES
In accordance with the Exchange Act, the registrant caused this report to be
signed by the undersigned, thereunto duly authorized.
Date: May 12, 2000 HealthWatch, Inc.
By: /s/ Paul W. Harrison
--------------------------------
Paul W. Harrison
(Chairman, President and Chief
Executive Officer)
(Principal Financial Officer)
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<PAGE>
EXHIBIT INDEX
Number Description
- ------ -----------
3.1 Articles of Incorporation, as amended, of the Company /1/
3.2 Bylaws, as amended, of the Company /2/
4.1 Specimen form of the Company's Common Stock certificate /2/
4.2 HealthWatch, Inc. Stock Option Plan of 1989 /3/
4.3 Form of Incentive Stock Option Agreement /3/
4.4 Form of Non-statutory Stock Option Agreement /3/
4.5 HealthWatch, Inc. Stock Option Plan of 1993 /4/
4.6 HealthWatch, Inc. Stock Option Plan of 1996 /5/
4.7 HealthWatch, Inc. 1995 Stock Grant and Salary Deferral Plan /5/
4.8 Subscription and Purchase Agreement dated as of the 14th day of August 1992
between the Company and the Purchasers of the Company's 10% convertible
senior debentures due 1997 (including as an appendix thereto the form of
the debenture certificate) /6/
4.9 Subscription and Purchase Agreement between HealthWatch, Inc. and Halis,
Inc. /7/
4.10 Certificate of the Designation, Preferences, Rights and Limitations of the
6% Series A Convertible Preferred Stock of HealthWatch, Inc. /10/
4.11 Certificate of the Designation, Preferences, Rights and Limitations of the
Series P Preferred Stock of HealthWatch, Inc. /10/
10.1 Business Collaboration Agreement dated as of October 10, 1997 between the
Company and Halis, Inc. /8/
10.2 License and Software Development Agreement dated as of October 10, 1997
between the Company and Merad Corporation /8/
10.3 Consulting Agreement dated as of October 10, 1997 among the Company, Paul
Harrison Enterprises, Inc. and Paul Harrison /8/
10.4 Consulting Agreement dated as of October 10, 1997 between the Company and
Larry Fisher /8/
10.5 Agreement and Plan of Merger dated as of September 30, 1998 among
HealthWatch, Inc., Merad Software, Inc. and Paul Harrison Enterprises, Inc.
/9/
10.6 Letter of Intent between HealthWatch, Inc. and Halis, Inc. dated July 14,
1998 /10/
99.2 Certificate of the Designation, Preferences, Rights and Limitations of the
Series C 8% Convertible Preferred Stock of HealthWatch, Inc. /12/
99.3 Certificate of the Designation, Preferences, Rights and Limitations of the
Series D 8% Convertible Preferred Stock of HealthWatch, Inc. /12/
99.4 Letter of Intent between HealthWatch, Inc. and Halis, Inc. dated March 8,
2000 /13/
10.8 Press Release stating that HealthWatch, Inc. had raised net proceeds of
approximately $4.8 Million from sale of its securities. /12/
27.1 Financial Data Schedule (for SEC use only).
/1/ Incorporated herein by reference to the Company's Annual Report, Form 10-K.
for the year ended June 30, 1990, file No. 0-11476.
/2/ Incorporated herein by reference to Registration Statement, Form S-18 (File
No. 2-85688D).
-20-
<PAGE>
/3/ Incorporated herein by reference to Registration Statement S-2 (File No.
33-42831).
/4/ Incorporated herein by reference to the Company's Annual Report Form 10-
KSB, for the year ended June 30, 1994 (File No. 0-11476).
/5/ Incorporated herein by reference to the Company's Annual Report Form 10-
KSB, for the year ended June 30, 1996 (File No. 0-11476).
/6/ Incorporated herein by reference to Registration Statement SB-2 (File No.
33-73462).
/7/ Incorporated herein by reference to the Company's Annual Report Form 10-
KSB, for the year ended June 30, 1997 (File No. 0-11476).
/8/ Incorporated herein by reference to the Company's Quarterly Report Form
10QSB, for the quarter ended December 31, 1997.
/9/ Incorporated herein by reference to the Company's Report, Form 8-K. dated
October 1, 1998.
/10/ Incorporated herein by reference to the Company's Annual Report Form 10-
KSB, for the year ended June 30, 1998 (File No. 0-11476).
/11/ Incorporated herein by reference to the Company's Report, Form 8-K, dated
December 28, 1999.
/12/ Incorporated herein by reference to the Company's Report, Form 8-K, dated
March 21, 2000
/13/ Filed herewith.
-21-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF HEALTHWATCH, INC. FOR THE NINE MONTHS ENDED MARCH 31,
2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 4,807,402
<SECURITIES> 0
<RECEIVABLES> 65,021
<ALLOWANCES> 19,845
<INVENTORY> 62,612
<CURRENT-ASSETS> 5,348,697
<PP&E> 591,480
<DEPRECIATION> 582,037
<TOTAL-ASSETS> 7,835,637
<CURRENT-LIABILITIES> 992,203
<BONDS> 0
0
6,378
<COMMON> 107,137
<OTHER-SE> 6,729,919
<TOTAL-LIABILITY-AND-EQUITY> 7,835,637
<SALES> 479,916
<TOTAL-REVENUES> 479,916
<CGS> 146,741
<TOTAL-COSTS> 1,583,086
<OTHER-EXPENSES> 317,269
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,455
<INCOME-PRETAX> (1,567,180)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,567,180)
<EPS-BASIC> (1.17)
<EPS-DILUTED> (1.17)
</TABLE>
<PAGE>
EXHIBIT 99.4
Letter of Intent
March 8, 2000
Board of Directors
Halis, Inc.
3525 Piedmont Road
7 Piedmont Center
Suite 300
Atlanta, Georgia 30305
Re: Proposed Merger of HealthWatch, Inc. and Halis, Inc.
Gentlemen:
This letter will confirm the various discussions that we have had regarding
the acquisition by HealthWatch, Inc. a Minnesota corporation (the "Purchaser"),
by means of merger of Halis, Inc., a Georgia corporation (the "Seller") into
Purchaser or a wholly-owned subsidiary of Purchaser (the "Subsidiary"). Subject
to the preparation, execution and performance of a definitive written agreement
(the "Agreement") containing such terms, conditions, covenants, representations
and warranties as either party may in good faith require, I understand that we
have agreed in principle to the following general terms:
1. Basic Transaction.
On a date to be agreed upon (the "Closing Date"), Seller will merge into
Purchaser or Subsidiary under the terms of which each shareholder of Seller will
receive that fraction of a share of Purchaser's Common Stock, $.05 par value,
equal to $.33 divided by the average closing price of Purchaser's Common Stock
on the NASDAQ Small Cap market for the ten days preceding the Closing Date in
return for cancellation of each outstanding share of Seller's Common Stock, $.01
par value. The $.33 value referenced in the preceding sentence reflects
approximately a 50% premium over the average closing price of Seller's Common
Stock for the ten trading days immediately preceding the date of this letter.
2. Representations and Warranties.
Seller will make the representations and warranties usual and customary in
such a transaction, including, without limitation, the following: (a) the clear
and unencumbered title of Seller to all of its assets; (b) all of the Seller's
personal property in good working condition subject to ordinary wear and tear;
and (c) the right and power of Seller to assign all of its license agreements
and customer contracts to Purchaser.
-1-
<PAGE>
Halis Board of Directors
March 8, 2000
3. Access.
Seller will grant Purchaser and its representatives access to the
personnel, property, contracts, books and records of Seller and will furnish to
Purchaser and its representatives such financial, operating and other
information with respect to the business and properties of Seller as Purchaser
shall, from time to time, reasonably request. In connection with its examination
of Seller, with prior written notice to Seller, Purchaser and its
representatives may communicate with any person having business dealings with
Seller. All of such access, investigation and communication by Purchaser and
its representatives will be conducted in a manner designed not to materially
interfere with the normal business of Seller.
4. Exclusive Dealing.
In consideration for the expenditures of time, effort and expense to be
undertaken by Purchaser in connection with the preparation and execution of the
Agreement and Purchaser's investigation of Seller which is a condition precedent
to the execution of the Agreement, the Halis Board of Directors will not and
will not cause the Seller to, between the date of the execution of this letter
and the Closing Date, enter into or conduct any discussions with any other
prospective purchaser of the stock or assets of Seller. In addition, the Halis
Board of Directors shall use its best efforts to preserve intact the business
organization and goodwill of Seller.
5. Non-Solicitation.
Purchaser agrees that during the period commencing on the date of the
execution of this letter and ending on the Closing Date, or for one year after
the termination of this letter, Purchaser shall not, directly or indirectly,
solicit or attempt to solicit, any person who is an employee of the Seller at
that time, or induce or attempt to induce any employee of the Seller to
terminate his or her employment relationship with the Seller.
6. Disclosure.
Except as and to the extent required by law or required for the Purchaser
or Seller, as the case may be, to obtain financing, due diligence or legal and
financial opinions, each party agrees that it will not release or issue any
reports, statements or releases pertaining to this letter of intent and the
implementation hereof without the prior written consent of the other party
hereto.
7. Costs.
Each party will be responsible for and bear all of its own costs and
expenses (including any broker's or finder's fees and the expenses of its
representatives) incurred at any time in connection with pursuing or
consummating the proposed merger.
-2-
<PAGE>
Halis Board of Directors
March 8, 2000
8. Conditions.
The closing of the merger will be conditioned upon (i) Purchaser and Seller
obtaining appropriate approval of their respective shareholders; (ii) Purchaser
having raised a minimum of $5,000,000 from issuances of equity securities of
Purchaser, prior to closing; and (iii) obtaining required governmental and
regulatory approvals.
9. Financing Option.
Prior to the closing of the merger, Purchaser shall have the unconditional
right to purchase up to $1,000,000 of the Seller's Common Stock at $.20 per
share, and upon any such financing Purchaser shall have a three month option to
invest up to an additional $5,000,000 at the same $.20 per share.
10. Entire Agreement.
Except as provided in paragraphs 1, 3, 4, 5 and 9 hereof, which are
intended to represent binding agreements of the parties hereto ("Binding
Provisions"), this letter is intended to be, and shall be construed only as, a
letter of intent summarizing and evidencing the discussions between Purchaser
and Seller to the date hereof. Except as otherwise provided in the preceding
sentence, the respective rights and obligations of Purchaser and Seller remain
to be defined in the Agreement, into which this letter and our prior discussions
shall merge. The Binding Provisions constitute the entire agreement by and
between the parties, supersede all prior oral or written agreements,
understandings, representations and warranties, and courses of conduct and
dealing between the parties on the subject matter hereof. Except as otherwise
provided in this letter, the Binding Provisions may be amended or modified only
by a writing executed by each of the parties.
11. Governing Law.
The Binding Provisions will be governed by and construed under the laws of
the State of Georgia without regard to conflict of laws principles.
12. Termination.
This letter will automatically terminate, unless extended by mutual consent
of the parties, upon the earlier to occur of : (a) the date the Agreement is
signed by all parties, or (b) two months after the date this letter is signed by
the Seller. In addition, this letter may be terminated earlier upon written
notice by Purchaser to Seller unilaterally, for any reason or no reason, with or
without cause, at any time; provided however, that the termination hereof will
have no effect on the liability of a party for a breach of any of the Binding
Provisions. Upon termination of this letter, the parties shall continue to be
bound by all of the Binding Provisions other than those relating to "Access" and
"Exclusive Dealings," which obligations will survive any such termination in
accordance with its terms for a period of six months.
-3-
<PAGE>
Halis Board of Directors
March 8, 2000
13. Counterparts.
This letter may be executed in one or more counterparts, each of which will
be deemed to be an original copy of this letter and all of which, when taken
together, will be deemed to constitute one and the same agreement.
If the foregoing correctly expresses our understanding, please indicate
your agreement by signing and dating the enclosed copy of this letter in the
space indicated below and returning it to me at the above letterhead address.
Upon receipt of a signed copy of this letter, I will instruct our attorneys to
prepare a draft of the Agreement and related documentation for review by you and
your counsel.
Yours very truly,
HEALTHWATCH, INC.
By: /s/ Paul W. Harrison
--------------------------
Paul Harrison, President
THE FOREGOING CORRECTLY EXPRESSES
OUR UNDERSTANDING,
THIS 8/TH/ DAY OF MARCH, 2000
HALIS, INC.
By: /s/ Joel Greenspan
---------------------------
Dr. Joel Greenspan, Director
-4-
