<PAGE> 1
As filed with the Securities and Exchange Commission on October 15, 1997
REGISTRATION NO. 333-34215
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
POST EFFECTIVE AMENDMENT
NO. 2 TO
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
HALIS, INC.
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(Exact name of Registrant as specified in its charter)
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<S> <C>
Georgia 58-1366235
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>
9040 ROSWELL ROAD
SUITE 470
ATLANTA, GEORGIA 30350
(770) 641-5555
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
PAUL W. HARRISON,
CHAIRMAN, CHIEF EXECUTIVE OFFICER AND PRESIDENT
9040 ROSWELL ROAD, SUITE 470
ATLANTA, GEORGIA 30350
(770) 641-5555
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copy to:
WILLIAM L. MEYER, ESQ.
SMITH, GAMBRELL & RUSSELL, LLP
Suite 3100, Promenade II
1230 Peachtree Street, N.E.
ATLANTA, GEORGIA 30309-3592
Approximate date of commencement of proposed sale to the public: As
soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [x]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
____________________________________________
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE> 2
PROSPECTUS
45,335,709 SHARES
HALIS, INC.
COMMON STOCK
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The 45,335,709 shares of Common Stock, $0.01 par value per share (the
"Common Stock") of HALIS, Inc. ("HALIS" or the "Company") offered hereby are
being sold by certain holders of the Common Stock of the Company named herein
under "Selling Shareholders." Unless the context otherwise requires, the
holders of the Common Stock selling shares hereunder are hereinafter
collectively referred to as the "Selling Shareholders." All of the shares
covered hereby will only be sold by the Selling Shareholders. The Company will
not receive any of the proceeds from the shares sold by the Selling
Shareholders. See "Selling Shareholders," "Plan of Distribution" and "Use of
Proceeds."
The Common Stock is traded on the Nasdaq Bulletin Board under the symbol
"HLIS." On October 14, 1997, the average of the closing bid and asked price for
the Common Stock, as reported on the Nasdaq Bulletin Board, was $1.75 per share.
--------------
SEE "RISK FACTORS" ON PAGES 4 TO 8 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK
OFFERED HEREBY.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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OFFERING UNDERWRITING PROCEEDS TO PROCEEDS
PRICE TO DISCOUNTS AND SELLING TO
PUBLIC COMMISSIONS SHAREHOLDERS COMPANY
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<S> <C> <C> <C> <C>
Per Share . . . . . . . . . . . . . . . See Text See Text See Text See Text
Total . . . . . . . . . . . . . . . . Below Below Below Below
====================================================================================================================================
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The Selling Shareholders have advised the Company that they may elect to
offer for sale and to sell the Common Stock from time to time in one or more
transactions through brokers in the over-the-counter market, in private
transactions, or otherwise, in each case at market prices then prevailing or
obtainable. Accordingly, sales prices and proceeds to the Selling Shareholders
will depend upon price fluctuations and the manner of sale. The Selling
Shareholders may effect such transactions by selling to or through one or more
broker-dealers, and such broker-dealers may receive compensation in the form of
underwriting discounts, brokerage commissions or similar fees in amounts which
may vary from transaction to transaction. Such brokerage commissions and
charges and the legal fees, if any, will be paid by the Selling Shareholders.
The Company will bear all other expenses in connection with registering the
shares offered hereby, which expenses are estimated to total approximately
$63,953. See "Plan of Distribution."
The date of this Prospectus is October 15, 1997
<PAGE> 3
AVAILABLE INFORMATION
The Company is subject to certain informational requirements of the
Securities Exchange Act of 1934 (the "1934 Act") and, in accordance therewith,
files reports and other information with the Securities and Exchange Commission
(the "Commission"). Such reports and other information can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's
regional offices located at Seven World Trade Center, 13th Floor, New York, New
York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material can also be obtained at prescribed
rates by writing to the Securities and Exchange Commission, Public Reference
Section, 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, the
Commission maintains a web site that contains reports, proxy and information
statements and other information regarding the Company at http://www.sec.gov.
The Company has filed a Registration Statement on Form S-2 (together
with all amendments and exhibits filed or to be filed in connection therewith,
the "Registration Statement") under the Securities Act of 1933, as amended,
with respect to the Common Stock offered hereby. This Prospectus does not
contain all the information set forth in the Registration Statement, certain
parts of which are omitted in accordance with the rules and regulations of the
Commission. Statements contained herein concerning the provisions of documents
are necessarily summaries of such documents, and each statement is qualified in
its entirety by reference to the copy of the applicable document filed with the
Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed with the Commission pursuant
to the 1934 Act are hereby incorporated in this Prospectus by reference:
1. The Company's Annual Report on Form 10-KSB for the year ended
December 31, 1996;
2. The Company's Quarterly Report on Form 10-QSB for the quarter
ended March 31, 1997;
3. The Company's Quarterly Report on Form 10-QSB for the quarter
ended June 30, 1997;
4. The Company's Current Report on Form 8-K dated January 10,
1997;
5. The Company's Amendment No. 1 on Form 8-K/A dated March 28,
1997 to its Current Report on Form 8-K dated January 10, 1997;
6. The Company's Current Report on Form 8-K dated January 24,
1997;
7. The Company's Amendment No. 1 on Form 8-K/A dated April 7,
1997 to its Current Report on Form 8-K dated January 24, 1997;
8. The Company's Current Report on Form 8-K dated January 31,
1997;
9. The Company's Amendment No. 1 on Form 8-K/A dated April 16,
1997 to its Current Report on Form 8-K dated January 31, 1997;
10. The Company's Current Report on Form 8-K dated May 2, 1997;
11. The Company's Amendment No. 1 on Form 8-K/A dated July 16,
1997 to its Current Report or Form 8-K dated May 2, 1997;
12. The Company's Current Report on Form 8-K dated July 7, 1997;
13. The Company's Amendment No. 1 on Form 8-K/A dated September
18, 1997 to its Current Report on Form 8-K dated July 7, 1997;
14. The Company's Current Report on Form 8-K dated July 31, 1997;
15. The Company's Amendment No. 1 on Form 8-K/A dated October 13,
1997 to its Current Report on Form 8-K dated July 31, 1997; and
16. The description of the Company's Common Stock contained in the
Company's Registration Statement on Form 8-A as filed with the
Commission on October 9, 1987.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified and superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom a
Prospectus is delivered, upon written or oral request of such person, a copy of
any and all of the information that has been incorporated by reference in this
Prospectus (excluding exhibits unless such exhibits are specifically
incorporated by reference into such documents). Please direct such requests to
Larry Fisher, Executive Vice President, HALIS, Inc., 9040 Roswell Road, Suite
470, Atlanta, Georgia 30350, telephone number (770) 641-5555.
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<PAGE> 4
THE COMPANY
HALIS, Inc. ("HALIS" or the "Company"), based in Atlanta, Georgia, is
a publicly traded company and supplier of information technology and services,
focusing on the healthcare industry. HALIS currently is implementing a
corporate strategy which combines external acquisitions and internal sales
growth, including the development of business partner relationships.
HALIS has offices in Atlanta, Chicago and Tampa and intends to expand
its geographic presence to Texas, California and the Northeast. The Atlanta
operation includes sales, service, and consulting functions, and currently
serves as the HALIS national Customer Service Center. The Chicago facility
performs healthcare technology-driven services and may serve as the Company's
outsourcing center for customers who wish to take advantage of the HALIS
technology, but do not wish to operate their own internal systems. The Tampa
office provides management, billing and related administrative services to
healthcare providers.
Utilizing advanced healthcare models and information technology not
previously available to the marketplace, HALIS has developed HALIS Healthcare
Enterprise System, a single program for the healthcare industry. This
Healthcare Enterprise System integrates all of the major functions needed by
clinics, hospitals, practices, payers, long term care facilities, laboratories,
pharmacies and home healthcare, the eight major markets into which HALIS
competes. HALIS is currently building out the specific features required by
each of these eight markets. Subsets of or all of the Healthcare Enterprise
System can be used by each of these markets and can be combined to provide a
complete solution for Integrated Healthcare Delivery Networks. These Networks
are being formed by hospitals, clinics, payers, practice management companies,
individual practices, and other entities which are involved in the delivery and
management of healthcare services.
The Company's systems business will be targeted to healthcare industry
participants such as physician practices, HMO's, home healthcare providers and
hospitals. The Company expects to capitalize on the healthcare industry's
demand for more software variety, updates, convenience, lower pricing, and
better support services. In addition, the Company will provide information
management systems to management companies to help manage their point-of- care
systems information. For example, in the healthcare industry, the Company will
provide an information management system to managed care organizations that
will aid in managing the networks of medical practices.
The Company's executive offices are located at 9040 Roswell Road,
Suite 470, Atlanta, Georgia 30350 and its telephone number is (770) 641-5555.
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RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE
FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND
ITS BUSINESS BEFORE PURCHASING ANY OF THE SHARES OF COMMON STOCK OFFERED
HEREBY. EXCEPT FOR HISTORICAL INFORMATION CONTAINED IN THIS PROSPECTUS AND IN
THE DOCUMENTS INCORPORATED IN THIS PROSPECTUS BY REFERENCE, THE MATTERS
DISCUSSED HEREIN AND THEREIN CONTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE SUGGESTED IN THE FORWARD-LOOKING STATEMENTS, INCLUDING WITHOUT
LIMITATION, THE EFFECT OF ECONOMIC CONDITIONS, PRODUCT DEMAND, COMPETITIVE
PRODUCTS AND OTHER RISKS DETAILED HEREIN AND IN THE COMPANY'S OTHER FILINGS
WITH THE COMMISSION.
THE PURCHASE OF THE SECURITIES OFFERED HEREBY INVOLVES SIGNIFICANT
RISKS. PROSPECTIVE INVESTORS SHOULD GIVE CAREFUL ATTENTION TO THE FOLLOWING
STATEMENTS RESPECTING CERTAIN RISKS APPLICABLE TO THE OFFERING.
Uncertainty of Market Acceptance; Reliance on a Limited Number of
Products. HALIS' Healthcare Enterprise System is a new technology. Achieving
market acceptance for HALIS' products will require substantial marketing
efforts and expenditure to inform potential customers of the distinctive
characteristics and benefits of these products. Since HALIS has limited
marketing experience, financial and other resources to undertake extensive
independent marketing activities, there can be no assurance that HALIS will be
able to market its products successfully. Furthermore, HALIS is dependent on a
limited number of products and on one technology for most of its revenues.
There can be no assurance that HALIS will be able to commercialize its
healthcare information technology profitably.
Acquisitions and Integration. An important element of HALIS' business
strategy is to expand through acquisitions. HALIS' future success is dependent
upon its ability to finance acquisitions and effectively integrate acquired
businesses with HALIS' operations. Although HALIS believes that it will be
able to effect such integration, there can be no assurance that past or future
acquisitions will be successfully integrated or that any such acquisition will
otherwise be successful. In addition, the financial performance of HALIS is
now and will continue to be subject to various risks associated with the
acquisition of businesses, including the financial effects associated with the
integration of such businesses. Although HALIS has made a number of
acquisitions over the past six months, there can be no assurance that HALIS'
acquisition strategy will be successful. Without a successful acquisition
strategy, HALIS believes that its prospects for revenue growth are
significantly reduced.
Limited History of Profitability. HALIS has not reported any profits
for a full year of operations since fiscal 1991. In addition, each of the
companies which HALIS has recently acquired has a limited operating history.
There can be no certainty regarding HALIS' ability to achieve or sustain
profitability in the future. Whether or not HALIS is able to operate
profitably, HALIS may require additional capital to finance its operations.
There is no assurance that any financing, if required, can be obtained when
needed or on terms acceptable to HALIS.
Healthcare Industry and Marketing Changes. The healthcare industry is
subject to changing political, economic and regulatory influences that may
affect the procurement practices and other operational aspects of the
healthcare industry. During the past several years, the healthcare industry
has been subject to an increase in governmental regulation of, among other
things, reimbursement rates and certain capital expenditures. A number of
lawmakers have announced that they intend to propose programs to reform the
U.S. healthcare system. These programs may contain proposals to increase
governmental involvement in healthcare, lower reimbursement rates
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<PAGE> 6
and otherwise change the operating environment for HALIS' customers. Cost
containment measures instituted by healthcare providers could result in greater
selectivity in the allocation of capital funds, which could have an adverse
effect on HALIS' ability to sell its products and services. HALIS cannot
predict with any certainty what effect, if any, such proposals or healthcare
reforms might have on its business, financial condition or results of
operations.
In addition, the healthcare industry is currently undergoing
significant consolidation of healthcare providers resulting in a smaller number
of larger healthcare delivery enterprises. The changing industry profile
produced by this consolidation could have an adverse impact on HALIS' margins
and revenues due to increased competition.
Control by Paul Harrison. Paul Harrison, the Chairman of the Board,
Chief Executive Officer and President of HALIS, exercises voting control over
approximately 34% of the outstanding shares of Common Stock of HALIS. As a
result of such concentration of ownership, Mr. Harrison has the ability to
exert significant influence on the policies and affairs of the Company and
corporate actions requiring shareholder approval, including the election of the
members of the Board of Directors. This concentration of ownership could have
the effect of delaying, deferring or preventing a change of control of the
Company, including any business combination with an unaffiliated party, and
could also affect the price that investors might be willing to pay in the
future for shares of Common Stock. See "Selling Shareholders."
Dependence on Management and Key Personnel. The success of HALIS
depends to a large degree upon the personal efforts and ability of its Chief
Executive Officer and President, Paul Harrison, and its Executive Vice
President, Chief Administrative Officer and Secretary, Larry Fisher. The loss
of the services of either Mr. Harrison or Mr. Fisher would have a materially
adverse effect on HALIS. HALIS has entered into employment agreements with
Messrs. Harrison and Fisher. HALIS does not maintain key man life insurance on
any of its executives.
The Company's future operating results also depend in significant part
upon the continued service of its key technical, consulting and senior
management personnel and its continuing ability to attract and retain highly
qualified technical and managerial personnel. Competition for such personnel is
intense, and there can be no assurance that the Company will retain its key
managerial or technical personnel or attract such personnel in the future. The
Company has at times experienced difficulty recruiting qualified personnel, and
there can be no assurance that the Company will not experience such
difficulties in the future. The Company actively recruits qualified product
development, consulting and sales and marketing personnel. If the Company is
unable to hire and retain qualified personnel in the future, such inability
could have a material adverse effect on the Company's business, operating
results and financial condition.
Technological Change; Proprietary Technology. Future advances in the
healthcare information systems industry could lead to new technologies,
products or services that are competitive with the products and services
offered by HALIS. HALIS' success will depend, in part, on its ability to be
responsive to technological developments and challenges. Such technological
advances could also lower the cost of such products and services or otherwise
result in competitive pricing pressures, which could have an adverse effect on
HALIS. To remain competitive in the evolving healthcare information systems
marketplace, HALIS must develop new products on a timely basis. The failure to
develop competitive products or to introduce new products on a timely basis
could have an adverse effect on HALIS' future financial performance.
Protection of Proprietary Information. HALIS does not have any
patents or registered copyrights and does not anticipate obtaining any patents
or registered copyrights in the near future. HALIS treats its software and
related technical data as confidential and relies on internal nondisclosure
safeguards, including confidentiality agreements with employees, and on laws
protecting trade secrets, to protect what it regards as proprietary
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<PAGE> 7
information. Competitors and customers may nevertheless be able to copy
certain functional aspects of HALIS' products. In addition, under the terms of
certain agreements by which HALIS licenses its software for inclusion in
software systems marketed by other manufacturers, HALIS has been required to
place in escrow the source code for the licensed software. In the event of a
default by HALIS in its performance under such agreements, the licensee would
be entitled to receive and retain such source code for its own use.
Competition. The industry in which HALIS operates is highly
competitive and subject to continuing change in the manner in which products
and services are marketed and vendors are selected by customers. The primary
competitive factors are scope and quality of products and service and support
capabilities. Certain current and potential competitors have greater resources
than HALIS.
Limited Trading Volume. On October 30, 1992, HALIS' Common Stock
ceased quotation on the Nasdaq Small Cap Market. Price information on HALIS'
Common Stock is now available on the Nasdaq "Bulletin Board." HALIS has
experienced limited trading volume in its stock historically. There is no
assurance that a public market for HALIS' securities will continue to be made
or that shareholders will be able to avail themselves of a public trading
market for the Common Stock in the future.
Moreover, sales and potential sales of substantial amounts of the
Company's Common Stock in the public market pursuant to this Prospectus, Rule
144 or otherwise could adversely affect the prevailing market prices for the
Common Stock and impair the Company's ability to raise additional capital
through the sale of equity securities.
No Dividends. HALIS has never paid cash dividends on its Common Stock
and has no plans to pay cash dividends in the foreseeable future. The policy
of HALIS' Board of Directors is to retain all available earnings for use in the
operation and expansion of HALIS' business.
Possible Issuance of Preferred Stock. HALIS is authorized to issue
up to 5,000,000 shares of Preferred Stock, $.10 par value. Preferred Stock
may be issued in one or more series, the terms of which may be determined at
the time of issuance by the Board of Directors, without further action by
shareholders, and may include voting rights (including the right to vote as a
series on particular matters), preferences as to dividends and liquidation,
conversion and redemption rights and sinking fund provisions. No Preferred
Stock is currently outstanding, and HALIS has no present plans for the issuance
thereof. The issuance of any series of Preferred Stock could affect the rights
of the holders of Common Stock, and therefore, reduce the value of the Common
Stock and make it less likely that holders of Common Stock would receive a
premium for the sale of their shares of Common Stock. In particular, specific
rights granted to future holders of Preferred Stock could be issued to restrict
HALIS' ability to merge with or sell its assets to a third party.
Possible Volatility of Stock Price. The market price of the Common
Stock may be subject to significant fluctuations in response to HALIS'
operating results and other factors, and there can be no assurance that the
market price of the Common Stock will not decline below the offering price
herein. In addition, the stock market has from time to time experienced
extreme price and volume fluctuations, particularly in the high technology
sector, which have often been unrelated to the operating performance of
particular companies. Such fluctuations and factors such as announcements of
technological innovations or new products by HALIS or its competitors or third
parties, as well as market conditions in the computer software or hardware
industries and healthcare reform measures, may have a significant effect on the
market price of HALIS' Common Stock.
Fluctuations in Quarterly Performance. HALIS' product sales will be
derived primarily from the sale of software systems and related services in the
healthcare industry, the market for which is still developing.
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<PAGE> 8
Accordingly, HALIS' quarterly results of operations are difficult to predict,
and delays in the closing of sales near the end of the quarter could cause
quarterly revenues and, to a greater degree, operating and net income to fall
substantially short of anticipated levels. HALIS' total revenues and net income
levels could also be adversely affected by cancellations or delays of orders,
interruptions or delays in the supply of key components, changes in customer
base or product mix, seasonal patterns of capital spending by customers, delays
in purchase decisions due to new product announcements by HALIS or its
competitors, increased competition and reductions in average selling prices.
Working Capital Requirements; Need for Additional Financing. HALIS
will require additional capital or other financing to finance its operations
and continued growth. There can be no assurance that HALIS will be able to
obtain such financing if and when needed, or that if obtained, it will be
sufficient or on terms and conditions acceptable to HALIS. If the Board of
Directors of HALIS determines to obtain additional capital through the issuance
of additional equity securities of HALIS, there can be no assurance that such
shares will be issued at prices or on terms equal to the offering price and
terms of this offering. Any such future equity financing could be dilutive to
shareholders of the Company.
Pending Litigation. In February 1997, a complaint was filed in the
State Court of Fulton County, Georgia alleging, among other things, breach of
contract in connection with the termination by HALIS of its merger agreement
with Advanced Custom Computer Solutions, Inc. ("ACCS"), which HALIS advised
ACCS was terminated in November 1996 due to the impossibility of ACCS'
fulfilling certain conditions to closing therein. In addition, the complaint
alleges that the defendants made false and misleading statements to the
plaintiffs for the purpose of inducing plaintiffs to lend money to HALIS. The
complaint seeks damages in the amount of at least $2.0 million (the exact
amount of such damages to be proved at trial), additional damages to be
determined by the jury at trial and punitive damages. HALIS has answered
denying the allegations of liability in the complaint and intends to vigorously
contest the lawsuit. There can be no assurance, however, that HALIS will be
successful in its defense or that the resolution of this matter will not have a
material adverse effect on the financial condition or results of operation of
HALIS.
In August 1995, HALIS entered into a Finders Fee Agreement with Penny
Sellers, pursuant to which HALIS agreed to pay Ms. Sellers a commission equal
to 10% of the amount of any equity investments in HALIS or software licensing
fees paid to HALIS in respect of transactions introduced to HALIS by Ms.
Sellers. The compensation payable to Ms. Sellers pursuant to the Finders Fee
Agreement is limited to $500,000. In late August 1995, Ms. Sellers introduced
HALIS to the principals of AUBIS, L.L.C. ("AUBIS"). To date, HALIS has paid
$19,350 to Ms. Sellers, which represents 10% of the investment made by the
principals of AUBIS in a private placement of convertible notes (in which
private placement other investors besides the AUBIS principals participated)
and 10% of the amounts received by HALIS from the sale of Fisher Restaurant
Management Systems by AUBIS.
Ms. Sellers has claimed that the entirety of a convertible notes
offering completed in 1996 (in which an aggregate of $1,470,000 was raised by
HALIS) would not have been successful but for her introduction of the AUBIS
principals to HALIS. As a result, Ms. Sellers has made a claim for 10% of all
amounts raised in the notes offering. Ms. Sellers has also made a claim, based
on the same rationale, to 10% of all future capital funding raised by HALIS (up
to the $500,000 maximum compensation). In this regard HALIS has recently
completed a private placement which raised gross proceeds of approximately
$2,000,000. Finally, Ms. Sellers has made a claim for 10% of the value of AHS,
ASI, and HSI, which were acquired by HALIS in November, 1996. Ms. Sellers
filed suit with respect to these claims against HALIS, Larry Fisher and Paul W.
Harrison on July 13, 1997, in the State Court of Fulton County, Georgia seeking
actual damages from the Company and Messrs. Fisher and Harrison in the amount of
$480,534.70 and punitive damages from Messrs. Fisher and Harrison in the amount
of $1,000,000. HALIS' management believes that these claims are outside the
scope of the Finders' Fee Agreement and intends vigorously to contest them.
There can be no assurance, however, that HALIS will be successful in its defense
or
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<PAGE> 9
that the resolution of this matter will not have a material adverse effect on
the financial condition or results of operation of HALIS.
BUSINESS
GENERAL
HALIS, based in Atlanta, Georgia, is a publicly traded company and
supplier of information technology and services, focusing on the healthcare
industry. HALIS currently is implementing a corporate strategy which combines
external acquisitions and internal sales growth, including the development of
business partner relationships.
HALIS has offices in Atlanta, Chicago and Tampa and intends to expand
its geographic presence to Texas, California and the Northeast. The Atlanta
operation includes sales, service, and consulting functions, and currently
serves as the HALIS national Customer Service Center. The Chicago facility
performs healthcare technology-driven services and may serve as the Company's
outsourcing center for customers who wish to take advantage of the HALIS
technology, but do not wish to operate their own internal systems. The Tampa
office provides management, billing and related administrative services to
health care providers.
Utilizing advanced healthcare models and information technology not
previously available to the marketplace, HALIS has developed HALIS Healthcare
Enterprise System, a single program for the healthcare industry. This
Healthcare Enterprise System integrates all of the major functions needed by
clinics, hospitals, practices, payers, long term care facilities, laboratories,
pharmacies and home healthcare, the eight major markets into which HALIS
competes. HALIS is currently building out the specific features required by
each of these eight markets. Subsets of or all of the Healthcare Enterprise
System can be used by each of these markets and can be combined to provide a
complete solution for Integrated Healthcare Delivery Networks. These Networks
are being formed by hospitals, clinics, payers, practice management companies,
individual practices, and other entities which are involved in the delivery and
management of healthcare services.
The Company's systems business will be targeted to healthcare industry
participants such as physician practices, HMO's, home healthcare providers and
hospitals. The Company expects to capitalize on the healthcare industry's
demand for more software variety, updates, convenience, lower pricing, and
better support services. In addition, the Company will provide information
management systems to management companies to help manage their point-of- care
systems information. For example, in the healthcare industry, the Company will
provide an information management system to managed care organizations that
will aid in managing the networks of medical practices.
COMPANY BACKGROUND
The Company was organized in 1979 by Larry Fisher to provide vertical
software applications for potential business users of IBM minicomputers. The
initial applications provided by the Company consisted principally of business
management software directed at a variety of different businesses, including
pharmacies, supermarkets and general retail, as well as restaurants. Spurred
by the introduction of the IBM Personal Computer, or "PC," the Company developed
its own proprietary PC-based business applications software in 1984. At the same
time, the Company's previously diffuse marketing approach was restructured to
focus on its most successful market niche - the restaurant industry.
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Due to a downturn in its business in 1994, the Company was unable to
commit sufficient resources to continue research and development of its
products to keep pace in the hospitality market place. As a result, the market
was not receptive to its products because the Company's competitors were able
to provide enhancements that were being demanded by hospitality customers. In
1995, the Company's Board of Directors concluded that the Company needed a
significant shift in its strategic plan to continue in operation. As a
consequence, the Company developed a strategy to grow its business through the
acquisition of select software companies in the hospitality and healthcare
markets. See "--Company Strategy." Pursuant to this strategy, the Company
merged with AUBIS Hospitality Systems, Inc. ("AHS"), AUBIS Systems Integration,
Inc. ("ASI") and HALIS Software, Inc. ("HSI") in November 1996. The Company
made three additional acquisitions in January 1997, one additional acquisition
in May 1997, and two additional acquisitions in July 1997. See "--Recent
Acquisitions."
INDUSTRY BACKGROUND
The healthcare industry is undergoing change at an unprecedented rate.
As a user of healthcare services, most people have direct experience with some
of these changes. Hospitals are buying physician practices; individual
practices are combining their efforts and forming independent practice
associations; physician practice management companies are either buying or
managing groups of practices and clinics; and insurance companies are entering
many of these markets.
The implications of these changes are numerous, but one of the key
factors in the success of each of these organizations is the availability of
information throughout the organization, beginning at the point of service. It
is estimated that as many as 90 manual steps are required to service a patient
and process a claim generated by an office visit. The process is fraught with
error; the physician often does not know all of the patient's history, and if
and how much he or she will be paid for the performance of a given service due
to the complexities in the benefit plans and management contracts under which
the practice operates.
As a result of the new healthcare environment, management expects
significant increases in spending on healthcare technology and related services
over the next several years. Historically, the industry has spent
approximately two to three percent of its revenues on information technology
and services, compared to six to ten percent of revenues for companies in other
industries, according to published research reports. Management believes that,
over the next several years, spending on healthcare technology and related
services will approach the levels experienced by other industries. This trend,
combined with the overall growth of the health care industry, is expected by
management to yield significant opportunities for companies who deliver
information technology products and services to the healthcare market.
Healthcare delivery costs have increased dramatically in recent years.
The growing influence of managed care has resulted in increasing pressure on
participants in the healthcare system to contain costs. Accordingly,
healthcare systems are migrating toward more managed care reimbursement,
including discounted fee for service and capitation. Under capitation,
providers are paid a predetermined fee per individual to provide all healthcare
services, thereby assuming the potential financial risks of escalating
healthcare costs.
To deliver care in a more cost-effective manner, providers are forming
integrated health delivery networks that may include acute-care hospitals,
physicians' offices, outpatient clinics, homecare and long-term care facilities.
The success of these comprehensive delivery networks is dependent on, among
other things, effectively managing and delivering information to caregivers and
managers across multiple points of care.
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Traditionally, the hospital information systems market has been the
largest segment of healthcare information services. According to industry
analysts, in 1995 the healthcare industry spent approximately $10 billion for
products and services to support automated information systems, and the growth
rate is expected to continue to rise, reaching an expected $28 billion by the
year 2000.
The current market of healthcare and related businesses in the United
States is estimated to be more than $1 trillion. International markets provide
even greater opportunity. The immediate domestic market potential for the
Company's software products and technology services is estimated to be a
universe of 3.4 million businesses representing more than $15 billion in annual
revenue.
In addition to this expanding market opportunity, the demand for
healthcare information systems is also increasing as hospitals and other
providers come under increased pressure to quantify and control their costs.
As a result, many providers are spending more on systems which enable them to
access such information. According to the 1995 Annual HIMSS/HP Leadership
Survey, an industry survey conducted by Hewlett Packard at the Healthcare
Information and Management Systems Society conference, 75% of the respondents
stated that their information system investments will increase at a rate of 20%
or more over the next two years.
Healthcare information systems are evolving to meet the needs of a
changing marketplace. Initially, these systems were financially oriented,
focusing on the ability to capture charges and generate patient bills.
However, as reimbursement has shifted more toward risk sharing and capitation,
providers and payers are seeking to better manage risk by controlling costs,
demonstrating quality, measuring outcomes and influencing utilization. Each of
these goals requires the collection, analysis and interpretation of clinical
and financial information related to the delivery of healthcare.
Management believes that the availability of a complete, timely and
cost-effective patient focused information system is essential to controlling
costs while providing high quality patient care. Sources of patient
information usually include a number of different sites; therefore, current and
historical paper records must be made available by computer to all
points-of-care. All participants in the delivery network need information
systems that can capture data at the point-of-care, communicate data across the
continuum of care and process and store large volumes of data necessary for the
development of the computer-based longitudinal patient record.
Information technology in healthcare has historically had a "bottoms
up" approach. Software applications such as billing, admissions, claims
processing, patient registration, medical records, contract management, and
others were developed individually using rigid programming techniques. Over
time, many of these systems were "interfaced" to each other in order to provide
a more complete solution. The piecing together of these disparate
applications, however, has caused significant problems in the development,
implementation, and enhancement of any or all of these systems. Each time a
change is made to one area of the system, many other different programs,
normally written by different groups of people, have to be changed to match
each other. This process results in long lead times and high costs of both
acquisition and on-going utilization and upgrading of the system.
It is not uncommon for a hospital to have more than 10 different
application systems (up to 50 different systems in larger hospitals) installed
to perform the functions of admissions, billing, patient registration,
insurance processing, internal reporting, laboratory information, pharmacy
records, contract management, and eligibility. A typical software application
(including integration testing and conversion) can cost in excess of $200,000,
and the total expenditure for the hospital can be over $5.0 million for software
alone. Annual software support can run as much as $600,000 or more, and changes
to the software programs create additional charges to the hospital.
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Physician practices have the same situation on a smaller cost scale, and can
spend up to $10,000 or more for the initial software license fees, plus support
and customization.
There are estimated to be approximately 120 million combinations of
computer instructions required to perform today's healthcare industry and
enterprise-wide applications. Using traditional "hard coding" of computer
instructions, this simply cannot practically be done. Therefore, most systems
in the market today have difficulty producing the total solution that the
changing healthcare environment demands. Traditional programming techniques do
not offer a quality, cost effective path to the future for today's customers.
THE HALIS HEALTHCARE ENTERPRISE SYSTEM
HALIS has developed an advanced and modern healthcare information
model and a single program for the healthcare industry, the HALIS Healthcare
Enterprise System. Using superior healthcare information models and advanced
database techniques, HALIS offers a totally integrated, not interfaced, top
down approach to healthcare information systems. The HALIS Healthcare
Enterprise System can be used in its entirety for an Integrated Healthcare
Delivery Network, or subsets can be used for clinics, hospitals, practices,
payers, long term care facilities, laboratories, pharmacies, and home
healthcare.
HALIS has eliminated more than 90% of the programming effort and
duplicity that other systems have required by placing most of the program logic
into its multi-media object database. Instead of literally thousands of
"if/then" programming statements for each healthcare event, which require
significant personnel and computer time to execute, the HALIS system directly
locates the relevant mathematical and decision operations and relationships in
the database. In addition, the HALIS system is designed to allow the user to
update most items in the database directly, virtually eliminating the user's
dependence on the software supplier to make such changes. The single HALIS
system also eliminates the need for redundant data found in all other systems.
It is estimated that more than half, and possibly up to 80% of the information
used by each individual software application is the same as required by every
other application in the system. The HALIS philosophy utilizes the relational
data-base concept to eliminate this redundancy and streamline the development,
enhancement and operational process dramatically.
The HALIS technology provides a new level of economies in the
production and maintenance of healthcare systems. HALIS systems are being sold
at over 50% less than competitive systems, with a huge corresponding reduction
in maintenance and support costs. HALIS' cost to continue to provide new
features and functions to its system will be substantially below today's market
costs, since there is only one system to modify, not up to 10 or more disparate
systems. HALIS will use state-of-the-art technology such as videoconferencing
and the Internet to deliver training and product support, sales support and
customer service. Each of these techniques is designed to improve user
satisfaction while lowering costs.
In 1997, HALIS will focus on four of the eight primary markets it
expects to penetrate: physician practices, including individual, group and
combinations; hospitals; clinics; and payers. The HALIS Practice Management
System is installed in the field as pilot sights, and is available for sale
today to practices, practice management organizations, clinics and hospitals.
The HALIS Payer System is installed in a pilot site and is expected to be ready
for general release near the end of 1997. The HALIS Hospital and Clinic
Systems are both currently being sold as pilots and are expected to be ready
for general release during 1998. A pilot site is a customer who acknowledges
that while the particular HALIS system being offered is theoretically complete,
it must be field tested in an operational environment, where additional features
may be added to further enhance its usability.
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The HALIS Healthcare Enterprise System was developed by the Company
through the healthcare prototype licensed from Paul Harrison Enterprises, Inc.
("PHE"). In November 1996, the Company entered into a perpetual, non-exclusive
transferable license to utilize proprietary technology known as MERAD ("MERAD")
owned by PHE for a license fee of 10% of gross revenues generated from MERAD
and any derivatives thereof by the Company or any of its affiliates. In July
1995, PHE acquired from Paul Harrison, the Chairman of the Board, Chief
Executive Officer and President of the Company, certain algorithms and concepts
for the creation of an advanced artificially intelligent software tool called
"MERAD." MERAD is a tool that is utilized to develop application software.
Through the use of artificial intelligence, MERAD can substantially decrease
the development time necessary to create and debug application software. The
Company uses MERAD to develop its medical practice software and Healthcare
Enterprise System.
HALIS MEDICAL PRACTICE SYSTEM
The HALIS Medical Practice System is multimedia-ready and open
database compliant (ODBC-SQL Relational), which enables users to add day-to-day
changes in patient data, billing criteria, and quality management in one
system. Management believes that the principal benefits of the medical
practice system include (i) centralization of patient data, (ii) coverage
verification, and (iii) increased collections and lower billing costs.
Applications provided include registration, medical records, patient
encounters, billing, managed care, reports and system support.
HEALTHCARE ENTERPRISE SYSTEM
The Company's Healthcare Enterprise System uses a fifth generation
database system that manages data through its integrated multimedia-object and
SQL-relational databases. The Healthcare Enterprise System technology platform
consists of five major integrated parts: the graphical end-user interface; the
program object processor; the multimedia object database; the SQL relational
and open database driver; and the communications network manager.
Healthcare Enterprise System provides a direct connection between the
consumer or end-user and the ready-to-use database driven system. Program data
and instruction can be added in an automated manner without traditional
programming knowledge. Currently, competing software technology and the
healthcare industry requires technical expertise to connect data and processing
instructions to a running program.
HES's ability to respond to conditions and changes makes it appealing
to healthcare industry participants. Programmer coded instructions or computer
generated coded instructions often exceed the computer workstation capacity.
Therefore, management believes that in industries such as healthcare, many of
the conditions and processing needs are not included in the currently available
commercial systems, and most of the processing must be handled manually.
Alternatively, Healthcare Enterprise System is expected to handle all the
processing conditions and needs of healthcare and other database information
intensive industries.
COMPANY STRATEGY
The Company has focused on the point-of-service system business in the
healthcare industry (physician practices, MSO's and other managed care
organizations) and is expanding to larger markets such as hospitals.
Management believes that the Company is well positioned to produce new software
products for special segments of the healthcare market using Healthcare
Enterprise System and its industry knowledge obtained from HALIS Services, Inc.
personnel. Management believes that the cost to produce and support all of the
Company's products will be less than other companies in the marketplace due to
the flexibility of the Company's technology and the fact
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that the Company has no "legacy" systems to maintain, enhance, or otherwise
invest in. Management believes that the flexibility of the Company's healthcare
software will allow the Company to keep up with the user's demands for updates
to health plan changes, management contract revisions, availability of new
pharmaceutical products, and changes in managed care-driven plans and practices.
The Company's strategy is to use its software technology to produce
lower cost applications software without compromising margins, to provide full
service to augment its software products, and to build superior distribution
channels, consolidating healthcare information systems distribution and service
companies into the Company, and through supplying distribution companies with
the Company's superior healthcare software products. The Company will manage
its operations through its corporate headquarters in Atlanta, Georgia and
strategically located regional offices that can be managed as profit and loss
centers and that can focus on sales and service in different geographical
areas.
The Company's strategic plan is a significant shift in the Company's
past business direction. As a result of the acquisitions of AHS, ASI and HSI
in November 1996 (see "--Recent Acquisitions"), the Company anticipates
positioning itself to capture a portion of the healthcare information systems
network and integration markets. There can be no assurance, however, that the
Company will be successful in this endeavor or that it will be able to achieve
or sustain profitability in the future.
The Company will offer customers a complete solution to their
healthcare information needs. The Company will be able to deliver integrated
software to virtually every healthcare market segment including medical
practices, home health agencies, hospitals, clinics, long-term care, labs,
pharmacies and payers.
The Company will be able to offer a wide array of healthcare software
through its advanced database technology. The advanced database technology of
the Healthcare Enterprise System will enable the Company to market new software
by adding a new market-specific healthcare database to the reusable advanced
database technology. Most companies have had to build or buy each system
separately for each market segment, which has created a mass of fragmented
systems for the healthcare industry.
The Company will address the healthcare systems industry's needs by
automating the production and maintenance of software for all healthcare market
segments through its own version of an automated factory based on the advanced
database technology. Several competitors have attempted to create one
technology to build software for multiple healthcare segments but have had
limited success. The Company believes that the advanced database technology
will be instrumental in automating and integrating the healthcare industry's
information cycle.
In addition to providing a set of integrated software products, the
Company will deliver a complete solution to healthcare organizations through
its ability to implement customized computer hardware, networks, and other
complimentary services through its systems integration and outsourcing
resources.
The Company believes that it will have an advantage over its
competitors because its products' "engines" -- the integrated health software
products and its information technology core -- are expected to be effective in
keeping pace with the ongoing changes in healthcare. Many competitors
currently have fragmented, inflexible healthcare software. The Company believes
that a systems integration project can succeed only if the core software
foundation meets the needs of the healthcare customer and the ongoing market
changes. The Company believes that the advanced database technology addresses
the information needs of healthcare companies.
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In addition to providing an improved healthcare systems solution, the
Company plans to use an aggressive acquisition strategy. The Company generally
focuses on acquisitions that expand its distribution and service capabilities,
and will be able to market internally generated software products based on one
common advanced database technology. This strategy will assist the Company in
delivering integrated systems to the healthcare markets.
HALIS will utilize business partners, in addition to its acquired
units, to facilitate entry into certain markets and to increase its geographic
presence in key areas of the United States. Through its acquisition of The
Compass Group, Inc., an Atlanta based consulting firm, HALIS is a Global
Alliance Partner with Geac (formerly Dun & Bradstreet Software). HALIS is
currently pursuing the expansion of its relationship with Geac at a corporate
and regional level. The Company has recently been selected as a Geac global
alliance partner for healthcare, and is working with Geac sales and marketing
management to identify Geac customers who are prospects for the Company's
software and services. The Company is also negotiating with other prospective
HALIS business partners.
HALIS acquisitions will typically be healthcare technology service
companies (as opposed to product producing companies). HALIS will convert the
"service only" oriented companies to technology-driven companies to increase
market share and value. These companies must project a positive cash flow
within the first year following acquisition in order to be candidates for
acquisition. HALIS intends to use its stock for these acquisitions and infuse
cash only when growing the companies. This model has been followed for the
initial acquisitions. HALIS typically pays between one and two times annual
revenues for an acquisition, deducting from the purchase price any debt.
HALIS will endeavor to keep its corporate overhead costs low, while
maintaining sufficient staff to implement the business plan and manage holding
company activities such as research and development and customer services.
During 1997, HALIS intends to implement several pilot sites for its Hospital,
Clinic, and Payer systems, while selling its Practice Management System product
to individual and group practices, practice management companies, hospital,
clinics, and other entities which own or manage practices.
While the Company believes the strategic plan that it is undertaking
will be successful and in the best interest of the Company, no assurances can
be given that the Company indeed will be successful and that shareholder value
will be enhanced. See "Risk Factors."
RECENT ACQUISITIONS
In November 1996, the Company merged AHS and ASI, each a wholly-owned
subsidiary of AUBIS, L.L.C. ("AUBIS"), with and into two wholly-owned
subsidiaries of the Company. In connection therewith, AUBIS received
10,000,000 shares of Common Stock of the Company. AHS and ASI are suppliers of
network integration products and services to the healthcare and other
industries.
ASI has provided value added computer services, network solutions,
connectivity solutions and system integration, principally to Atlanta area
businesses, since 1985. Its trained technical staff has experience in computer
system integration, network configuration and network implementation. ASI has
certified network engineers on staff for LAN and WAN network services. ASI
sells, services and supports many major brands of computers, peripherals and
networks. ASI support services include onsite hardware maintenance as well as
network support programs. ASI offers a local area network design and
installation, wide area network design and installation, cable
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plant design, installation and management, network management systems and
network trouble shooting, protocol debugging and performance analysis.
In November 1996, the Company also acquired HSI, a wholly-owned
subsidiary of Healthcare Technology Investments, L.L.C. (formerly, HALIS,
L.L.C.). In connection therewith, Healthcare Technology Investments, L.L.C.
received 5,000,000 shares of Common Stock of the Company. HSI is a supplier of
healthcare systems to managed healthcare markets and to medical practices and
related point of service markets. HSI represents an alternative information
system for today's dynamic healthcare environment. The HSI application
software provides a comprehensive system solution to two primary groups,
medical practices and managed care organizations
In January 1997, the Company acquired The Compass Group, Inc., a
software consulting company ("Compass"). In connection therewith, Debra York,
the sole shareholder of Compass, was issued an aggregate of 350,000 shares of
the Company's Common Stock and Compass became a wholly-owned subsidiary of the
Company (the "Compass Subsidiary"). In addition, as consideration for the
waiver by Ms. York of her rights under a provision in the Merger Agreement
providing for the issuance of additional shares of the Company's Common Stock
at a future date if certain financial targets were achieved for the year ending
December 31, 1997, on June 30, 1997 the Company agreed to issue 688,000 shares
of the Company's Common Stock to Ms. York.
In connection with the Compass merger, the Compass Subsidiary entered
into an employment agreement with Ms. York providing for the employment of Ms.
York as President of the Compass Subsidiary for a term of two years at an
annual base salary of $120,000. In addition, in connection with the
consummation of the Merger, the Company granted to Ms. York non-qualified
options to purchase 85,000 shares of the Company's Common Stock at an option
price of $2.00 per share. The options granted to Ms. York are fully
exercisable and expire January 10, 2007.
In January 1997, the Company also acquired Software Manufacturing
Group, Inc., a developer and seller of practice management systems for
orthodontists ("SMG"). In connection therewith, the SMG shareholders were
issued an aggregate of 3,072,000 shares of Common Stock and SMG became a
wholly-owned subsidiary of the Company (the "SMG Subsidiary"). In addition, as
consideration for the waiver by the SMG shareholders of their rights under a
provision in the Merger Agreement providing for the issuance of additional
shares of Common Stock at a future date if certain financial targets were
achieved for the year ending December 31, 1997, on June 30, 1997 the Company
agreed to issue 960,000 shares of the Company's Common Stock to the SMG
shareholders.
In connection with the SMG merger, the SMG Subsidiary entered into an
employment agreement with Charles Cone, Jr. providing for the employment of Mr.
Cone as President of the SMG Subsidiary for a term of two years at an annual
base salary of $192,000 plus incentive compensation determined in accordance
with the provisions of his Employment Agreement.
In January 1997, the Company also acquired American Benefit
Administrative Services, Inc. ("ABAS") and Third Party Administrators, Inc.
("TPA"), which provide third party administrative services for healthcare plans
of large and small companies throughout the United States. In connection
therewith, the ABAS and TPA shareholders were issued an aggregate of 1,875,000
shares of Common Stock and ABAS and TPA became a wholly-owned subsidiary of the
Company (the "ABAS/TPA Subsidiary").
Upon consummation of the ABAS and TPA mergers, the ABAS/TPA Subsidiary
entered into an Employment Agreement with Philip E. Spicer providing for the
employment of Mr. Spicer as President and a director of the ABAS/TPA Subsidiary
for a term of three years following the consummation of the mergers (subject
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to extension in accordance with the terms of the Employment Agreement). The
Employment Agreement provides for Mr. Spicer to receive an annual base salary of
$200,000 plus incentive compensation determined in accordance with the terms of
Mr. Spicer's Employment Agreement.
In addition, Mr. Spicer received a $100,000 signing bonus, payable in
two installments with $50,000 due upon execution of his Employment Agreement
and the remainder due on or before July 1, 1997. In addition, the Company
granted to Mr. Spicer non-qualified options to purchase 1,250,000 shares of
Common Stock at an option price of $2.00 per share. The options granted to Mr.
Spicer are fully exercisable and expire on the tenth anniversary of the date of
issuance. Mr. Spicer's Employment Agreement also provides for certain
payments to be made to Mr. Spicer in the event he is terminated without cause
or in the event of a change in control of the ABAS/TPA Subsidiary. The Merger
Agreement also provides that Mr. Spicer may repay a loan from ABAS/TPA, which
had a balance of $547,790 as of August 15, 1997, in the form of HALIS Common
Stock if certain specified conditions are met.
Upon consummation of the ABAS and TPA mergers, the ABAS/TPA Subsidiary
also entered into an Employment Agreement with Patricia M. Toledano providing
for the employment of Ms. Toledano as Vice President and a director of the
ABAS/TPA Subsidiary for a term of three years following the consummation of the
mergers (subject to extension in accordance with the terms of the Employment
Agreement). The Employment Agreement provides for Ms. Toledano to receive an
annual base salary of $77,000 plus incentive compensation determined in
accordance with the terms of Ms. Toledano's Employment Agreement.
In addition, the Company granted to Ms. Toledano non-qualified options
to purchase 100,000 shares of Common Stock at an option price of $2.00 per
share. The options granted to Ms. Toledano are fully exercisable and expire on
the tenth anniversary of the date of issuance. Ms. Toledano's Employment
Agreement also provides for certain payments to be made to Ms. Toledano in the
event she is terminated without cause or in the event of a change in control of
the ABAS/TPA Subsidiary.
In May 1997 the Company acquired TG Marketing Systems, Inc., a Georgia
corporation ("TGM") which became a subsidiary of the Company (the "TGM
Subsidiary"). Upon consummation of the TGM merger, Joseph M. Neely, in his
capacity as the sole shareholder of TGM, was issued an aggregate of 2,388,060
shares of the Company's Common Stock.
In connection with the TGM merger, the TGM Subsidiary entered into an
employment agreement with Mr. Neely providing for the employment of Mr. Neely
as President of the TGM Subsidiary for a term of two years at an annual base
salary of $150,000. In addition, in connection with the consummation of the
TGM merger, the Company granted options to purchase an aggregate of 500,000
shares of the Company's Common Stock to certain employees of TGM at an option
price of $1.50 per share. Mr. Neely also serves as the Chief Operating Officer
of the Company.
In July 1997 the Company acquired Physicians Resource Network, Inc., a
Florida corporation ("PRN") which became a subsidiary of the Company (the "PRN
Subsidiary"). Upon consummation of the PRN merger, Anthony F. Maniscalco, in
his capacity as the sole shareholder of PRN, was issued an aggregate of
3,733,333 shares of the Company's Common Stock.
In connection with the PRN merger, the PRN Subsidiary entered into an
employment agreement with Mr. Maniscalco providing for the employment of Mr.
Maniscalco as President of the PRN Subsidiary for a term of two years at an
initial base salary of $125,000.
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Also in connection with the PRN merger, the Company retired
approximately $80,000 of existing indebtedness of PRN and agreed to cause all
personal guaranties with respect to the indebtedness of PRN in the principal
amount of $520,000 to a financial institution to be terminated by refinancing,
payment in full or otherwise on or before December 25, 1997.
In July 1997 the Company acquired PhySource Ltd., an Illinois
corporation ("PhySource") which became a subsidiary of the Company (the
"PhySource Subsidiary"). Upon consummation of the PhySource merger, the
shareholders of PhySource were issued an aggregate of 2,632,611 shares of the
Company's Common Stock, including payment of certain deferred compensation and
expense advances to certain shareholders, payments to certain shareholders for
termination of employment agreements, and payment in retirement of certain
existing indebtedness of PhySource.
In connection with the PhySource merger, the PhySource Subsidiary
entered into an employment agreement with Theodore M. Homa, M.D. providing for
the employment of Dr. Homa as the Medical Director for the medical practice
that previously constituted the business of Theodore M. Homa, M.D., S.C. (the
"Homa Practice"), which was acquired by PhySource immediately prior to the
consummation of the PhySource merger. The employment agreement provides for
the employment of Dr. Homa for a term of two years and for the payment of an
annual base salary for the initial 12 months of the employment agreement of
$144,000. In addition, as incentive compensation Dr. Homa will be paid an
amount equal to 50% of the EBITDA (as defined in the employment agreement) for
the Homa Practice for the immediately preceding month; provided, however, that
in no event shall the total compensation (base salary plus incentive
compensation) for Dr. Homa in any month exceed $35,000 during the initial
12-month period or $40,000 during the remainder of the term of employment.
CONSOLIDATION OF ATLANTA OPERATIONS
In June 30, 1997, the following subsidiaries of the Company were
merged into HALIS Services, Inc., a newly- organized, wholly-owned Georgia
subsidiary of the Company: Software Manufacturing Group, Inc.; TG Marketing
Systems, Inc.; HALIS Software, Inc.; AUBIS Hospitality Systems, Inc.; AUBIS
Systems Integration, Inc. and The Compass Group, Inc. The purpose of the
merger was to simplify the Company's corporate structure and facilitate the
consolidation of accounting and treasury functions.
RECENT DEVELOPMENTS
On August 20, 1997, the Company and HealthWatch, Inc. ("HealthWatch")
entered into a Subscription and Purchase Agreement (the "Purchase Agreement"),
pursuant to which the Company agreed to purchase up to 50,000 shares of Series H
Preferred Stock (the "HealthWatch Preferred Stock") of HealthWatch for an
aggregate consideration of up to $300,000, depending on the number of shares of
HealthWatch Preferred Stock purchased. Each share of HealthWatch Preferred Stock
may be converted at any time at the option of the holder thereof into twenty
shares of the common stock of HealthWatch (the "HealthWatch Common Stock").
HealthWatch is a developer, manufacturer and distributor of medical
instrumentation used in infusion therapy and vascular diagnosis.
From August 20, 1997 through September 22, 1997, the Company purchased
an aggregate of 20,833 shares of HealthWatch Preferred Stock for $125,000. The
HealthWatch Preferred Stock purchased by the Company is presently convertible
into an aggregate of 416,666 shares of HealthWatch Common Stock, or 8.9% of the
outstanding HealthWatch Common Stock. The Company is not obligated and does not
have the present intent to purchase additional shares of the capital stock of
HealthWatch.
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The purpose of the acquisition by the Company of the HealthWatch
Preferred Stock was (i) to take an initial step in connection with the possible
acquisition by the Company of HealthWatch, and (ii) to provide HealthWatch with
working capital. The Company and HealthWatch entered into a non-binding letter
of intent, dated August 8, 1997 (the "Letter of Intent"), providing for the
merger of HealthWatch with the Company. Since the execution of the Letter of
Intent, the Company and HealthWatch abandoned the proposed merger between the
two companies and instead pursue a joint venture and co-marketing arrangement.
In return for the Company's HealthWatch Preferred Stock investment of
$125,000, viewed by both companies as demonstrating the Company's commitment to
the joint venture, the Company anticipates that it will have use of the Health
Watch facility in California and access to additional support and distribution
resources on the West Coast. The co-marketing arrangement contemplates shared
sales prospects by the Company and HealthWatch with a commission or revenue
arrangement to be structured. HealthWatch will provide technology, including
the management of digitalized information from its devices, and an integration
database engine for connection at the point of care. Management believes that
this will provide an automated link to the HALIS Healthcare Enterprise
application system for faster and more accurate information transfer.
CUSTOMERS
The Company's customers are expected to include numerous healthcare
industry participants located throughout the United States, including provider
groups and managed care organizations.
COMPETITION
The Company believes that the principal competitive factors in the
healthcare information market are the breadth and quality of system and product
offerings, access to proprietary data, the proprietary nature of methodologies
and technical resources, price and the effectiveness of marketing and sales
efforts. In addition, the Company believes that the speed with which
information companies anticipate and respond to the evolving healthcare industry
structure and identify unmet information needs is an important competitive
factor. The Company believes that, with adequate capital, it will be able to
compete favorably with respect to each of these factors.
The market for healthcare information products and services is
intensely competitive. Competitors vary in size and in the scope and breadth of
products and services offered, and the Company competes with different
companies in each of its target markets. Many of the Company's competitors,
such as HBO & Company, have significantly greater financial, technical, product
development and marketing resources than the Company.
The Company's potential competitors include specialty healthcare
information companies, healthcare information system and software vendors and
large data processing and information companies. Many of these competitors
have substantial installed customer bases in the healthcare industry and the
ability to fund significant product development and acquisition efforts.
PROPRIETARY RIGHTS
The Company's success and ability to compete are dependent in part
upon its proprietary technology, including its software source code. To protect
its proprietary technology, the Company relies on a combination of trade
secret, nondisclosure and copyright law, which may afford only limited
protection. In addition, effective copyright and trade secret protection may be
unavailable or limited in certain foreign countries. Although the Company
relies on the limited protection afforded by such intellectual property laws,
it also believes that factors
-18-
<PAGE> 20
such as the technological and creative skills of its personnel, new product
developments, frequent product enhancements, name recognition and reliable
maintenance are essential to establishing and maintaining a technology
leadership position. The Company generally enters into confidentiality or
license agreements with its employees, consultants and customers and generally
controls access to and distribution of its software, documentation and other
proprietary information. Although the Company restricts the use by the customer
of the Company's software and does not permit the re-sale, sublicense or other
transfer of such software, there can be no assurance that unauthorized use of
the Company's technology will not occur.
Despite the measures taken by the Company to protect its proprietary
rights, unauthorized parties may attempt to reverse engineer or copy aspects of
the Company's products or to obtain and use information that the Company
regards as proprietary. Policing unauthorized use of the Company's products is
difficult. In addition, litigation may be necessary in the future to enforce
the Company's intellectual property rights, to protect the Company's trade
secrets, to determine the validity and scope of the proprietary rights of
others, or to defend against claims of infringement or invalidity. Such
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on the Company's business, operating
results and financial condition.
Certain technology used in conjunction with the Company's products is
licensed from third parties, generally on a non-exclusive basis. These licenses
usually require the Company to pay royalties and fulfill confidentiality
obligations. The termination of any such licenses, or the failure of the
third-party licensors to adequately maintain or update their products, could
result in delay in the Company's ability to ship certain products while it
seeks to implement technology offered by alternative sources. Any required
replacement licenses could prove costly. Also, any such delay, to the extent it
becomes extended or occurs at or near the end of a fiscal quarter, could result
in a material adverse effect on the Company's results of operations. While it
may be necessary or desirable in the future to obtain other licenses relating
to one or more of the Company's products or relating to current or future
technologies, there can be no assurance that the Company will be able to do so
on commercially reasonable terms or at all.
In the future, the Company may receive notices claiming that it is
infringing on the proprietary rights of third parties, and there can be no
assurance that the Company will not become the subject of infringement claims
or legal proceedings by third parties with respect to current or future
products. In addition, the Company may initiate claims or litigation against
third parties for infringement of the Company's proprietary rights or to
establish the validity of the Company's proprietary rights. Any such claim
could be time consuming, result in costly litigation, cause product shipment
delays or force the Company to enter into royalty or license agreements rather
than dispute the merits of such claims. Moreover, an adverse outcome in
litigation or similar adversarial proceedings could subject the Company to
significant liabilities to third parties, require the expenditure of
significant resources to develop non-infringing technology, require disputed
rights to be licensed from others or require the Company to cease the marketing
or use of certain products, any of which could have a material adverse effect
on the Company's business, operating results and financial condition. To the
extent the Company desires or is required to obtain licenses to patents or
proprietary rights of others, there can be no assurance that any such licenses
will be made available on terms acceptable to the Company, if at all. As the
number of software products in the industry increases and the functionality of
these products further overlaps, the Company believes that software developers
may become increasingly subject to infringement claims. Any such claims
against the Company, with or without merit, as well as claims initiated by the
Company against third parties, can be time consuming and expensive to defend,
prosecute or resolve.
-19-
<PAGE> 21
EMPLOYEES
As of October 1, 1997, the Company had approximately 225 full-time
employees, including five in senior management. The Company also utilizes
contract personnel for support services, installations of Company systems and
programming. None of the Company's employees is subject to a collective
bargaining agreement, and the Company considers its employee relations to be
good.
FORWARD-LOOKING STATEMENTS
This Prospectus 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 and 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. See "RISK FACTORS."
-20-
<PAGE> 22
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of
shares of the Common Stock by the Selling Shareholders. See "Selling
Shareholders" for a list of those persons who will receive the proceeds from
such sales. Certain of the shares of the Common Stock to be sold by the
Selling Shareholders represent Common Stock underlying warrants and options to
purchase Common Stock and the Company's 7.0% Convertible Promissory Notes Due
January 15, 1998 (the "Notes"). Although the Company will not receive any
proceeds from the sale of the Common Stock by the Selling Shareholders, the
Company will receive proceeds upon the exercise of such warrants and options in
an amount equal to the product of the number of warrants/options exercised
multiplied by their exercise price. Such proceeds will be used for general
corporate purposes and working capital. In addition, for every share of Common
Stock issued upon conversion of the Notes, the Company will benefit in an
amount equal to a $1.00 reduction in the indebtedness outstanding under the
Notes.
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
On October 30, 1992, the Company's Common Stock ceased quotation on
the Nasdaq Small Cap Market. Price information on the Company's Common Stock
is now available on the Nasdaq "Bulletin Board." The trading symbol for the
Common Stock is "HLIS."
As of October 2, 1997, there were approximately 300 holders of record
of the Company's Common Stock; however, the Company believes that there are
more than 300 beneficial owners of its Common Stock.
The Company has not paid any dividends and does not expect to do so in
the foreseeable future. Although the payment of dividends rests with the
discretion of the Board of Directors, the Company intends to employ its
earnings, if any, to finance its ongoing operations and to further develop its
business.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements of HALIS, Inc. and subsidiaries contained
elsewhere herein. As a result of the acquisitions of AHS, ASI and HSI in
November 1996, which acquisitions were accounted for as a "reverse
acquisition," the financial statements of the Company are the financial
statements of the "accounting entity," consisting of AHS, ASI and HSI.
Accordingly, the financial statements of the Company are the financial
statements of the "accounting entity" adjusted for the assumed acquisition of
the net assets of the Company in exchange for the issuance of Company Common
Stock outstanding before the transaction. As a result, the Company's results
of operations for the years ended December 31, 1996 and 1995 consist of the
operations of AHS, ASI and HSI for the entire years and the operations of
HALIS, Inc. from November 19, 1996 to December 31, 1996.
As a result of the acquisitions of Compass, SMG, ABAS/TPA, and TGM
during the first and second quarters of 1997, the results of operations for
these four acquired companies are included in the Company's consolidated
financial statements from their respective dates of acquisition (January 10,
January 24, January 31 and May 2, respectively).
-21-
<PAGE> 23
FINANCIAL CONDITION
During the six months ended June 30, 1997, total assets increased
$11,488,924 or 1,009% from total assets of $1,138,129 at December 31, 1996.
This increase is primarily attributable to the Company's four acquisitions
described above, and is reflected in the majority of the Balance Sheet
categories. In particular, accounts receivable, net fixed assets, goodwill,
and capitalized software development costs all exhibited substantial increases
during the period. Total assets also increased during the six month period
ended June 30, 1997 as a result of proceeds of $2,037,747 received from the
sale of Common Stock during such period.
Total assets increased $492,521 or 76% during the year ended December
31, 1996, due primarily to an increase in cash of $591,338. The increase in
cash results from proceeds of a private placement of Common Stock and Warrants
in the fourth quarter of 1996, and the sale of convertible promissory notes
earlier in the year. See "- Liquidity and Capital Resources."
During the six months ended June 30, 1997, current liabilities
increased from $1,723,955 at December 31, 1996 to $4,918,569 at June 30, 1997.
This increase of $3,194,614, or 185%, is again largely attributable to the four
acquisitions. The growth in current liabilities also reflects the
reclassification of the Company's 7% convertible notes from long term debt, due
to their January 15, 1998 maturity. At June 30, 1997, the Company had a
working capital deficit of $2,652,262.
During the fiscal year ended December 31, 1996, total liabilities
increased $1,748,854, due primarily to the issuance of $1,506,000 in
convertible promissory notes. At December 31, 1996, the Company had a working
capital deficit of $925,614 and the Company's current liabilities include
accounts payable and accrued expenses of $984,444, including accrued severance
payable to a former officer of HSI ($138,000), and notes payable totaling
$354,000, the proceeds of which were utilized to fund operations, and payroll
and sales tax payable of $366,405. Payroll and sales taxes payable at December
31, 1996, consisted primarily of sales and use taxes for the State of Georgia.
The Company is in the process of negotiating an agreement with the Georgia
Department of Revenue which will call for regular monthly payments. In January
1997, the Company paid all trust fund taxes owed relative to its federal
payroll tax liability.
As a result of the Company's working capital deficit, coupled with the
fact that the Company has sustained losses from operations since inception, the
Company's independent certified public accountants have included a paragraph in
their audit report accompanying the Company's financial statements regarding
the uncertainties surrounding the Company's ability to continue as a going
concern. Until such time as the Company's healthcare software is accepted in
the marketplace and generates revenues sufficient to support the operations of
the Company, operations will be financed, in part, from outside sources. See "-
Liquidity and Capital Resources." The Company also intends to implement
certain cost containment measures.
RESULTS OF OPERATIONS
SIX-MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX-MONTHS ENDED JUNE 30, 1997
Sales revenue, which consist of systems sales and services, increased
by $1,663,425 or 267% for the three months ended June 30, 1997, and $2,303,702
or 177% for the six months ended June 30, 1997 as compared to the respective
prior year periods. This increase is primarily the result of consolidating the
results of the four acquisitions (Compass, SMG, ABAS/TPA and TGM) from their
respective acquisition dates (January 10, 24, and 31, and May 2) through the
period end of June 30, 1997.
-22-
<PAGE> 24
Cost of goods sold increased $692,902 or 252% in absolute terms for
the three months ended June 30, 1997, but declined as a percentage of sales
from 44.2% for the three months ended June 30, 1996 to 42.4% for the three
months ended June 30, 1997. During the six month period ending June 30, 1997
the Company's cost of goods sold as a percentage of revenue decreased to 38.8%
from 62.6% for the same period in the prior year, reflecting the shift in
product mix away from lower margin hardware sales and support towards software
sales and support. The margin improvement would have been greater without the
$169,555 of amortized software development costs included in the cost of goods
sold amount of $967,979.
Selling, general and administrative costs increased by $1,588,568 or
521% and $2,722,697 or 414% for the three and the six-month periods ended June
30, 1997, respectively. These increases resulted from the four acquisitions,
as well as the Company's investment in its corporate infrastructure to support
future growth. Amortization expense totaled $619,489 for the six months ended
June 30, 1997, most of which was attributable to goodwill ($220,116) and other
intangibles recorded for the acquisitions referenced above and as required by
APB 16.
Research and development costs increased by a total of $333,554 or
370% and $581,411 or 458% for the three and the six-month periods ended June
30, 1997, respectively, reflecting the Company's continued investment in its
proprietary software technology.
The net loss of $1,048,336 and $1,956,636 for the three and the six
month periods ended June 30, 1997, respectively, is primarily attributable to
increased selling, general and administrative expenses, as well as the
increased research and development costs.
Management believes that the January 1997 acquisitions of Compass, SMG
and ABAS/TPA (See "Business -- Recent Acquisitions") help to position the
Company to capitalize on its Healthcare Enterprise System product as it is
introduced into the various healthcare marketplaces during 1997 and 1998.
ABAS, for example, will utilize the Healthcare Enterprise System product in its
current healthcare administration business, and will serve what the Company
believes will be a substantial market for clients who wish to take advantage of
this new technology, but would prefer a transaction fee arrangement, rather
than in-house implementation. SMG will continue to market its existing
software product to the orthodontics market, and will utilize its sales force
to introduce the Healthcare Enterprise System product into the southeastern
region of the U.S. Compass will continue to provide technical electronic data
processing consulting to a variety of businesses and will, in addition, assist
in the development of Business Partner relationships for the marketing of the
Healthcare Enterprise System product. Management's acquisition strategy is to
grow the business by acquiring business units which will project a positive
cash-flow within the first year following acquisition. See "Business --
Company Strategy."
FISCAL YEAR ENDED DECEMBER 31, 1995 COMPARED TO FISCAL YEAR ENDED
DECEMBER 31, 1996
Revenues declined 46.3% from $3,582,896 for the year ended December
31, 1995 ("fiscal 1995") to $1,925,412 for the year ended December 31, 1996
("fiscal 1996"), primarily due to the termination on December 31, 1995 of a
distribution agreement with a significant supplier of AHS and the subsequent
withdrawal by AHS from the hospitality business. This business line accounted
for approximately $1.75 million, or 48.8%, of the Company's revenue for fiscal
1995. To offset this anticipated loss of revenue, AHS had attempted to
increase its sales efforts with respect to selling its other product lines in
the fast food segment of the market and attempted during the first quarter of
1996 to sell the Fisher Restaurant Management System(R) in the fine dining
segment of the market. In March 1996, AHS made a strategic decision to
discontinue the resale of third party products by AHS in the
-23-
<PAGE> 25
hospitality market, and the related support services provided by AHS to the
customers thereof. This line of business accounted for approximately $1.9
million of the Company's revenues in 1995, or 53.0% of total revenues.
During fiscal 1996, AHS experienced a severe cash drain caused by the
loss of its previously referenced product line and slower than expected sales
of its other products. This caused management to reevaluate the focus of AHS'
business, which had been primarily directed towards small independent
restaurant operators that required a substantial staff to provide support
services. In the second quarter of 1996, management redirected the focus of
AHS and, in anticipation of the merger of AHS into the Company, decided to
direct its resources to providing software and systems integration services to
the healthcare market through ASI and its relationships with the Company and
HSI.
In addition, during fiscal 1996, revenues from HSI decreased by
$263,616, primarily as a result of its decision to terminate the Partners in
Prevention Program and the Managed Care Guide. HSI's major customer for the
Partners In Prevention(TM) program had been Prudential Health Care Systems of
Georgia ("Prudential"). Prudential notified HSI in mid-1996 that it did not
intend to honor the balance of its contract, which had two years remaining.
Prudential did not honor the balance of its contract for two reasons. First,
the Partners in Prevention Program was inadequate to meet Prudential's needs.
Second, Prudential decided to cancel the project that utilized Partners in
Prevention. Lost revenues to HSI as a result of the termination of the
contract by Prudential was approximately $270,000.
The major client for the Managed Care Guide(TM) had been Hoechst
Marion Roussel ("HMR"), an international pharmaceutical company. A contract is
currently in force with HMR that provides HMR a right of first refusal to
distribute the Managed Care Guide(TM) in all major markets in the United
States. The impact upon HSI of HMR's right of first refusal concerning the
Managed Care Guide on a historical basis has been immaterial. HSI has not
focused on the Managed Care Guide as a product in itself and only plans to
incorporate the generic information used to produce the Guide. HSI did not
expect to generate revenues from the Managed Care Guide as a separate product.
The projected impact HMR will have on HSI in general is negligible
because HSI does not plan to market the Managed Care Guide as a product in
itself. HSI plans to only use generic information (public domain type of
information) available to incorporate in the HALIS Healthcare Enterprise
System. In addition, HSI believes that HMR will not exercise its right of
first refusal and would allow HSI to distribute (if HSI chose to do so) the
Managed Care Guide through other organizations. If HMR does exercise its right
of first refusal, HSI will receive revenues it would otherwise not generate on
its own.
No other contracts contain unilateral customer cancellation features.
The Company's management has been encouraged by the initial
marketplace response to its Healthcare Enterprise System product, as evidenced
by four executed contracts for pilot sales during the first quarter of 1997.
Sales of the Healthcare Enterprise System product accounted for revenues of
only $67,615 in fiscal 1996, as it was still in the development stage for most
of 1996. The Company will follow a strategy of carefully selecting a limited
number of pilot sites and subjecting the software to extensive field use in
selected markets prior to officially launching the product. For that reason,
revenues recognized from the Healthcare Enterprise System product in 1997 will
be minimal, but are expected to be more significant in 1998 and beyond.
Selling, general and administrative expenses increased 15.3% from
$1,249,790 in fiscal 1995 to $1,441,572 in fiscal 1996. Although the Company
reduced operating expenses in the ASI and AHS operating units to
-24-
<PAGE> 26
compensate for the loss of business addressed above, significant financial
resources were invested in the development of the HALIS Healthcare Enterprise
System ($561,694), and the staffing of a senior corporate management team
($295,676). Additionally, the Company made the decision to merge ProHealth
Solutions into HSI in March of 1996. ProHealth Solutions had developed a
database program called Partners in Prevention, as well as the Managed Care
Guide. Management decided in early 1996 that neither product had marketplace
viability as stand-alone offerings. ProHealth's operating expenses for 1996,
prior to being merged into HSI, were $129,109.
Other expenses in fiscal 1996 included interest expense of $67,613
related to the Company's convertible promissory notes and other notes payable,
as well as interest on the Company's sales and use tax liabilities. Other
expenses also included merger costs of $378,588 incurred primarily in
connection with the reverse acquisition of the Company by AHS, ASI and HSI
during the year.
As a consequence of the decrease in revenues during fiscal 1996,
coupled with the increase in selling, general and administrative and other
expenses during the year (both in absolute terms and as a percentage of
revenue), the Company incurred a net loss of $1,989,696 or $0.12 per share for
fiscal 1996. This compares to a net loss of $372,938 for fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 1997, operating activities
consumed $1,857,607 of cash, primarily due to the net loss of $1,956,636. The
primary reasons for the net loss are the substantial selling, general and
administrative expenses and research and development expenses incurred to fund
the corporate infrastructure development, as well as the ongoing investment in
the Company's proprietary software products.
The Company recorded a net decrease in cash of $14,064 during the six
months ended June 30, 1997, offsetting the operational losses with proceeds
from private placements. Management continues to seek and evaluate potential
sources of additional capital to support the Company's expected future growth.
Financing activities during fiscal 1997 provided $2,374,072, primarily
the result of proceeds from the issuance of stock during the six months ended
June 30, 1997.
In September 1996, the Company completed an offering of $1,506,000 of
7.0% Convertible Promissory Notes due January 15, 1998 (the "Notes"). Interest
on the Notes is payable quarterly by the Company and the principal thereof
(plus any accrued interest) may, at the option of the holder, be converted into
shares of Common Stock at a conversion price of $1.00 per share. Any such
conversion must be made on or before January 15, 1998. Approximately
$1,165,007 of the proceeds of this offering were advanced to AHS, ASI and HSI
to support their operations (which advances were accounted for as notes
receivable from affiliates), while the balance of the proceeds from the sale of
the Notes were utilized to expand the Company's sales and marketing
capabilities. The advances to AHS, ASI and HSI were converted to equity upon
the acquisition of these companies in November 1996.
In January 1997, the Company completed a private placement of
1,684,975 shares of Common Stock and 730,156 Warrants, resulting in net
proceeds to the Company of approximately $1.8 million. The net proceeds of the
offering were utilized by the Company to expand its sales and marketing
efforts, enhance its software products, support the growth of its
administrative infrastructure, to fund expenses related to the acquisition of
selected healthcare software, service and system integration companies and for
general corporate purposes.
-25-
<PAGE> 27
In May 1997, the Company completed a private placement of 1,148,333
shares of Common stock and 497,609 Warrants, resulting in net proceeds to the
Company of approximately $1.5 million. The net proceeds of the offering were
utilized by the Company to expand its sales and marketing efforts, support the
growth of its administrative infrastructure, to fund expenses related to the
acquisition of selected healthcare software, service and system integration
companies and for general corporate purposes.
In September 1997, the Company completed a private placement of
1,739,000 shares of Common Stock, resulting in net proceeds to the Company of
approximately $1,875,000. The net proceeds of the offering were utilized by the
Company to expand its sales and marketing efforts, support the growth of its
administrative infrastructure, to fund expenses related to the acquisition of
selected healthcare software, service and system integration companies and for
general corporate purposes.
On September 30, 1997, the Company issued 1,081,000 shares of Common
Stock upon the conversion by holders of approximately $1,081,000 in principal
amount of the Company's Notes. Following the conversion, $425,000 in principal
remained outstanding under the Notes. In addition to reducing future cash
interest expense by approximately $22,000, the Note conversion eliminated the
obligation of the Company to repay the principal sum of $1,081,000 at maturity
on January 15, 1998. Also on September 30, 1997, the Company issued
approximately 327,000 shares of Common Stock upon the conversion by certain
creditors of approximately $327,000 of principal and accrued interest.
The Company will likely require additional capital or other financing
to finance its operations and continued growth. There can be no assurance that
the Company will be able to obtain such financing if and when needed, or that
if obtained, it will be sufficient or on terms and conditions acceptable to the
Company.
In May 1997, the Company entered into a settlement agreement with a
former employee of HSI with respect to the amount of severance owed by HSI
pursuant to the employee's employment contract. The parties reached a
settlement of $138,000 (which amount had been accrued by the Company at
December 31, 1996), with $50,000 payable in installments through August 1997
and a lump sum payment of $88,000 due September 1, 1997. The lump sum amount
may, under certain conditions, be paid in stock of the Company.
No provision has been made in the financial statements for any
settlements or judgments relating to either of the matters discussed under the
Risk Factors section included herein or in "Item 3. Legal Proceedings" in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1996.
In the event of a material judgment or settlement resulting from either of
these matters, the Company would experience an adverse effect on its liquidity.
Additionally, all agreements to date for the Healthcare Enterprise System
product have been for pilot sites and have contingencies. In the event that
the pilot testing identifies substantive modifications to the product which are
mandatory for marketplace feasibility, additional development costs and/or
delays in launching the product could have a material adverse effect on
liquidity.
INFLATION
The Company is affected by inflation through increased personnel costs
and other selling, general and administrative expenses. Hardware costs have
generally declined, and this trend is expected to continue.
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<PAGE> 28
SELLING SHAREHOLDERS
Except as indicated otherwise, the following table sets forth certain
information regarding the beneficial ownership of the Company's Common Stock as
of October 2, 1997 by the shareholders of the Company who are offering
securities pursuant to this Prospectus (the "Selling Shareholders"). "Beneficial
Ownership" includes shares for which an individual, directly or indirectly, has
or shares voting or investment power or both. All of the listed persons have
sole voting and investment power over the shares listed opposite their names
unless otherwise indicated in the notes below. Shares shown as beneficially
owned after the offering assumes that all shares offered hereby by the Selling
Shareholder are sold. As of October 2, 1997, there were 44,288,929 shares of the
Company's Common Stock outstanding.
<TABLE>
<CAPTION>
BEFORE THE OFFERING AFTER THE OFFERING
------------------- ------------------
Number NUMBER
NAME OF BENEFICIAL Beneficially PERCENT SECURITIES TO BENEFICIALLY PERCENT
OWNER OWNED (1) OF CLASS BE OFFERED(2) OWNED OF CLASS
- ------------------ ------------- -------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Jeffrey Albrecht ................... 266,667(3) * 266,667 0 0
Mitchell Andrews ................... 165,510(13) * 165,510 0 0
Annecy Partners .................... 80,000(4) * 80,000 0 0
Shepard B. Ansley, IRA R/O ......... 13,333(5) * 13,333 0 0
Atlanta Jewish Federation .......... (9) * (9) 0 0
Wayne P. Attkinson, DDS, PA
Money Purchase Pension Plan ..... 22,221(6) * 22,221 0 0
Attkisson, Carter & Akers, Inc. .... 283,331(7) * 283,331 0 0
James E. Askew ..................... 58,667(8) * 58,667 0 0
AUBIS, L.L.C ....................... 9,978,389(9) 22.5 9,870,889 107,500 *
John W. Baker ...................... 379,999(10) * 379,999 0 0
Evelyn Barrett/WSJR ................ 19,000 * 19,000 0 0
Philip Beatty ...................... 5,000 * 5,000 0 0
Chris Bentson ...................... 72,563(11) * 72,563 0 0
David E. Boyd ...................... 80,000(4) * 80,000 0 0
James Brown ........................ 16,000 * 16,000 0 0
Darren H. Bryant ................... 15,000 * 15,000 0 0
Freddie & Jean Bryant .............. 25,000 * 25,000 0 0
Todd Bryant ........................ 80,000(12) * 80,000 0 0
Sharon Bryant-Brown ................ 10,000 * 10,000 0 0
R. Stephen Burch ................... 10,000 * 10,000 0 0
Burch G. Cameron ................... 189,000(13) * 189,000 0 0
Peter M. Candler ................... 53,000(14) * 53,000 0 0
Belfield H. Carter, Jr. IRA ........ 80,000(4) * 80,000 0 0
Anne W. Carville ................... 532 * 532 0 0
Anne W. Carville as custodian for
Claire Sevier Carville .......... 532 * 532 0 0
Stephen Normand Carville ........... 532 * 532 0 0
Stephen N. Carville as custodian for
Joseph James Carville ........... 532 * 532 0 0
Stephen N. Carville as custodian for
Stephen Normand Carville, Jr .... 532 * 532 0 0
</TABLE>
-27-
<PAGE> 29
<TABLE>
<CAPTION>
BEFORE THE OFFERING AFTER THE OFFERING
-------------------------- -----------------------
Number NUMBER
NAME OF BENEFICIAL Beneficially PERCENT SECURITIES TO BENEFICIALLY PERCENT
OWNER OWNED (1) OF CLASS BE OFFERED(2) OWNED OF CLASS
- ------------------ ------------- -------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Victor & Deborah Clark ............. 10,000 * 10,000 0 0
Charles Cone, Jr ................... 2,112,205(13) 4.8 2,112,205 0 0
Gael J. Cone ....................... 25,000 * 25,000 0 0
William E. Davidson, Jr ............ 20,000 * 20,000 0 0
Jay M. Davis ....................... 111,111(15) * 111,111 0 0
Wink A. Davis, Jr .................. 80,000(4) * 80,000 0 0
John M. Dratch ..................... 10,000(12) * 10,000 0 0
Keith B. Dressler .................. 200,000 * 200,000 0 0
First Tennessee Bank Trustee for
Stanley Dressler Pension Plan ... 200,000 * 200,000 0 0
George V. Duczak ................... 730,964(13) 1.7 675,000 55,964 *
Ruben M. Duron ..................... 7,407 * 7,407 0 0
Jeffrey S. Ellerman ................ 50,000 * 50,000 0 0
Jim Elliott ........................ 50,000(12) * 50,000 0 0
Ann J. Ellis ....................... 532 * 532 0 0
Jack Ray Farm ...................... 80,000(4) * 80,000 0 0
Rodger Fauber ...................... 50,000 * 50,000 0 0
Michelle R. Fawcett ................ 96,340(13) * 96,340 0 0
Walter R. Fawcett, III ............. 397,451(13) * 397,451 0 0
Larry Fisher(16) ................... 3,050,500(17) 6.6 2,142,500 908,000 2.0
Laurie B. Fisher ................... 155,000 * 155,000 0 0
James D. Fluker, Jr ................ 105,000(18) * 105,000 0 0
Gerald R. Forsythe ................. 837,376(13) 1.9 837,376 0 0
Jean D. Forsythe ................... 89,755 * 89,755 0 0
Melissa S. Forsythe ................ 96,340(13) * 96,340 0 0
Monica J. Forsythe ................. 96,340(13) * 96,340 0 0
Marsha F. Fournier ................. 96,340(9)(13) * 96,340 0 0
Deborah R. Fowler .................. 25,000 * 25,000 0 0
W. Guy Fowler ...................... 25,000 * 25,000 0 0
Charles P. Garrison ................ 146,667(19) * 66,667 80,000 *
J. Harper Gaston ................... 25,000(12) * 25,000 0 0
Anyce Cecilia Griffon .............. 532 * 532 0 0
Howard E. Gilbert .................. 5,000 * 5,000 0 0
Duane Joseph Griffon ............... 532 * 532 0 0
George Gustave Griffon, III ........ 532 * 532 0 0
Jodi Kleinpeter Griffon ............ 532 * 532 0 0
Lance Champagne Griffon ............ 532 * 532 0 0
Renee Lucille Griffon .............. 532 * 532 0 0
Luis F. Gutierrez .................. 250,000 * 250,000 0 0
Nancy W. Halper .................... 5,000 * 5,000 0 0
Joseph W. Hamilton ................. 10,000 * 10,000 0 0
Sonny Hamilton ..................... 10,000 * 10,000 0 0
</TABLE>
-28-
<PAGE> 30
<TABLE>
<CAPTION>
BEFORE THE OFFERING AFTER THE OFFERING
-------------------------- ----------------------
Number NUMBER
NAME OF BENEFICIAL Beneficially PERCENT SECURITIES TO BENEFICIALLY PERCENT
OWNER OWNED (1) OF CLASS BE OFFERED(2) OWNED OF CLASS
- ------------------ ------------- -------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Brad Hammond ....................... 50,000(12) * 50,000 0 0
Brett Hardt ........................ 400,000(20) * 400,000 0 0
Harshman & Phillips, P.C ........... 31,996 * 31,996 0 0
Paul Harrison(21) .................. 19,527,723(22) 40.1 4,100,000 350,000 *
Quill O. Healey .................... 80,000(4) * 80,000 0 0
Healthcare Technology Investments, . 5,000,000(23) 11.3 5,000,000 0 0
L.L.C. Charles R. Heaton ........... 40,000(24) * 40,000 0 0
Joseph Terrell Hill as custodian for
David Williams Hill ............. 532 * 532 0 0
Joseph Terrell Hill as custodian for
Joseph Carter Hill .............. 532 * 532 0 0
Joseph Terrell Hill as custodian for
Laren Terrell Hill .............. 532 * 532 0 0
Phillip L. Hinson .................. 15,000 * 15,000 0 0
Samuel D. Holmes ................... 50,000 * 50,000 0 0
Theodore M. Homa ................... 200,946(13) * 200,946 0 0
W. Gerry Howe ...................... 180,075(13) * 180,075 0 0
Gordon P. Hurley ................... 80,000(4) * 80,000 0 0
Indeck Energy Services, Inc. ....... 85,132(13) * 85,132 0 0
Peter R. Indovina .................. 675,000(13) 1.5 675,000 0 0
Mark Jarosz ........................ 25,000(25) * 25,000 0 0
Mark C. Kendall .................... 144,745(13) * 144,745 0 0
Frank Kinnett ...................... 25,000 * 25,000 0 0
Frank Kinnett Profit Sharing Plan .. 80,000(4) * 80,000 0 0
Diane G. Kling ..................... 532 * 532 0 0
Sherrill W. Lane ................... 532 * 532 0 0
Sherrill W. Lane as custodian for
Camille Womack Palmer ........... 532 * 532 0 0
Sherrill W. Lane as custodian for
Archer Cotton Lane .............. 532 * 532 0 0
Sherrill W. Lane as custodian for
Malcolm Taylor Lane ............. 532 * 532 0 0
Thomas A. Lane ..................... 532 * 532 0 0
Thomas A. Lane as custodian for
Caroline Copeland Lane .......... 532 * 532 0 0
Gordon R. Lang ..................... 250,000 * 250,000 0 0
Leslie S. Leighton and Deborah G ...
Leighton ........................ 98,667(19) * 66,667 32,000 *
Daniel S. Lipson .................. 50,000(26) * 50,000 0 0
Nathan I. Lipson(27) ............... 228,945(28) * 90,000 138,945 *
Sara Beth Lipson ................... 74,000(29) * 74,000 0 0
James Long, Jr ..................... 20,000 * 20,000 0 0
</TABLE>
-29-
<PAGE> 31
<TABLE>
<CAPTION>
BEFORE THE OFFERING AFTER THE OFFERING
-------------------------- -----------------------
Number NUMBER
NAME OF BENEFICIAL Beneficially PERCENT SECURITIES TO BENEFICIALLY PERCENT
OWNER OWNED (1) OF CLASS BE OFFERED(2) OWNED OF CLASS
- ------------------ ------------- -------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Priscilla W. Lopez-Tan ............. 155,597(13) * 155,597 0 0
Gail Mackey ........................ 532 * 532 0 0
Reno Madsen ........................ 10,000 * 10,000 0 0
David J. Mahan ..................... 11,667(30) * 11,667 0 0
David J. Mahan and Sue R. Mahan ....
JTWROS .......................... 64,400(31) * 64,400 0 0
David J. Mahan IRA ................. 51,240(32) * 51,240 0 0
David J. Mahan Custodian for Holly
M. Mahan ........................ 22,439(33) * 22,439 0 0
Anthony F. Maniscalco and Catherine
A. Maniscalco ................... 3,733,333(13) 8.4 3,733,333 0 0
Gary M. Marcello ................... 34,000(34) * 34,000 0 0
Victor L. Marcello ................. 27,777(35) * 27,777 0 0
John D. Margeson ................... 340,000(36) * 340,000 0 0
James A. Martin, III ............... 8,000(37) * 8,000 0 0
Joseph J. Maschek, Jr .............. 163,332(13) * 163,332 0 0
Greg McGowan ....................... 66,666(38) * 66,666 0 0
William L. Meyer ................... 35,200(39) * 25,000 10,200 *
Randy H. Nash ...................... 21,384(40) * 21,384 0 0
Randy H. Nash IRA .................. 34,395(41) * 34,395 0 0
Joseph H. Neely & Christine G ......
Neely(42) ....................... 2,365,838 5.3 2,365,838 0 0
Northstar Capital Partners, LP. .... 72,000(43) * 72,000 0 0
Toni Olson and Mark Olson JTWROS ... 43,333(44) * 43,333 0 0
Cole Pate .......................... 10,000(45) * 10,000 0 0
Don Pearce ......................... 50,000 * 50,000 0 0
Robert F. Perry .................... 53,333(46) * 53,333 0 0
Paul Harrison Enterprises, Inc. .... 98,334(47) * 90,000 8,334 *
Joanne Pisani ...................... 60,000(12) * 60,000 0 0
Charles Powell ..................... 10,000 * 10,000 0 0
Jeff Powell......................... 10,000 * 10,000 0 0
Johanne Powell...................... 10,000 * 10,000 0 0
Gordon Random....................... 25,000(48) * 25,000 0 0
Vijaykumar M. Rao & Prema V. Rao.... 250,000 * 250,000 0 0
Brenda Rappaport.................... 10,000 * 10,000 0 0
Daniel B. Rather.................... 146,667(49) * 146,667 0 0
Karen Robinson...................... 22,222 * 22,222 0 0
William G. Rogers................... 28,000(50) * 28,000 0 0
Robert A. Rowland................... 80,000(4) * 80,000 0 0
Steven M. Schwartz.................. 50,000 * 50,000 0 0
Paul M. Seeley...................... 10,000 * 10,000 0 0
Charles L. Shields.................. 40,000(24) * 40,000 0 0
</TABLE>
-30-
<PAGE> 32
<TABLE>
<CAPTION>
BEFORE THE OFFERING AFTER THE OFFERING
-------------------------- -----------------------
Number NUMBER
NAME OF BENEFICIAL Beneficially PERCENT SECURITIES TO BENEFICIALLY PERCENT
OWNER OWNED (1) OF CLASS BE OFFERED(2) OWNED OF CLASS
- ------------------ ---------- -------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Irving M. Shlesinger...................... 25,000 * 25,000 0 0
John Shlesinger........................... 50,000(12) * 50,000 0 0
David Short............................... 1,000 * 1,000 0 0
Jim Simmons............................... 50,000(12) * 50,000 0 0
John F. Singleton......................... 20,000 * 20,000 0 0
Robert V. Smith........................... 10,000 * 10,000 0 0
Philip E. Spicer.......................... 1,875,000(51) 4.1 1,875,000 0 0
Gordon Stene.............................. 13,333(5) * 13,333 0 0
Penny Stovall............................. 25,000 * 25,000 0 0
Wayne W. Surman & Charlotte S.
Surman................................. 60,000 * 60,000 0 0
Kenneth Swinney........................... 45,000(45) * 45,000 0 0
Mark Thompson............................. 15,000 * 15,000 0 0
Patricia Toledano......................... 100,000(45) * 100,000 0 0
Barnie Vanzant, Jr........................ 27,777(35) * 27,777 0 0
James B. Vincent.......................... 10,000 * 10,000 0 0
Sudesh K. Vohra........................... 250,000 * 250,000 0 0
Robert Wait............................... 18,000 * 18,000 0 0
Marvin E. Wallace......................... 72,115(52) * 72,115 0 0
Walton Properties Profit Sharing Plan *
& Trust................................ 50,000(12) 50,000 0 0
Adam J. Waxman............................ 25,000 * 25,000 0 0
Samuel E. Webster......................... 80,000(4) * 80,000 0 0
James H. Whitmire......................... 855,157(13) 1.9 855,157 0 0
David Williams and Judith Napier True..... 22,221(53) * 22,221 0 0
Barbara Womack............................ 532 * 532 0 0
Ellen Lowe Womack......................... 532 * 532 0 0
Lydia Womack.............................. 266 * 266 0 0
Lydia Womack as custodian for Lydia
Caroline Campbell...................... 266 * 266 0 0
Lydia Womack as custodian for
William Campbell....................... 266 * 266 0 0
Margaret Champagne Griffon Womack......... 5,320 * 5,320 0 0
Milton J. Womack.......................... 57,656(4) * 57,656 0 0
Milton J. Womack, Jr...................... 532 * 532 0 0
Milton J. Womack, Jr. as custodian for
Hannah Louise Womack.................... 532 * 532 0 0
Thomas McD. Womack as custodian for
Thomas McD. Womack, Jr................. 266 * 266 0 0
Thomas McD. Womack as custodian
for Annie Weeks Womack................. 266 * 266 0 0
Thomas McD. Womack as custodian
for Maria McKenzie Womack.............. 266 * 266 0 0
</TABLE>
-31-
<PAGE> 33
<TABLE>
<CAPTION>
BEFORE THE OFFERING AFTER THE OFFERING
-------------------------- -----------------------
Number NUMBER
NAME OF BENEFICIAL Beneficially PERCENT SECURITIES TO BENEFICIALLY PERCENT
OWNER OWNED (1) OF CLASS BE OFFERED(2) OWNED OF CLASS
- ------------------ ---------- -------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Thomas McD. Womack as custodian
for Reed Waddell Womack................ 266 * 266 0 0
Thomas McD. Womack as custodian
for Brendan Wall Womack................. 266 * 266 0 0
Dr. James H. Wood......................... 50,000 * 50,000 0 0
Dr. James H. Wood and Mary K. *
Wood................................... 316,667(3) 266,667 50,000 *
Ken Woods................................. 27,777(35) * 27,777 0 0
Debra York................................ 1,201,000(54) 2.7 1,183,000 18,000 *
-----------
Total............................... 45,335,709
</TABLE>
- ----------------------------------------
* Less than 1% of outstanding shares
(1) In September 1996, the Company completed an offering of $1,506,000 of 7.0%
Convertible Promissory Notes due January 15, 1998 (the "Notes"). Interest
on the Notes is payable quarterly by the Company and the principal (plus
any accrued interest) may, at the option of the holder, be converted into
shares of Common Stock at a conversion price of $1.00 per share. In January
1997, the Company completed a private placement of 1,684,975 shares of
Common Stock and 730,156 warrants (the "Warrants"). Warrants are
immediately exercisable at an exercise price of $1.75 per share and expire
on December 31, 1999. In addition, in May, 1997, the Company completed a
private placement of 1,148,333 shares of Common Stock and 497,609 Warrants.
The holders of the above-referenced securities have been granted certain
registration rights by the Company. Accordingly, such securities are being
registered by the Company hereby. For the purpose of this Prospectus, it is
assumed that the holder exercises 100% of the option or Warrant or converts
100% of the Note, as the case may be.
(2) Substantially all of the shares of Common Stock included in this
Registration Statement are being registered by the Company for the benefit
of the selling shareholders pursuant to certain registration rights granted
by the Company. Accordingly, not all of the shares of Common Stock included
herein may actually be sold by the selling shareholders pursuant to the
Registration Statement.
(3) Includes 66,667 shares subject to presently exercisable Warrants.
(4) Includes 20,000 shares subject to presently exercisable Warrants.
(5) Includes 3,333 shares subject to presently exercisable Warrants.
(6) Includes 5,555 shares subject to presently exercisable Warrants.
(7) Represents shares subject to presently exercisable Warrants.
(8) Represents shares of Common Stock issued by the Company to Mr. Askew
pursuant to the terms of a settlement agreement entered into by the Company
and Mr. Askew. See Note 22 hereof for information with respect to certain
shares of Common Stock held indirectly as a member of Healthcare Technology
Investments, L.L.C.
(9) The shares held by AUBIS, L.L.C., a Georgia limited liability company
("AUBIS"), may be transferred to any of its members or subsequent
transferees who shall also be specifically covered by this offering. Mr.
Harrison presently has the power to vote all of these shares by virtue of
his positions as President and manager of this entity, but specifically
disclaims beneficial ownership with respect to 7,452,229 shares held by
AUBIS. The current members and their current beneficial ownership interests
in the shares held by AUBIS are as follows: Paul Harrison Enterprises, Inc.
(4,457,047, of which 4,409,030 are being registered); Paul W. Harrison
(346,900 directly, 2,179,260 indirectly, of which 343,163 and 2,155,782 are
being registered, respectively); Nathan Lipson (2,719,410, of which
2,690,113 are being registered); Gordon Random (997,839, of which 987,089
are being registered); Marvin Wallace (997,839, of which 987,089 are being
registered); Sara Beth Lipson (149,676, of which 148,063 are being
registered); Daniel S. Lipson (149,676, of which 148,063 are being
registered); Marsha F. Fournier (152,019, of which 150,381 are being
registered); and Bruce Reich (7,983, of which 7,898
-32-
<PAGE> 34
are being registered). Immediately upon distribution of the shares of
Common Stock held by AUBIS to its members, Mr. Lipson will transfer by gift
100,000 shares of such Common Stock to the Atlanta Jewish Federation,
which shall then be deemed to be a Selling Shareholder in this Offering.
AUBIS' business address is 3390 Peachtree Road, N.E., Suite 1000, Lenox
Towers, Atlanta, Georgia 30326.
(10) Includes 94,999 shares subject to presently exercisable Warrants.
(11) Includes 45,000 shares subject to presently exercisable stock options.
Shares were issued by the Company in connection with acquisitions of other
businesses. The holders of these shares have been granted certain
registration rights by the Company. Accordingly, such shares are being
registered by the Company hereby.
(12) Represents shares subject to a presently convertible Note.
(13) All or a portion of such shares were issued by the Company in connection
with acquisitions of other businesses. The
holders of these shares have been granted certain registration rights by
the Company. Accordingly, such shares are being registered by the Company
hereby.
(14) Includes 7,000 shares subject to presently exercisable Warrants and 25,000
shares subject to a presently convertible Note.
(15) Includes 27,778 shares subject to presently exercisable Warrants.
(16) Mr. Fisher is a director, the Executive Vice President, Chief
Administrative Officer and Secretary of the Company.
(17) Includes 2,400,000 shares subject to presently exercisable stock options.
Mr. Fisher's business address is 9040 Roswell Road, Suite 470, Atlanta,
Georgia 30350.
(18) Includes 20,000 shares subject to presently exercisable Warrants and 25,000
shares subject to a presently convertible Note.
(19) Includes 16,667 shares subject to presently exercisable Warrants.
(20) Includes 100,000 shares subject to presently exercisable Warrants. (21) Mr.
Harrison is the Chairman of the Board and Chief Executive Officer of the
Company.
(22) Includes (i) 4,450,000 shares subject to presently exercisable stock
options, (ii) 98,334 shares owned by PHE, Inc., which Mr. Harrison has the
power to vote by virtue of his position as the president of such entity but
of which Mr. Harrison disclaims beneficial ownership with respect to 50,254
shares, (iii) 9,978,389 shares owned by AUBIS, L.L.C., which Mr. Harrison
has the power to vote by virtue of his position as the President and
manager of this entity but of which Mr. Harrison disclaims beneficial
ownership with respect to 7,452,229 shares and (iv) 5,000,000 shares owned
by Healthcare Technology Investments, L.L.C. ("HTI"), which Mr. Harrison
has the power to vote by virtue of his position as the President and
manager of this entity but of which Mr. Harrison disclaims beneficial
ownership with respect to 2,581,168 shares. Mr. Harrison's business address
is 9040 Roswell Road, Suite 470, Atlanta, Georgia 30350.
(23) The shares held by Healthcare Technology Investments, L.L.C., a Georgia
limited liability company ("HTI"), may be transferred to any of its members
or subsequent transferees who shall also be specifically covered by this
offering. Mr. Harrison presently has the power to vote all of these shares
by virtue of his positions as President and manager of this entity, but
specifically disclaims beneficial ownership with respect to 2,581,168
shares held by HTI. The current members and their current beneficial
ownership interests in the shares held by HTI are as follows: Paul Harrison
Enterprise, Inc. (3,879,050); Paul W. Harrison (522,180, directly,
1,896,652, indirectly); James Askew (186,495); Lonnie Herzog (186,495),
Eugene Harrison (99,465); Kathleen Wilhoit (74,595); Bill McIvor (39,785);
and Frank Sparkman (11,935). HTI's business address is 3390 Peachtree Road,
N.E., Lenox Towers, Suite 1000, Atlanta, Georgia 30326.
(24) Includes 10,000 shares subject to presently exercisable Warrants.
(25) Represents shares subject to presently exercisable stock options.
(26) See Note 9 hereof for information with respect to certain shares of Common
Stock held indirectly as a member of AUBIS, L.L.C.
(27) Mr. Lipson is a director of the Company.
(28) Includes 10,000 shares subject to presently exercisable stock options. See
Note 9 hereof for information with respect to certain shares of Common
Stock held indirectly as a member of AUBIS, L.L.C.
(29) See Note 9 hereof for information with respect to certain shares of Common
Stock held indirectly as a member of AUBIS, L.L.C.
(30) Includes 2,917 shares subject to presently exercisable Warrants.
(31) Includes 16,100 shares subject to presently exercisable Warrants.
(32) Includes 12,810 shares subject to presently exercisable Warrants.
(33) Includes 5,610 shares subject to presently exercisable Warrants.
(34) Includes 8,500 shares subject to presently exercisable Warrants.
-33-
<PAGE> 35
(35) Includes 6,944 shares subject to presently exercisable Warrants.
(36) Includes 85,000 shares subject to presently exercisable Warrants.
(37) Includes 2,000 shares subject to presently exercisable Warrants.
(38) Includes 16,666 shares subject to presently exercisable Warrants.
(39) Includes 10,000 shares held by Mr. Meyer's two minor children. Mr. Meyer is
a partner of the law firm of Smith, Gambrell & Russell, LLP which serves as
the Company's outside legal counsel.
(40) Includes 5,346 shares subject to presently exercisable Warrants.
(41) Includes 8,599 shares subject to presently exercisable Warrants.
(42) Mr. Neely serves as the Chief Operating Officer of the Company. Mr. Neely's
business address is 9040 Roswell Road, Suite 470, Atlanta, Georgia 30350
(43) Includes 18,000 shares subject to presently exercisable Warrants.
(44) Includes 10,833 shares subject to presently exercisable Warrants.
(45) Represents shares subject to presently exercisable stock options.
(46) Includes 13,333 shares subject to presently exercisable Warrants.
(47) See Note 9 hereof for information with respect to certain shares of Common
Stock held indirectly as a member of AUBIS, L.L.C. See Note 23 hereof for
information with respect to certain shares of Common Stock held indirectly
as a member of Healthcare Technology Investments, L.L.C.
(48) See Note 9 hereof for information with respect to certain shares of Common
Stock held indirectly as a member of AUBIS, L.L.C.
(49) Includes 36,667 shares subject to presently exercisable Warrants.
(50) Includes 7,000 shares subject to presently exercisable Warrants.
(51) Includes 1,250,000 shares subject to presently exercisable stock options.
Mr. Spicer's business address is 1733 Park Street, Suite 300, Naperville,
Illinois 60544. Shares were issued by the Company in connection with
acquisitions of other businesses. The holders of these shares have been
granted certain registration rights by the Company. Accordingly, such
shares are being registered by the Company hereby.
(52) See Note 9 hereof for information with respect to certain shares of Common
Stock held indirectly as a member of AUBIS, L.L.C.
(53) Includes 5,555 shares subject to presently exercisable Warrants.
(54) Includes 85,000 shares subject to presently exercisable stock options.
Shares were issued by the Company in connection with acquisitions of other
businesses. The holders of these shares have been granted certain
registration rights by the Company. Accordingly, such shares are being
registered by the Company hereby.
-34-
<PAGE> 36
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of HALIS consists of 100,000,000 shares
of Common Stock, par value $.01 per share and 5,000,000 shares of Preferred
Stock, par value $.10 per share.
COMMON STOCK
Each share of Common Stock is entitled to one vote per share for the
election of directors and on all other matters submitted to a vote of
shareholders. There are no cumulative voting rights. Common shareholders do
not have preemptive rights or other rights to subscribe for additional shares,
and HALIS' Common Stock is not subject to conversion or reduction. All the
outstanding Common Stock is, and all shares issuable hereunder will be, duly
and validly issued, fully paid and nonassessable. In the event of liquidation,
subject to the rights of holders of the Notes and any other notes or Common
Stock subsequently issued, the holders of Common Stock will share equally in
any balance of corporate assets available for distribution to them. Subject to
the rights of holders of the Notes, holders of the Common Stock are entitled to
receive dividends when and as declared by HALIS' Board of Directors out of
funds legally available therefor. HALIS has not paid any dividends since its
inception and has no intention to pay any dividends in the foreseeable future.
Any future dividends would be subject to the discretion of HALIS' Board of
Directors and would depend on, among other things, future earnings, the
operating and financial condition of HALIS, its capital requirements, and
general business conditions.
PREFERRED STOCK
HALIS is authorized to issue up to 5,000,000 shares of $.10 par value
Preferred Stock, none of which is outstanding. The Board of Directors has the
power, without further action by the shareholders, to divide any and all shares
of Preferred Stock into series and to fix and determine the relative rights and
preferences of the Preferred Stock, such as the designation of series and the
number of shares constituting such series, dividend rights, redemption and
sinking fund provisions, liquidating and dissolution preferences, conversion or
exchange rights and voting rights, if any. Issuances of Preferred Stock by the
Board of Directors may result in such shares having senior dividend and/or
liquidation preferences to the holders of shares of Common Stock and may dilute
the voting rights of such holders. Issuances of Preferred Stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could, among other things, adversely affect the
voting rights of holders of the Common Stock. In addition, the issuance of
Preferred Stock could make it more difficult for a third party to acquire a
majority of the outstanding voting stock. Accordingly, the issuance of
Preferred Stock may be used as an "anti-takeover" device without further action
on the part of the stockholders of HALIS. HALIS has no present plans to issue
any shares of Preferred Stock and has agreed that it will not issue any shares
of Preferred Stock on or before September 11, 1997 without shareholder
approval.
COMMON STOCK PURCHASE WARRANTS
HALIS currently has outstanding approximately 1.2 million Common Stock
Purchase Warrants.
Exercise Price and Periods. Each Warrant is exercisable at a price of
$1.75 per share (the "Exercise Price"). The expiration date of the Warrants
may be extended indefinitely or the exercise price thereof reduced, at the
discretion of HALIS, upon giving written notice to the Transfer and Warrant
Agent and the Warrantholders. The expiration date of the Warrants is December
31, 1999, subject to further extension at the option of HALIS.
-35-
<PAGE> 37
Rights of Warrantholders. Holders of the Warrants have no voting
rights and are not entitled to dividends. In the event of liquidation,
dissolution, or winding up of the affairs of HALIS, holders of the Warrants
will not be entitled to participate in any liquidation distribution. Holders
of Warrants are protected against dilution of their interests represented by
the underlying shares of Common Stock upon the occurrence of stock dividends,
stock splits, or reclassifications of HALIS' Common Stock.
Limitations Upon Exercise. The Warrants may not be exercised unless
HALIS maintains a current Registration Statement in effect with the SEC or an
exemption from such registration is available during the exercise period of the
Warrants. HALIS is required to use its best efforts to file a Registration
Statement and to keep information on HALIS current during the period within
which the Warrants may be exercised. However, HALIS will have no obligation to
keep the Registration Statement current when the market bid price for HALIS'
Common Stock is below the exercise price of the Warrants by more than ten
percent (10%) for a period of not less than twenty (20) consecutive trading
days.
Transfer, Exchange and Exercise. The Warrants are in registered form
and may be presented to the Transfer and Warrant Agent for transfer, exchange
or exercise at any time on or prior to their expiration date, at which time the
Warrants become wholly void and of no value. If a market for the Warrants
develops, the holder may sell the Warrants instead of exercising them. There
can be no assurance, however, that a market for the Warrants will develop or
continue.
Effect of Warrants. For the life of the Warrants, Warrantholders have
the opportunity to profit from a rise in the market value of the Common Stock
of HALIS, if any, at the expense of the holders of Common Stock. A
Warrantholder may be expected to exercise Warrants at a time when HALIS, in all
likelihood, would be able to obtain equity capital, if it so desired, by a
public sale of new Common Stock on terms more favorable than those provided in
the Warrants. Exercise of the Warrants could dilute the equity interest of
other stockholders in HALIS.
TRANSFER AND WARRANT AGENT
SunTrust Bank, Atlanta, acts as the Transfer Agent and Warrant Agent
for the Common Stock and Warrants of HALIS.
-36-
<PAGE> 38
PLAN OF DISTRIBUTION
The shares of Common Stock offered hereby for the benefit of the
Selling Shareholders were originally issued by the Company pursuant to the
private placement exemption from registration provided in Sections 3(b) and/or
4(2) of the Securities Act of 1933, as amended. The Company has agreed to
register the shares for resale by the Selling Shareholders. The Company will
not receive any of the proceeds from the sale of such shares by the Selling
Shareholders. See "Use of Proceeds."
The Common Stock may be sold from time to time by the Selling
Shareholders, or by pledgees, donees, transferees or other successors in
interest. Such sales may be made on one or more exchanges or in the
over-the-counter market, or otherwise, at prices and on terms then prevailing
or at prices related to the then current market price, or in negotiated
transactions. Accordingly, sales prices and proceeds to the Selling
Shareholders will depend upon market price fluctuations and the manner of sale.
The shares may be sold by one or more of the following, without limitation: (a)
a block trade in which the broker or dealer so engaged will attempt to sell the
shares as agent but may position and resell a portion of the block as principal
to facilitate the transaction, (b) purchases by a broker or dealer as principal
and resale by such broker or dealer or for its account pursuant to the
Prospectus, as supplemented, (c) an exchange distribution in accordance with
the rules of such exchange, and (d) ordinary brokerage transactions and
transactions in which the broker solicits purchasers. In addition, any
securities covered by the Prospectus which qualify for sale pursuant to Rule
144 may be sold under Rule 144 rather than pursuant to the Prospectus, as
supplemented. From time to time the Selling Shareholders may engage in short
sales, short sales against the box, puts and calls and other transactions in
securities of the Company or derivatives thereof, and may sell and deliver the
shares in connection therewith.
From time to time Selling Shareholders may pledge their shares
pursuant to the margin provisions of their respective customer agreements with
their respective brokers. Upon a default by a Selling Shareholder, the broker
may offer and sell the pledged shares of Common Stock from time to time as
described hereunder.
The Selling Shareholders may effect transactions by selling to or
through one or more broker-dealers, and such broker-dealers may receive
compensation in the form of underwriting discounts, brokerage commissions or
similar fees in amounts which may vary from transaction to transaction. The
Selling Shareholders will pay such brokerage commissions and charges, as well
as the fees and expenses of any counsel retained by them in connection with
this offering. The Company will bear all other expenses in connection with
registering the shares offered hereby, which expenses are estimated to total
approximately $63,953.
LEGAL MATTERS
Certain legal matters with respect to the legality of the shares of
Common Stock offered hereby have been passed upon for the Company by Smith,
Gambrell & Russell, LLP, Atlanta, Georgia.
EXPERTS
The financial statements of the Company as of and for the fiscal year
ended December 31, 1996, and the financial statements of AUBIS Hospitality
Systems, Inc. and Subsidiaries, AUBIS Systems Integration, Inc., HALIS
Software, Inc., and ProHealth Solutions, Inc. as of and for the fiscal year
ended December 31, 1995, included and incorporated in this Prospectus by
reference to the Company's Annual Report on Form 10-KSB for the year ended
-37-
<PAGE> 39
December 31, 1996 have been audited by the firm of Habif, Arogeti & Wynne,
P.C., independent auditors, as set forth in their report thereon and are so
incorporated in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.
The financial statements of Compass as of and for the fiscal year
ended December 31, 1996, included and incorporated in this Prospectus by
reference to the Company's Current Report on Form 8-K (Amendment No. 1) dated
March 28, 1997, have been audited by the firm of Habif, Arogeti & Wynne, P.C.,
independent auditors, as set forth in their report thereon and are so
incorporated in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.
The financial statements of SMG as of December 31, 1996 and for the
two year period ended December 31, 1996, included and incorporated in this
Prospectus by reference to the Company's Current Report on Form 8-K (Amendment
No. 1) dated April 7, 1997, have been audited by the firm of Habif, Arogeti &
Wynne, P.C., independent auditors, as set forth in their report thereon and are
so incorporated in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
The financial statements of ABAS/TPA as of October 31, 1996 and for
the two year period ended October 31, 1996, included and incorporated in this
Prospectus by reference to the Company's Current Report on Form 8-K (Amendment
No. 1) dated April 14, 1997, have been audited by the firm of Habif, Arogeti &
Wynne, P.C., independent auditors, as set forth in their report thereon and are
so incorporated in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
The financial statements of TGM as of December 31, 1996 and for the
year ended December 31, 1996, included and incorporated in this Prospectus by
reference to the Company's Current Report on Form 8-K (Amendment No. 1) dated
July 16, 1997, have been audited by the firm of Habif, Arogeti & Wynne, P.C.,
independent auditors, as set forth in their report thereon and are so
incorporated in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.
The financial statements of PRN as of December 31, 1996 and for the two
year period ended December 31, 1996, included and incorporated in this
Prospectus by reference to the Company's Current Report on Form 8-K (Amendment
No. 1) dated September 18, 1997, have been audited by the firm of Habif, Arogeti
& Wynne, P.C., independent auditors, as set forth in their report thereon and
are so incorporated in reliance upon such report given upon the authority of
such firm as experts in accounting and auditing.
The combined financial statements of PhySource and Theodore M. Homa,
M.D., S.C. as of December 31, 1996 and for the period from inception (February
28, 1996) through December 31, 1996 for PhySource and the year ended December
31, 1996 for Theodore M. Homa, M.D., S.C., included and incorporated in this
Prospectus by reference to the Company's Current Report on Form 8-K (Amendment
No. 1) dated October 13, 1997, have been audited by the firm of Habif, Arogeti
& Wynne, P.C., independent auditors, as set forth in their report thereon and
are so incorporated in reliance upon such report given upon the authority of
such firm as experts in accounting and auditing.
-38-
<PAGE> 40
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
HALIS, INC. AND SUBSIDIARIES
<S> <C>
Independent Auditors' Report...........................................................................F-4
Consolidated Balance Sheet - December 31, 1996.........................................................F-5
Consolidated Statement of Operations for the year ended
December 31, 1996 and Combined Statement of Operations
of the Predecessor for the year ended December 31, 1995..............................................F-7
Consolidated Statement of Stockholders' Deficit for the year
ended December 31, 1996 and Combined Statement of Stockholders'
Deficit of the Predecessor for the year ended December 31, 1995......................................F-8
Consolidated Statement of Cash Flows for the year ended
December 31, 1996 and Combined Statement of Cash Flows
of the Predecessor for the year ended December 31, 1995..............................................F-9
Notes to Consolidated Financial Statements............................................................F-10
Consolidated Balance Sheet at June 30, 1997 (unaudited)...............................................F-26
Consolidated Statements of Operations for the three months Ended June
30, 1997 and Combined Statements of Operations of
the Predecessor for the three months Ended June 30, 1996 (unaudited)................................F-28
Consolidated Statement of Operations for the six months
ended June 30, 1997 and Combined Statements of Operations of
the Predecessor for the six months ended June 30, 1997 (unaudited)..................................F-29
Consolidated Statements of Cash Flows for the six months
ended June 30, 1997 and Combined Statements of Cash Flows
of the Predecessor for the six months Ended June 30, 1996 (unaudited)...............................F-30
Notes to Unaudited Consolidated Financial Statements.................................................F-32
THE COMPASS GROUP, INC.
Independent Auditor's Report..........................................................................F-34
Balance Sheet at December 31, 1996....................................................................F-35
Statement of Operations for the year ended December 31, 1996..........................................F-36
Statement of Stockholders' Equity for the year ended December 31, 1996................................F-37
Statement of Cash Flows for the year ended December 31, 1996..........................................F-38
Notes to Financial Statements.........................................................................F-39
SOFTWARE MANUFACTURING GROUP, INC.
Independent Auditors' Report..........................................................................F-42
Balance Sheet at December 31, 1996....................................................................F-43
Statements of Operations for the years ended December 31, 1996 and 1995...............................F-44
Statements of Changes in Stockholders' Deficit for the years ended
December 31, 1996 and 1995.........................................................................F-45
Statements of Cash Flows for the years ended December 31, 1996 and 1995...............................F-46
Notes to Financial Statements.........................................................................F-47
</TABLE>
F-1
<PAGE> 41
<TABLE>
<CAPTION>
AMERICAN BENEFIT AND ADMINISTRATIVE SERVICES, INC. AND
THIRD PARTY ADMINISTRATORS, INC.
<S> <C>
Independent Auditors' Report..........................................................................F-54
Combined Balance Sheets at January 31, 1997 (unaudited) and October 31, 1996..........................F-55
Combined Statements of Operations for the three month periods ended January 31,
1997 and 1996 (unaudited) and the years ended October 31, 1996 and 1995.............................F-57
Combined Statements of Changes in Stockholders' Equity for the three months ended
January 31, 1997 (unaudited) and the years ended October 31, 1996 and 1995..........................F-58
Combined Statements of Cash Flows for the three month periods ended January 31,
1997 and 1996 (unaudited) and the years ended October 31, 1996 and 1995.............................F-59
Notes to Combined Financial Statements................................................................F-60
TG MARKETING SYSTEMS, INC.
Independent Auditors' Report..........................................................................F-65
Balance Sheets at December 31, 1996 and March 31, 1997 (unaudited)....................................F-66
Statements of Income for the year ended December 31, 1996 and for the
three month periods ended March 31, 1997 and 1996 (unaudited).........................................F-67
Statement of Changes in Stockholders' Equity for the year ended
December 31, 1996 and for the three months ended March 31, 1997 (unaudited)...........................F-68
Statements of Cash Flows for the year ended December 31, 1996 and for
the three month periods ended March 31, 1997 and 1996 (unaudited).....................................F-69
Notes to Financial Statements.........................................................................F-70
PHYSICIANS RESOURCE NETWORK, INC.
Independent Auditors' Report..........................................................................F-74
Balance Sheets at December 31, 1996 and June 30, 1997 (unaudited).....................................F-75
Statements of Operations for the years ended December 31, 1996 and 1995
and the six months ended June 30, 1997 and 1996 (unaudited)..........................................F-76
Statements of Changes in Stockholders' Deficit for the years ended December 31,
1996 and 1995 and the six month period ended June 30, 1997 (unaudited)...............................F-77
Statements of Cash Flows for the years ended December 31, 1996 and 1995
and the six months ended June 30, 1997 and 1996 (unaudited).........................................F-78
Notes to Financial Statements.........................................................................F-79
PHYSOURCE LTD. AND THEODORE M. HOMA, M.D., S.C.
Independent Auditors' Report..........................................................................F-85
Combined Balance Sheet at December 31, 1996 and June 30, 1997 (unaudited).............................F-86
Combined Statement of Operations for the period from Inception (February 28, 1996)
through December 31, 1996 for PhySource Ltd. and for the year ended
December 31, 1996 for Theodore M. Homa, M.D., S.C. and for the six months
ended June 30, 1996 and 1997 (unaudited)............................................................F-87
Combined Statement of Changes in Stockholder's Equity [Deficit] for the period from
Inception (February 28, 1996) through December 31, 1996 for PhySource Ltd.
and for the year ended December 31, 1996 for Theodore M. Homa, M.D., S.C.
and the six month period ended June 30, 1997 (unaudited)............................................F-88
Combined Statement of Cash Flows for the period from Inception (February 28, 1996)
through December 31, 1996 for PhySource Ltd. and for the year ended December 31, 1996
for Theodore M. Homa, M.D., S.C. and for the six months ended
June 30, 1996 and 1997 (unaudited)..................................................................F-89
Notes to Financial Statements.........................................................................F-90
PRO FORMA FINANCIAL INFORMATION OF HALIS, INC. -- THE COMPASS GROUP, INC.,
SOFTWARE MANUFACTURING GROUP, INC. AND AMERICAN BENEFIT AND
ADMINISTRATIVE SERVICES, INC. AND THIRD PARTY ADMINISTRATORS, INC.
ACQUISITIONS
Introduction..........................................................................................F-96
Unaudited Pro Forma Condensed Consolidated Balance Sheet -
December 31, 1996....................................................................................F-97
Unaudited Pro Forma Condensed Consolidated Statement of Operations - year ended
December 31, 1996...................................................................................F-99
Notes to Unaudited Condensed Consolidated Pro Forma Financial Statements.............................F-100
</TABLE>
F-2
<PAGE> 42
<TABLE>
<CAPTION>
PRO FORMA FINANCIAL INFORMATION OF HALIS, INC. -- TG MARKETING SYSTEMS, INC.
ACQUISITION
<S> <C>
Introduction.........................................................................................F-101
Unaudited Pro Forma Condensed Consolidated Balance Sheet -
March 31, 1996.....................................................................................F-102
Unaudited Pro Forma Condensed Consolidated Statements of Operations - year ended
December 31, 1996 and three month period ended March 31, 1997.....................................F-103
Notes to Unaudited Condensed Consolidated Pro Forma Financial Statements.............................F-105
<CAPTION>
PRO FORMA FINANCIAL INFORMATION OF HALIS, INC. -- PHYSICIANS RESOURCE
NETWORK, INC.
<S> <C>
Introduction.........................................................................................F-107
Unaudited Pro Forma Condensed Consolidated Balance Sheet - June 30, 1997.............................F-108
Unaudited Pro Forma Condensed Consolidated Statements of Operations - year ended
December 31, 1996 and six month period ended June 30, 1997........................................F-109
Notes to Unaudited Condensed Consolidated Pro Form Financial Statements..............................F-111
<CAPTION>
PRO FORMA FINANCIAL INFORMATION OF HALIS, INC. -- PHYSOURCE LTD. AND PHYSICIANS RESOURCE NETWORK, INC.
<S> <C>
Introduction.........................................................................................F-113
Unaudited Pro Forma Condensed Consolidated Balance Sheet - June 30, 1997.............................F-114
Unaudited Pro Forma Condensed Consolidated Statements of Operations - year ended
December 31, 1996 and six month period ended June 30, 1997.........................................F-115
Notes to Unaudited Condensed Consolidated Pro Form Financial Statements..............................F-117
</TABLE>
F-3
<PAGE> 43
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
of HALIS, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of HALIS, Inc. and
Subsidiaries as of December 31, 1996, and the related consolidated statements of
operations, stockholders' deficit and cash flows for the year ended December 31,
1996. We have also audited the combined statements of operations, stockholders'
deficit and cash flows of AUBIS Hospitality Systems, Inc. and Subsidiaries,
AUBIS Systems Integration, Inc., HALIS Software, Inc., and ProHealth Solutions,
Inc., [collectively, the Predecessor], for the year ended December 31, 1995.
These consolidated financial statements and combined financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and combined financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements and the
combined financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements and combined financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of HALIS, Inc. and Subsidiaries as
of December 31, 1996 and the Predecessor as of December 31, 1995 and the results
of their operations and their cash flows for the years ended December 31, 1996
and 1995 in conformity with generally accepted accounting principles.
As discussed in Note A to the consolidated financial statements, HALIS, Inc. was
involved in a business combination with the Predecessor that has been accounted
for as a reverse acquisition in which the Predecessor is treated as the acquirer
for accounting purposes; accordingly, the financial statements for periods prior
to November 19, 1996 are the combined financial statements of the Predecessor.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note C to the
consolidated financial statements, the Company has had recurring losses, a
working capital deficit and a capital deficit. These conditions raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note C. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Habif, Arogeti & Wynne, P.C.
Atlanta, Georgia
March 7, 1997, except for Notes C and J, as to which the date is March 31, 1997
F-4
<PAGE> 44
HALIS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
ASSETS
<TABLE>
<S> <C>
Current assets
- --------------
Cash $ 719,989
Receivables, less allowance for possible losses
of $39,027 45,003
Current portion of receivables - related party 13,285
Inventories 10,178
Other current assets 9,886
----------
Total current assets 798,341
----------
Property and equipment, at cost
- ----------------------
Computer equipment 101,777
Office furniture and fixtures 45,349
----------
147,126
Less accumulated depreciation (86,972)
----------
60,154
----------
Other assets
- ------------
Deposits 16,434
Receivables - related party, net of current portion 48,458
Deferred merger costs 32,659
Loan origination fees, net of accumulated
amortization of $18,000 18,000
Capitalized software development costs, net of
accumulated amortization of $-0- 160,995
Other intangible assets, net of accumulated amortization
of $2,059 3,088
----------
279,634
----------
$1,138,129
==========
</TABLE>
See auditors' report and accompanying notes
F-5
<PAGE> 45
HALIS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
LIABILITIES AND STOCKHOLDERS' DEFICIT
<TABLE>
<S> <C>
Current liabilities
- -------------------
Accounts payable and accrued expenses $ 908,660
Accounts payable and accrued expenses - related party 75,784
Deferred revenue and customer deposits 19,106
Notes payable 210,000
Notes payable - related party 144,000
Payroll and sales tax payable 366,405
------------
Total current liabilities 1,723,955
------------
Long-term debt, net of current portion
- --------------------------------------
Convertible notes payable 1,506,000
------------
Commitments and contingencies (Note G)
- --------------------------------------
Stockholders' deficit
- ---------------------
Common stock $.01 par value, 100,000,000
authorized; 23,972,621 issued and outstanding 239,726
Additional paid-in capital 10,881,151
Stock subscription receivable (240,000)
Accumulated deficit (12,965,953)
Treasury stock (6,750)
------------
(2,091,826)
------------
$ 1,138,129
============
</TABLE>
See auditors' report and accompanying notes
F-6
<PAGE> 46
HALIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND
COMBINED STATEMENTS OF OPERATIONS
OF THE PREDECESSOR
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
[Predecessor]
1996 1995
------------ ------------
<S> <C> <C>
Systems sales and services $ 1,925,412 $ 3,582,896
------------ ------------
Costs and expenses
- ------------------
Cost of goods sold 1,656,113 2,613,259
Selling, general, and administrative 1,441,572 1,249,790
Research and development 400,699 -0-
------------ ------------
3,498,384 3,863,049
------------ ------------
Operating loss (1,572,972) (280,153)
- -------------- ------------ ------------
Other income (expense)
- ----------------------
Gain (loss) on asset disposal (8,228) 6,385
Rental income 27,600 21,350
Interest expense (67,613) (22,798)
Interest income 546 1,394
Other income 9,559 315
Merger costs (378,588) -0-
Loss from misappropriation -0- (97,123)
------------ ------------
(416,724) (90,477)
------------ ------------
Loss before income taxes (1,989,696) (370,630)
Income taxes -0- 2,308
- ------------ ------------ ------------
Net loss $ (1,989,696) $ (372,938)
============ ============
Net loss per common share $ (0.12) --
============
Weighted average shares outstanding 15,956,824 --
============
</TABLE>
See auditors' report and accompanying notes
F-7
<PAGE> 47
HALIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1996 AND
COMBINED STATEMENT OF STOCKHOLDERS' DEFICIT
OF THE PREDECESSOR
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Common Stock Stock Total
------------ Paid-in Subscription Accumulated Treasury Stockholders'
Predecessor Company Shares Amount Capital Receivable Deficit Stock Deficit
- -------------------------------- ---------- -------- ----------- ------------ ------------ -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1994 -0- $ -0- $ 375,787 $ -0- $ (1,048,842) $ -0- $ (673,055)
Additional capital contribution -0- -0- 210,500 -0- -0- -0- 210,500
Net loss -0- -0- -0- -0- (372,938) -0- (372,938)
---------- -------- ----------- --------- ------------ ------- -----------
Balances, December 31, 1995 -0- -0- 586,287 -0- (1,421,780) -0- (835,493)
HALIS, Inc.
- --------------------------------
Net loss -0- -0- -0- -0- (1,989,696) -0- (1,989,696)
Additional capital contributed -0- -0- 199,678 -0- -0- -0- 199,678
Assumed purchase of net assets
of Fisher at Predecessor cost 7,455,646 74,556 8,621,537 -0- (9,554,477) (6,750) (865,134)
Issuance of shares in reverse acquisition
of Fisher by HALIS, Inc. 15,000,000 150,000 (150,000) -0- -0- -0- -0-
Issuance of common stock 1,516,975 15,170 1,623,649 (240,000) -0- -0- 1,398,819
---------- -------- ----------- --------- ------------ ------- -----------
Balances, December 31, 1996 23,972,621 $239,726 $10,881,151 $(240,000) $(12,965,953) $(6,750) $(2,091,826)
========== ======== =========== ========= ============ ======= ===========
</TABLE>
See auditors' report and accompanying notes
F-8
<PAGE> 48
HALIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND
COMBINED STATEMENT OF CASH FLOWS
OF THE PREDECESSOR
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
[Predecessor]
1996 1995
----------- ---------
<S> <C> <C>
Cash flow from operating activities
- -----------------------------------
Net loss $(1,989,696) $(372,938)
----------- ---------
Adjustments to reconcile net loss to
net cash used by operating activities
Depreciation 15,100 18,896
Amortization 3,279 1,030
Assumption of expenses by parent 32,000 -0-
Allowance for loss on account receivable (40,000) 18,000
Loss (Gain) on disposal of assets 8,228 (6,385)
Changes in assets and liabilities
Decrease (Increase) in accounts receivable 140,031 22,841
Decrease (Increase) in receivables - related party 21,813 (8,048)
Decrease (Increase) in inventories 45,669 (6,196)
Decrease (Increase) in other current assets 71 (5,716)
Increase in intangible assets -0- (5,147)
Increase in deposits (4,230) (8,609)
Increase (Decrease) in accounts payable
and accrued expenses (255,061) 162,902
Increase in accounts payable and
accrued expenses - related party 37,599 88,468
Increase (Decrease) in income tax payable (6,908) 6,908
Increase (Decrease) in deferred revenue
and customer deposits (96,219) 48,266
Increase in payroll and sales taxes payable 90,517 150,569
----------- ---------
Total adjustments (8,111) 477,779
----------- ---------
Net cash provided [used] by
operating activities (1,997,807) 104,841
----------- ---------
Cash flows from investing activities
- ------------------------------------
Purchase of property equipment (16,424) (52,498)
Increase in software development costs (160,995) -0-
Net decrease (increase) in deferred merger costs 137,049 (169,708)
Net proceeds from sale of property and equipment 10,651 -0-
Advances from Fisher and cash received in acquisition 1,187,233 -0-
Insurance recovery from equipment loss -0- 30,677
----------- ---------
Net cash provided [used] by investing activities 1,157,514 (191,529)
----------- ---------
Cash flows from financing activities
- ------------------------------------
Proceeds from issuance of common stock 1,398,819 -0-
Proceeds from additional capital contributions -0- 210,000
Net payments on note payable and line-of-credit (16,088) (17,912)
Proceeds from issuance of notes payable - related party 100,000 11,020
Repayments on notes payable - related party (51,100) -0-
----------- ---------
Net cash provided by financing activities 1,431,631 203,108
----------- ---------
Net increase in cash 591,338 116,420
Cash, beginning of year 128,651 12,231
----------- ---------
Cash, end of year $ 719,989 $ 128,651
=========== =========
</TABLE>
See auditors' report and accompanying notes
F-9
<PAGE> 49
HALIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND THE
COMBINED FINANCIAL STATEMENTS OF THE PREDECESSOR
FOR THE YEAR ENDED DECEMBER 31, 1995
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Description of the Company and Basis of Presentation:
HALIS, Inc. (HALIS) and Subsidiaries (collectively, the Company) is a
developer and supplier of healthcare software systems to managed
healthcare markets and to medical practices and related point of
service markets. The Company also provides value added computer
services, network solutions, and connectivity solutions and systems
integration principally to Atlanta area businesses. Additionally, the
Company provides services support, including onsite hardware
maintenance, as well as network support programs.
On November 19, 1996, HALIS, Inc. (f/k/a Fisher Business Systems, Inc.)
issued 15,000,000 shares (66.8%) of its common stock in exchange for
100% of the capital stock of AUBIS Hospitality Systems, Inc. and
Subsidiaries (AHS), AUBIS Systems Integration, Inc. (ASI), and HALIS
Software, Inc. (HSI), which included ProHealth Solutions, Inc. (see
Note B).
The acquisitions set out in the preceding paragraph are being accounted
for as the reverse acquisition of HALIS, Inc. by an "accounting entity"
consisting of AHS, ASI, and HSI (collectively, the Predecessor) because
following the transaction, the former shareholders of AHS, ASI, and HSI
are in control of the Company. Accordingly, the financial statements of
the Company are the financial statements of the "accounting entity"
adjusted for the assumed acquisition of the net assets of HALIS, Inc.
in exchange for the issuance of HALIS, Inc. common stock outstanding
before the transaction. The net assets of the Predecessor are accounted
for at their historical cost.
In accordance with purchase accounting principles pursuant to
Accounting Principles Board Statement No. 16, Business Combinations
(APB 16), the Company accounted for the net assets of HALIS, Inc.
acquired at the fair value of such net assets as of November 19, 1996.
Because of the transactions noted above, the Company's results of
operations for the year ended December 31, 1996 consists of the
operations of AHS, ASI, and HSI for the entire year and the operations
of HALIS, Inc. from November 19, 1996 to December 31, 1996.
Principles of Consolidation:
The consolidated financial statements include the accounts of HALIS,
Inc. and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
The combined financial statements of the Predecessor include the
accounts of AUBIS Hospitality Systems, Inc. and Subsidiaries, AUBIS
Systems Integration, Inc., HALIS Software, Inc. and ProHealth
Solutions, Inc. All significant intercompany accounts and transactions
have been eliminated.
F-10
<PAGE> 50
HALIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND THE
COMBINED FINANCIAL STATEMENTS OF THE PREDECESSOR
FOR THE YEAR ENDED DECEMBER 31, 1995
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: [Continued]
Revenue Recognition:
Revenue consists primarily of licensing fees, sales of related computer
hardware, and post contract customer support. The Company accounts for
such revenue in accordance with the American Institute of Certified
Public Accountants' (AICPA) Statement of Position 91-1, Software
Revenue Recognition, as follows:
License Revenue - Revenue from the sales of
software licenses is
recognized after shipment of
the product and fulfillment of
acceptance terms, provided no
significant obligations remain
and collection of resulting
receivable is deemed probable.
Support contract - Ratably over the life of the
contract from the effective
date
Installation, training and education - When the services are provided
Hardware - Upon shipment of computer
equipment to the customer,
provided no significant
obligations remain and
collection of resulting
receivable is deemed probable.
Inventory:
Inventory is recorded on the first-in, first-out method at the
lower-of-cost or market.
Property and Equipment:
Property and equipment is carried at cost. Depreciation is computed
using the straight-line method based on estimated useful lives of the
assets, generally three to seven years. For income tax purposes,
depreciation is calculated on accelerated methods.
Software Development Costs:
In accordance with Statement of Financial Accounting Standards No. 86,
Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed, research and development costs incurred prior to
the attainment of technological and marketing feasibility of products
are charged to operations. Thereafter, the Company capitalizes the
direct costs and associated allocated overhead incurred in the
development of products, until the point of market release of such
products, wherein costs incurred are again charged to operations.
F-11
<PAGE> 51
HALIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND THE
COMBINED FINANCIAL STATEMENTS OF THE PREDECESSOR
FOR THE YEAR ENDED DECEMBER 31, 1995
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: [Continued]
Software Development Costs: [Continued]
Capitalized costs are amortized over a period of five years on a
straight-line basis, and amortization commences when the product is
available for market release. Unamortized costs are carried at the
lower of book value or net realizable value.
Deferred Merger Costs:
Deferred merger costs will be capitalized as part of the merger
agreements subsequently commenced. (Note M). Deferred merger costs
associated with mergers which were consummated during 1996 (Note B)
were charged to operations in 1996 because the assets balances of
HALIS, Inc. were considered to be at fair value.
Income Taxes:
Income taxes are based on loss for financial reporting purposes and
reflect a current liability (asset) for the estimated taxes payable
(recoverable) in the current year tax return and changes in deferred
taxes. Deferred tax liabilities and assets are recognized for the
estimated tax effects of temporary differences between financial
reporting and taxable income (loss) for the loss carryforwards based on
enacted tax laws and rates. A valuation allowance is used to reduce
deferred tax assets to the amount that is more likely than not to be
realized.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of certain assets,
liabilities, and disclosures including the allowance for doubtful
accounts, inventory reserve, useful lives and recoverability of
long-term assets such as capitalized software development costs. Actual
amounts could differ from those estimates. Any adjustments applied to
estimated amounts are recognized in the year in which such adjustments
are determined.
Reclassifications:
Certain 1995 amounts have been reclassified to conform to 1996
presentation.
B. MERGER AND REORGANIZATION:
On March 7, 1996, ProHealth Solutions, Inc. merged with and into HSI.
HSI continued as the surviving corporation and ProHealth Solutions,
Inc. was the nonsurviving corporation.
F-12
<PAGE> 52
HALIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND THE
COMBINED FINANCIAL STATEMENTS OF THE PREDECESSOR
FOR THE YEAR ENDED DECEMBER 31, 1995
B. MERGER AND REORGANIZATION: [Continued]
On November 19, 1996, HALIS, Inc., consummated the acquisition of AHS
and ASI, pursuant to the Amended and Restated Agreement and Plan of
Merger and Reorganization, dated December 13, 1995 and amended and
restated as of March 29, 1996, and as further amended on September 27,
1996. On November 19, 1996, AHS and ASI were merged into two
wholly-owned subsidiaries of HALIS, Inc. In connection therewith,
AUBIS, L.L.C., the parent company of AHS and ASI, received 10,000,000
shares of HALIS, Inc. common stock.
On November 19, 1996, HALIS, Inc., consummated the acquisition of HSI
pursuant to the Amended and Restated Agreement and Plan of Merger and
Reorganization, as of March 29, 1996 and amended on September 27, 1996.
On November 19, 1996, HSI was merged into a wholly-owned subsidiary of
HALIS, Inc. In connection therewith, HALIS, L.L.C., the parent company
of HSI, received 5,000,000 shares of HALIS, Inc. common stock.
Following consummation of the AUBIS and HALIS transactions, the
Company's corporate name was changed from Fisher Business Systems, Inc.
to HALIS, Inc.
C. REALIZATION OF ASSETS:
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles, which contemplate the
continuation of the Company as a going concern. However, the Company
has sustained losses from operations since inception and such losses
are expected to continue through the coming period. Additionally, the
Company has used, rather than provided, cash in its operating
activities during the current period. The Company had a working capital
and capital deficiency as of December 31, 1996.
In view of the matters described in the preceding paragraph,
recoverability of the recorded assets and satisfaction of the
liabilities reflected in the accompanying balance sheet is dependent
upon continued operation of the Company, which is in turn dependent
upon the Company's ability to meet its financing requirements on a
continuing basis and to succeed in its future operations. The financial
statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or amounts
and classification of liabilities that might be necessary should the
Company be unable to continue in existence.
Management plans to take the following steps to improve its operating
results and financial position, which it believes to be sufficient to
provide the Company with the ability to continue in existence during
the ensuing twelve month period.
The Company is presently raising capital in a private placement which
provides for up to $3,000,000 of capital infusion. Management believes
that the net proceeds contemplated by this offering will be sufficient
to fund both the Company's operations and acquisitions over the next
twelve months. To date, the Company has raised net proceeds of $681,122
in this offering (Note J).
F-13
<PAGE> 53
HALIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND THE
COMBINED FINANCIAL STATEMENTS OF THE PREDECESSOR
FOR THE YEAR ENDED DECEMBER 31, 1995
C. REALIZATION OF ASSETS: [Continued]
As discussed in Note M to these financial statements, the Company
completed three acquisitions in January 1997 which it believes
substantially strengthen the Company's operations and complement the
existing business units. These acquisitions were effected through the
issuance of an aggregate of 5,297,000 shares of the Company's common
stock and an aggregate of 1,535,000 of common stock options rather than
utilizing working capital. The Company contemplates future acquisitions
will be effected in a similar manner, in order to preserve working
capital for operations.
Additionally, the Company expects to increase sales volumes of existing
products as a result of increased marketing and advertising efforts.
During 1996, the Company's development of its software product entered
the "pilot" stage, and the Company commenced selling pilot systems in
1997. Management represents that sales to date under such pilot
contracts have been promising, and expects the trend to continue during
the coming period. Additionally, the Company will implement certain
cost containment measures which should benefit future operations.
Management plans to seek sources of financing in order to continue as a
going concern.
D. SOFTWARE DEVELOPMENT COSTS:
<TABLE>
<CAPTION>
Years ended December 31, 1996 1995
-------- -----
<S> <C> <C>
Balances, beginning of year $ -0- $ -0-
Amounts capitalized 160,995 -0-
Amortization -0- -0-
-------- -----
Balances end of year $160,995 $ -0-
======== =====
Research and development costs incurred $561,694 $ -0-
Less amounts capitalized 160,995 -0-
-------- -----
Research and development charged to expense $400,699 $ -0-
======== =====
</TABLE>
No amortization of capitalized software development costs was
recognized during 1996 as market release had not occurred for the
product.
F-14
<PAGE> 54
HALIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND THE
COMBINED FINANCIAL STATEMENTS OF THE PREDECESSOR
FOR THE YEAR ENDED DECEMBER 31, 1995
E. NOTES PAYABLE:
The Companies have the following notes payables as of December 31,
1996:
<TABLE>
<S> <C>
Bank-note payable, interest of 8.25% per annum,
payable at maturity, due January 10, 1997.
Secured by shareholders' certificate of deposit. $105,000
Bank-note payable, interest of 8.25% per annum,
payable at maturity, due January 29, 1997.
Secured by shareholders' certificate of deposit. 105,000
--------
$210,000
========
</TABLE>
Both of the $105,000 notes were subsequently renewed on their maturity
dates, mature on April 14, 1997 and April 29, 1997, and are now secured
by a certificates of deposit owned by HALIS, Inc. Both certificates of
deposit are in the amount of $105,000 and mature on April 14, 1997 and
April 29, 1997, respectively.
Convertible Notes Payable - 7% convertible promissory notes were issued
in a private placement by the acquired company, HALIS, Inc., in early
1996 and mature January 15, 1998. The notes are convertible into common
stock of the Company at any time until their maturity date at $1 per
share. Forty-three notes were issued by the Company in amounts ranging
from $10,000 to $80,000 generating $1,470,000 in proceeds.
Additionally, $36,000 of notes were issued in consideration for
services rendered to HALIS, Inc. $455,000 of these notes were issued to
related parties at terms identical to the terms of notes issued to
third parties. Interest expense on these notes recognized from November
19 through December 31, 1996 (period of inclusion) totaled $14,334.
F. NOTES PAYABLE - RELATED PARTIES:
The Companies have the following unsecured notes payable to shareholder
directors as of December 31, 1996:
<TABLE>
<S> <C>
Shareholder/Director - note payable with interest of 8.75%
payable on demand; due on demand. This note is unsecured $ 70,000
Shareholder/Director - note payable with interest payable
of 12% per annum; due on demand. This note is unsecured 65,000
Shareholder/Director - note payable non-interest
bearing; due on demand. This note is unsecured 9,000
--------
$144,000
========
</TABLE>
F-15
<PAGE> 55
HALIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND THE
COMBINED FINANCIAL STATEMENTS OF THE PREDECESSOR
FOR THE YEAR ENDED DECEMBER 31, 1995
G. COMMITMENTS AND CONTINGENCIES:
Concentrations of Credit Risk:
The Companies do not have a secured interest in their accounts
receivable; however, they do have legal recourse for defaulted amounts.
The Company maintains the majority of its cash deposits at one
financial depository institution. The amount of the accounting loss due
to credit risk the Company would incur if the financial depository
institution failed would be the cash deposits in excess of the $100,000
amount per depositor that is federally insured. The amount at risk
totaled approximately $585,000 at December 31, 1996.
Payroll and Sales Taxes:
The Company is delinquent in paying certain federal and state payroll
taxes and sales taxes. The Internal Revenue Service has written the
Companies indicating that it may file a Notice of Federal Tax Lien or
levy the Companies' assets if past due payroll taxes are not paid. The
Company made a payment of $27,446 related to this liability to the
Internal Revenue Service in January 1997.
Operating Leases:
The Companies lease office space and equipment under several operating
lease agreements. Rent expense for the office space and equipment
totaled $156,553 and $95,714 for the years ended December 31, 1996 and
1995, respectively.
At December 31, 1996, future minimum lease payments under
non-cancelable leases having remaining terms in excess of one year are
as follows:
<TABLE>
<CAPTION>
December 31, Amount
------------ ------
<S> <C>
1997 $153,613
1998 104,432
1999 86,160
2000 83,972
2001 59,535
--------
Totals $487,712
========
</TABLE>
Employee Benefit Plan:
The Company sponsors a 401(k) retirement savings plan for all employees
who meet certain eligibility requirements. Employees may contribute to
the plan up to 20% of their salary or the maximum allowed by the IRS.
The Company may elect to make matching and/or discretionary
contributions. Employee contributions are immediately 100% vested while
Company contributions are subject to a six-year vesting schedule. The
Company made no contributions to the plan during any of the previous
two fiscal years.
Significant Customers:
For the year ended December 31, 1996, sales to two customers, Atlanta
Jewish Federation and Canada Life, totaled approximately $852,000, and
accounted for 44% of the Company's sales.
F-16
<PAGE> 56
HALIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND THE
COMBINED FINANCIAL STATEMENTS OF THE PREDECESSOR
FOR THE YEAR ENDED DECEMBER 31, 1995
G. COMMITMENTS AND CONTINGENCIES: [Continued]
Economic Dependency:
For the year ended December 31, 1996, purchases from one vendor,
Merisal, totaled approximately $589,000 and accounted for 49% of the
Company's purchases from suppliers. Unpaid invoices included in
accounts payable at December 31, 1996 totaled $73,519.
During 1995, AHS purchased a significant portion of its products from
Sulcus, also know as Sulcus Hospitality Group, Sulcus Computer
Corporation, and Squirrel Companies, Inc. (Sulcus). Sales generated
from Sulcus products and services were approximately $1,750,000.
Effective January 1, 1996, AHS was no longer an authorized Sulcus
dealer.
Employment Agreements:
The Company has entered into an employment agreement with Paul W.
Harrison which expires December 31, 1999. The agreement provides for a
annual base salary of $200,000 (to be increased upon the attainment of
certain annual revenue targets) plus certain incentive bonus payments
and certain qualified and non-qualified stock options to purchase
shares of common stock of the Company at the discretion of the Board of
Directors.
The Company also entered into an employment agreement with Larry Fisher
which expires December 31, 1999. The agreement provides for an annual
salary of $175,000 (to be increased upon the attainment of certain
annual revenue targets) plus incentive bonus payments. In addition, the
employment agreement provides for certain qualified and non-qualified
options to purchase shares of common stock of the Company at the
discretion of the Board of Directors.
In connection with mergers which occurred subsequent to year end, the
Company entered into employment agreements with certain members of
management (Note M).
Litigation:
The Company and its directors have been named as defendants in a claim
relating to an acquisition target which was aborted. The plaintiff,
Advanced Customer Computer Solutions, Inc. (ACCS), alleges breach of
contract in connection with the termination by the Company of its
merger agreement. In addition, the complaint alleges that the
defendants made false and misleading statements to the plaintiffs for
the purpose of inducing plaintiffs to lend money to the Company; the
Company has a convertible note payable to one of the plaintiffs in the
amount of $60,000. The complaint seeks damages in the amount of at
least $2 million plus damages. The Company intends to deny the
allegations of liability in the complaint and to vigorously contest and
defend against the lawsuit. Additionally, the Company has filed a
counterclaim against certain parties related to ACCS alleging that
those parties made intentional misrepresentations and concealed
material facts for the purpose of inducing the Company to pursue a
merger with ACCS. Additionally, the HSI subsidiary filed a counterclaim
against ACCS alleging that ACCS breached the terms of its marketing and
licensing agreement with HSI. Due to uncertainties in the settlement
process, management and its legal counsel do not express an opinion
with respect to the likelihood of an unfavorable outcome in this
matter.
F-17
<PAGE> 57
HALIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND THE
COMBINED FINANCIAL STATEMENTS OF THE PREDECESSOR
FOR THE YEAR ENDED DECEMBER 31, 1995
G. COMMITMENTS AND CONTINGENCIES: [Continued]
Litigation: [Continued]
The Company entered into a finder's fee agreement with Penny Sellers in
which the Company agreed to pay a 10% commission up to $500,000 on
investments made by investors introduced by Ms. Sellers. Ms. Sellers
introduced HALIS, Inc. (then Fisher) to the principals of AUBIS L.L.C.
and contends that all money raised by the Company could not have been
possible if not for her introduction. She has made a claim for 10% of
private placements of approximately $3,470,000 and 10% of the value of
ASI, AHS, and HSI. Management believes that these claims are outside
the scope of the finder's fee agreement and intends to contest them
vigorously. Management and legal counsel express no opinion as to the
likely outcome of this matter.
No provision has been made in these financial statements regarding
these two items due to the uncertainty of their ultimate resolution.
H. INCOME TAXES:
The sources of temporary differences and their effect on the net
deferred taxes are as follows:
<TABLE>
<S> <C>
Deferred tax asset resulting from
net operating loss carryforwards $ 3,800,000
Other temporary differences 17,632
Less valuation allowances (3,817,632)
-----------
$ -0-
===========
</TABLE>
The valuation allowance fully reserves the net deferred tax asset which
arose from the tax loss carryforwards and temporary differences
generated.
At December 31, 1996, the Company had available for carryforward a net
operating loss of approximately $10,000,000. On November 19, 1996, the
Company had a significant change in ownership (Note A). As a result of
the ownership change, and in accordance with Section 382 of the
Internal Revenue Code, the Company's net operating loss is limited in
total and each year. The net operating loss available for the year
ending December 31, 1996 is $840,997. For each year thereafter, the net
operating loss will be limited to approximately $840,997 plus any
unused loss from the prior year (1996 and forward). In addition to the
limitation from Section 382 of the Internal Revenue Code, the losses
are limited to a fifteen-year carryforward, with losses from 1984
beginning to expire in the year 1999.
I. STOCK OPTION PLAN:
During 1996, the Company adopted the 1996 Stock Option Plan which
provides for the issuance of both qualified and nonqualified stock
options to employees and non-employee directors pursuant to Section 422
of the Internal Revenue Code. The number of shares reserved for the
plan are 3,000,000. Additional non-qualified options may be granted
outside of the plan with approval of the board of directors.
F-18
<PAGE> 58
HALIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND THE
COMBINED FINANCIAL STATEMENTS OF THE PREDECESSOR
FOR THE YEAR ENDED DECEMBER 31, 1995
I. STOCK OPTION PLAN: [Continued]
Options issued to participants are granted with an exercise price of
the mean between the high "bid" and low "ask" price (average market
price) as of the close of business on the date of grant, and are
exercisable up to ten years from date of grant. Incentive stock options
issued to persons who directly or indirectly own more than ten percent
of the outstanding stock of the Company shall have an exercise price of
110 percent of the average market price on the date of grant and are
exercisable up to five years from date of grant. The aggregate fair
market value of the shares with respect to which incentive stock
options are exercisable for the first time by a holder during any
calendar year under all plans shall not exceed $100,000.
The Company's previous incentive stock option plan, the 1986 incentive
Stock Option Plan, expired on January 29, 1996. The 1988 Non-qualified
Stock Option Plan was terminated by the Company on April 24, 1996.
Activity related to these plans is as follows:
<TABLE>
<CAPTION>
1986 and
1988 Plans Weighted Avg 1996 Plan Weighted Avg
Number of Exercise Number of Exercise
Options Price Options Price
---------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Outstanding,
December 31, 1994 120,340 $ .7279 -- --
Awarded 753,200 .3682 -- --
Expired (3,200) .7279 -- --
------- -------
Outstanding,
December 31, 1995 870,340 0.4166 -- --
Awarded -- -- 1,760,000 $1.5926
Exercised (5,600) 0.5000 -- --
------- ------- --------- -------
Outstanding,
December 31, 1996 864,740 $0.4160 1,760,000 $1.5926
======= ======= ========= =======
Vested Options 864,740 1,260,000
======= =========
</TABLE>
There were 6,200,000 options granted during 1996 outside of the 1996
Plan, of which 4,800,000 were terminated subsequent to year end. The
remaining 1,400,000 options were vested at year end, have an exercise
price of $1.125 per share and a remaining life of 9.5 years.
Exercise prices for options outstanding as of December 31, 1996 under
the 1986 and 1988 Plan ranged from $.25 to $20.00 per share. The
weighted average remaining life of these options was approximately 5
years.
F-19
<PAGE> 59
HALIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND THE
COMBINED FINANCIAL STATEMENTS OF THE PREDECESSOR
FOR THE YEAR ENDED DECEMBER 31, 1995
I. STOCK OPTION PLAN: (Continued)
Exercise prices for options outstanding as of December 31, 1996 granted
under the 1996 Plan ranged from $1.125 to $2.00 per share. The weighted
average remaining life of these options was approximately 10 years.
The Company has elected to follow Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees (APB 25) and related
interpretations in accounting for its employee stock options because,
as discussed below, the alternative fair value accounting provided for
under Financial Accounting Standards Board Statement No. 123,
Accounting for Stock-Based Compensation, (FAS 123) requires use of
option valuation models that were not developed for use in valuing
employee stock options. Under APB 25, if the exercise price of the
underlying stock equals fair market value on the date of grant, no
compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company
had accounted for its employee stock options under the fair value
method of that Statement. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions for 1996
respectively: risk-free interest rates of 6.1%, no dividend yield,
volatility factors of the expected market price of the Company's common
stock of .30 and a weighted-average expected life of the option of 3
years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion,
the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma net loss if compensation expense had been
recognized for the options issued would have been $2,944,622. Loss per
share on a primary basis would have been $.18.
No information as to the compensation expense, effect upon operations,
and net loss per share as computed under the guidelines of FAS 123 is
provided for periods prior to 1996 as the financial information
included in this report for prior periods is for the Predecessor
whereas options issued in prior periods relate to the acquired company
(Note B). Applying compensation expense as determined under FAS 123 to
options of the acquired company to the historical operations of the
Predecessor would be misleading.
F-20
<PAGE> 60
HALIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND THE
COMBINED FINANCIAL STATEMENTS OF THE PREDECESSOR
FOR THE YEARS ENDED DECEMBER 31, 1995
J. PRIVATE PLACEMENT OF COMMON STOCK:
During 1996, the Company effected a private placement of shares of
common stock in accordance with Regulation D of the Securities and
Exchange Commission. The shares were sold at $1.20 per share. For every
three shares of stock sold, one common stock warrant was issued to the
purchaser, which represents the right to purchase an additional share
at $1.75 per share. In aggregate, 1,516,975 shares of common stock and
657,356 warrants were issued, which included an additional 151,698
warrants issued to the placement agent. All warrants expire December
31, 1999. The Company raised $1,638,818 in capital after payment of
issuance costs and related fees as of December 31, 1996. An additional
$183,000 was raised by the Company in this offering in January 1997.
Subsequent to year end, the Company initiated an additional private
placement of common stock which provides for the issuance of up to
2,000,000 shares of stock at a price of $1.50 per share. For every
three shares of stock sold, one common stock warrant was issued to the
purchaser, which represents the right to purchase an additional share
at $1.75 per share. As of March 28, 1997, the Company had issued
500,000 shares of common stock and 216,667 common stock purchase
warrants (including 50,000 warrants issued to the placement agent) for
proceeds of $681,122, which are net of certain placement costs of
$68,878.
K. RELATED PARTY TRANSACTIONS:
HSI has software development and license agreements with OneTree
Corporation, which is controlled by the majority shareholder of the
Company. The agreement is dated September 15, 1996 and shall terminate
when development services are completed. The development fee is $30,000
per month plus out of pocket costs, payable bi-weekly. Included in
capitalized or expensed research and development costs for the year
ended December 31, 1996 is $244,915 of these fees. Included in related
party accounts payable is $15,750 which had not been paid to OneTree as
of December 31, 1996.
HSI has also entered into a software development and license agreement
with MERAD Corporation, which is controlled by the majority shareholder
of the Company. The agreement is dated August 15, 1996 and shall
terminate after the enhancements to the HALIS software are delivered
and accepted by the Company. The development fee is $15,000 per month,
payable bi-weekly. Included in capitalized or expensed research and
development are $90,000 which was paid to MERAD Corporation. Accounts
receivable of $13,285 were due from MERAD for reimbursement of the
purchase of certain equipment.
F-21
<PAGE> 61
HALIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND THE
COMBINED FINANCIAL STATEMENTS OF THE PREDECESSOR
FOR THE YEAR ENDED DECEMBER 31, 1995
K. RELATED PARTY TRANSACTIONS: [Continued]
HSI has entered into an agreement with Paul Harrison Enterprises, Inc.
(PHE), which is controlled by the majority shareholder of the Company.
The agreement was entered into on July 1, 1996. HSI shall pay PHE
$15,000 upon completion of the software according to specifications. On
November 18, 1996, the Company entered into a license to a proprietary
technology asset (PHE Technology) from PHE. The Company is obligated to
pay a license fee of 10% of the gross revenues generated from the PHE
Technology and any derivations thereof by the Company or any of its
affiliates. Included in selling, general and administrative expenses is
$7,259 in royalties which were paid to PHE which represent the 10%
royalty on sales of this software.
The Company paid management fees to AUBIS L.L.C. in the amount of
$85,100 and $76,979, for the years ended December 31, 1996 and 1995,
respectively. Included in related party accounts payable are $39,247 of
these fees which were not paid as of December 31, 1996.
Interest expense to related parties for the years ended December 31,
1996 and 1995 were $16,155 and $21,332, respectively. Included in
related party accrued expenses are $20,787 of those expenses which were
not paid as of December 31, 1996.
Additionally, in 1996, a 10% commission of $7,259 on sales of software
was paid to Paul Harrison, the majority shareholder, and is included in
selling, general and administrative expenses.
L. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Supplemental information required by Statement of Financial Accounting
Standards No. 95, relative to the statement of cash flows, is as
follows:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Taxes paid $6,908 $ -0-
Interest paid 6,585 6,145
</TABLE>
The following non-cash transaction occurred for the year ended December
31, 1996:
AUBIS L.L.C. contributed capital by satisfying a note payable - related
party of $150,000 and related accrued interest of $17,678.
Common stock and additional paid-in capital totaling $240,000 was
issued by issuing a stock subscription receivable.
The following non-cash transactions occurred for the year ended
December 31, 1995:
Employee advances were increased by transferring fixed assets valued at
$11,500 to those employees.
Capital was contributed to HSI by issuing a receivable from the parent
in the amount of $500.
F-22
<PAGE> 62
HALIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND THE
COMBINED FINANCIAL STATEMENTS OF THE PREDECESSOR
FOR THE YEAR ENDED DECEMBER 31, 1995
M. SUBSEQUENT EVENTS:
Merger Agreements:
During January 1997, the Company effected three merger agreements with
companies that will be accounted for as purchases under APB 16 by the
Company. It is the opinion of management and legal counsel that these
transactions qualify as tax-free reorganizations within the meaning of
Section 368(a) of the Internal Revenue Code of 1986. Management of all
companies represent they have no plans or intentions which would
adversely affect the operations of any of the companies.
The Compass Group, Inc. (Compass) was purchased for 350,000 shares of
the Company's common stock in exchange for all outstanding shares of
Compass. The agreement also provides for contingent merger
consideration, paid in the form of the Company's common stock, based
upon certain, specified operating results of the year ended December
31, 1997.
In addition, the Compass merger agreement provided for an employment
agreement with the managing director of Compass which expires in
January 1999 and provides for a base salary of $120,000 which may be
increased after twelve months at the discretion of the board of
directors. The Company also awarded to the managing director options to
purchase 85,000 shares of the Company's common stock at $2.00 per
share, exercisable for ten years from the closing date.
The Software Manufacturing Group, Inc. (SMG) was purchased for
3,072,000 shares of common stock of the Company in consideration for
all outstanding shares of SMG. The agreement also provides for
contingent merger consideration, paid in the form of the Company's
common stock based upon certain, specified operating results of the
period ended December 31, 1997.
In addition, the SMG merger agreement included an employment agreement
with the president of SMG which expires in January 1999 and provides
for a base salary of $192,000 plus certain variable incentive
compensation. Options to purchase a total of 100,000 shares of HALIS
common stock at $2.00 per share were granted to three employees of SMG.
American Benefit Administrative Services, Inc. and Third Party
Administrators, Inc., (ABAS/TPA) were purchased for 1,875,000 shares of
the Company's common stock in consideration for all outstanding shares
of ABAS/TPA. Additionally, the merger agreement included noncompetition
agreements between the Company and the president and vice-president of
ABAS/TPA.
The purchase agreement also provides that the president of ABAS/TPA may
repay a loan from ABAS/TPA, which had a balance of $558,500 at October
31, 1996, in the form of the Company's common stock commencing at the
end of 1997, if certain specified conditions are met.
F-23
<PAGE> 63
HALIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND THE
COMBINED FINANCIAL STATEMENTS OF THE PREDECESSOR
FOR THE YEAR ENDED DECEMBER 31, 1995
M. SUBSEQUENT EVENTS: [Continued]
Merger Agreements: [Continued]
In addition, the ABAS/TPA merger agreement provided for an employment
agreement with the president which expires in January, 2000 and
provides for a base salary of $200,000 plus certain variable incentive
compensation, a $100,000 signing bonus payable in two $50,000
installments: one installment upon signing the employment agreement and
one installment on or before July 1, 1997. The merger agreement also
provides for an employment agreement with the vice-president which
provides for a base salary of $77,000. Both employment agreements
provide for incentive compensation and guaranteed payments in the event
of termination or in the event of change in control of the ABAS/TPA
subsidiary. Additionally, the Company executed agreements with both of
these parties which provide for the issuance of an aggregate of
1,350,000 fully-vested common stock options of the Company's stock,
exercisable at $2.00 per share for a period of ten years from the date
of the agreement.
N. UNAUDITED PRO FORMA INFORMATION:
The following unaudited pro forma consolidated statement of operations
of HALIS, Inc. gives retroactive effect to the following transactions
as if they had occurred on January 1, 1995.
The unaudited pro forma consolidated statement of operations was
prepared by HALIS, Inc.'s management based on, and should be read in
conjunction with, the historical statement of operations appearing
elsewhere herein. This statement may not be indicative of the results
of operations that would actually have been achieved had the
transactions taken place at the date indicated and should not be
construed as indicative of HALIS, Inc.'s results of operations for any
future period.
<TABLE>
<CAPTION>
Year ended December 31, 1996
As reported Adjustments Pro Forma
----------- ----------- ---------
<S> <C> <C> <C>
Systems sales and services $ 1,925,412 $ 333,855 $ 2,259,267
=========== ========= ===========
Net loss $(1,989,696) $(564,256) $(2,553,952)
=========== ========= ===========
Net loss per common share (0.12) (0.12)
=========== ===========
Weighted average shares outstanding 15,956,824 22,194,634
=========== ===========
</TABLE>
F-24
<PAGE> 64
HALIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND THE
COMBINED FINANCIAL STATEMENTS OF THE PREDECESSOR
FOR THE YEAR ENDED DECEMBER 31, 1995
N. UNAUDITED PRO FORMA INFORMATION: [Continued]
<TABLE>
<CAPTION>
Year ended December 31, 1995
As reported Adjustments Pro Forma
----------- ----------- ---------
<S> <C> <C> <C>
System sales and services $ 3,582,896 $ 732,549 $ 4,315,445
=========== ========= ============
Net loss (372,938) (408,037) (780,975)
=========== ========= ============
Net loss per common share $ -- $ -- $ (.03)
=========== ========= ============
Weighted average shares outstanding -- -- 21,849,254
=========== ========= ============
</TABLE>
F-25
<PAGE> 65
HALIS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS
Cash $ 705,925
Customer Claims and Premium Funds 516,453
Receivable, less allowance for possible losses
of $47,024 944,903
Inventories 10,178
Other current assets 88,848
------------
Total current assets 2,266,307
PROPERTY AND EQUIPMENT AT COST
Computer equipment 243,908
Office furniture and fixtures 333,311
Leasehold improvements 4,840
Real estate 22,973
Less: accumulated depreciation (151,993)
------------
Total property and equipment 453,039
OTHER ASSETS
Deposits 122,519
Goodwill, net of accumulated
amortization of $376,991 5,536,274
Capitalized software development costs,
net of accumulated amortization of $263,409 3,625,348
Other Intangibles, net of
accumulated amortization of $10,007 15,476
Notes receivable - related parties 603,090
Long term investments 5,000
------------
Total other assets 9,907,707
TOTAL ASSETS $ 12,627,053
============
</TABLE>
F-26
<PAGE> 66
HALIS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
<TABLE>
<S> <C>
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,303,282
Convertible promissory notes 1,506,000
Line of credit 34,862
Deferred revenue and customer deposits 718,818
Payroll and sales taxes payable 384,998
Premiums payable 510,965
Notes payable 288,786
Notes payable - related parties 94,241
Obligations under capital lease - current portion 76,617
------------
Total current liabilities 4,918,569
LONG-TERM DEBT, NET OF CURRENT PORTION
Notes payable - related parties 99,992
Obligations under capital lease - net of current portion 95,828
------------
Total long-term debt 195,820
STOCKHOLDERS' EQUITY
Common stock $.01 par value 100,000,000
authorized 32,979,413 issued and outstanding 329,794
Additional paid-in capital 22,098,793
Common stock subscribed 13,417
Accumulated deficit (14,922,590)
Treasury stock (6,750)
------------
Total stockholder's equity 7,512,664
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $ 12,627,053
============
</TABLE>
F-27
<PAGE> 67
HALIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1997 AND
COMBINED STATEMENTS OF OPERATIONS
OF THE PREDECESSOR FOR THE THREE MONTHS
ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
PREDECESSOR
1997 1996
------------ ---------
<S> <C> <C>
SALES REVENUE $ 2,285,573 $ 622,148
COST AND EXPENSES
Cost of goods sold 967,979 275,077
Selling, general, and administrative 1,893,482 304,914
Research and development 423,660 90,106
------------ ---------
3,285,121 670,097
OPERATING LOSS (999,548) (47,949)
OTHER INCOME (EXPENSES)
Gain (loss) on asset disposal 0 (27,528)
Interest expense (39,113) (14,166)
Interest income 13,973 0
Other income (expense) (5,415) (7,500)
Merger costs (18,233) 0
Rental income 0 7,700
------------ ---------
(48,788) (41,494)
------------ ---------
NET LOSS BEFORE INCOME TAXES ($ 1,048,336) ($ 89,443)
INCOME TAX PROVISION $ 0 $ 0
------------ ---------
NET LOSS ($ 1,048,336) ($ 89,443)
============ =========
NET LOSS PER COMMON SHARE ($ 0.03)
============
WEIGHTED AVERAGE SHARES OUTSTANDING 32,227,220
</TABLE>
F-28
<PAGE> 68
HALIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND
COMBINED STATEMENTS OF OPERATIONS
OF THE PREDECESSOR FOR THE SIX MONTHS
ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
PREDECESSOR
1997 1996
------------ -----------
<S> <C> <C>
SALES REVENUE $ 3,605,926 $ 1,302,224
COST AND EXPENSES
Cost of goods sold 1,399,064 815,734
Selling, general, and administrative 3,379,773 657,076
Research and development 708,334 126,923
------------ -----------
5,487,171 1,599,733
OPERATING LOSS (1,881,245) (297,509)
OTHER INCOME (EXPENSES)
Gain (loss) on asset disposal 8,678 (27,528)
Interest expense (77,492) (14,166)
Interest income 22,307 0
Other income (expense) 3,253 (7,500)
Merger costs (32,137) 0
Rental income 0 7,700
------------ -----------
(75,391) (41,494)
------------ -----------
NET LOSS BEFORE INCOME TAXES ($ 1,956,636) ($ 339,003)
INCOME TAX PROVISION $ 0 $ 0
------------ -----------
NET LOSS ($ 1,956,636) ($ 339,003)
============ ===========
NET LOSS PER COMMON SHARE ($ 0.07)
============
WEIGHTED AVERAGE SHARES OUTSTANDING 29,822,386
</TABLE>
F-29
<PAGE> 69
HALIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND
COMBINED STATEMENTS OF CASH FLOWS
OF THE PREDECESSOR FOR THE
SIX MONTHS ENDED
JUNE 30, 1996
<TABLE>
<CAPTION>
PREDECESSOR
Cash flows from operating activities 1997 1996
----------- -----------
<S> <C> <C>
Net loss ($1,956,636) ($339,003)
Adjustments to reconcile net loss to
net cash used by operating activities
Depreciation 68,567 8,835
Amortization 619,489 515
Gains (loss) on disposal of assets 0 27,528
Changes in assets and liabilities
Decrease (increase) in accounts receivable (899,900) (107,884)
Decrease (increase) in receivables-related parties (541,347) 703
Decrease (increase) in customer claims/premium funds (516,453) 0
Decrease (increase) in inventory 0 700
Decrease (increase) in prepaid expenses/other assets (78,962) 2,044
Decrease (increase) in deposits (106,085) (4,467)
Decrease (increase) in intangible assets 5,612 0
Increase (decrease) in accounts payable
& accrued expenses 394,622 (255,107)
Increase (decrease) in accrued expenses - related parties (75,784) 5,966
Increase (decrease) in sales & payroll taxes 18,593 (60,886)
Increase (decrease) in deferred revenues
& customer deposits 699,712 (79,862)
Increase (decrease) in premiums payable 510,965 0
Increase (decrease) in other current liabilities 0 690
Increase (decrease) in income tax payable 0 (6,908)
Increase (decrease) in accrued salary - officer 0 600
Total adjustments 99,029 (467,533)
----------- ---------
Net cash provided (used) by operating activities ($1,857,607) ($806,536)
</TABLE>
F-30
<PAGE> 70
HALIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND
COMBINED STATEMENTS OF CASH FLOWS
OF THE PREDECESSOR FOR THE
SIX MONTHS ENDED
JUNE 30, 1996
<TABLE>
<CAPTION>
PREDECESSOR
1997 1996
----------- ---------
<S> <C> <C>
Cash flows from investing activities
Purchase of equipment and furniture ($ 461,452) ($ 7,252)
Net costs of acquisitions (64,077) 0
Decrease (increase) in long term investments (5,000) 0
Deferred merger costs 0 (169,339)
Insurance recovery from equipment loss 0 5,024
Proceeds from sale of maintenence contracts 0 47,912
----------- ---------
Net cash provided (used) by investing activities ($ 530,529) ($123,655)
Cash flows from financing activities
Proceeds (net payments) from/on bank lines of credit $ 34,862 $ 0
Proceeds (net payments) from/on capital leases 172,445 0
Proceeds (net payments) from/on notes payable 78,786 315,051
Proceeds (net payments) from/on notes payable - affiliates 0 458,469
Proceeds (net payments) from/on notes payable - related parties 50,232 (16,101)
Proceeds (net payments) from/on LT debt - related party 0 50,000
Proceeds from private placements 2,037,747
----------- ---------
Net cash provided (used) by financing activities $ 2,374,072 $ 807,419
Net increase (decrease) in cash (14,064) (122,772)
Cash, beginning of the period 719,989 128,651
Cash, end of period $ 705,925 $ 5,879
</TABLE>
F-31
<PAGE> 71
HALIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996
BASIS OF PRESENTATION:
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-QSB.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In management's opinion, all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation have been included. Operating
results for the three-month and six-month periods ended June 30, 1997 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1997. For further information, refer to the consolidated financial
statements and the footnotes thereto included in the Company's annual report on
Form 10-KSB for the year ended December 31, 1996.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
On November 19, 1996, HALIS, Inc. (f/k/a Fisher Business Systems, Inc.,
the "Company") issued 15,000,000 shares (66.8%) of its common stock in exchange
for 100% of the capital stock of AUBIS Hospitality Systems, Inc. (AHS), AUBIS
Systems Integration, Inc. (ASI), and HALIS Software, Inc. (HSI), which included
ProHealth Solutions, Inc.
The acquisitions set out in the preceding paragraph were accounted for
as the reverse acquisition of HALIS, Inc. by an "accounting entity" consisting
of AHS, ASI, and HSI (collectively, the "Predecessor") because, following the
transaction, the former shareholders of AHS, ASI, and HSI were in control of the
Company. Accordingly, the financial statements of the Company are the financial
statements of the "accounting entity" adjusted for the assumed acquisition of
the net assets of HALIS, Inc. in exchange for the issuance of HALIS, Inc. common
stock outstanding before the transaction. The net assets of the Predecessor are
accounted for at their historical cost.
In accordance with purchase accounting principles pursuant to
Accounting Principles Board Statement No. 16, Business Combinations (APB 16),
the Company accounted for the net assets of HALIS, Inc. acquired at the fair
value of such net assets as of November 19, 1996.
During January, 1997, the Company effected three merger agreements with
companies that have been accounted for as purchases under APB 16 by the Company.
As a result of the acquisitions of The Compass Group, Inc. ("Compass"), Software
Manufacturing Group, Inc. (SMG), and American Benefit and Administrative
Services, Inc. and Third Party Administrators, Inc. (ABAS/TPA), the results of
operations for these three acquired companies are included in the Company's
Consolidated financial statements from their dates of acquisition (January 10,
24, and 31, respectively) through the period end of June 30, 1997.
F-32
<PAGE> 72
The Company acquired TG Marketing Systems, Inc. (TGM) on May 2, 1997
through the issuance of 2,388,060 shares of its common stock. The results of
operations for TGM are included in the Company's Consolidated financial
statements from the acquisition date through the period end of June 30, 1997. It
is the opinion of management and legal counsel that these transactions qualify
as tax-free reorganizations within the meaning of Section 368 (a) of the
Internal Revenue Code of 1986. Management of all companies represent they have
no plans or intentions which would adversely affect the operations of any of the
companies.
On June 30, 1997, the Company formed HALIS Services, Inc. ("Services"),
a wholly owned subsidiary. Simultaneously, the Company performed a legal entity
consolidation by merging its Compass, SMG, HSI, AHS, AIS, and TGM subsidiaries
into Services. The reorganization was undertaken to simplify the Company's legal
structure and facilitate the operational and financial assimilation of the
acquisitions.
Principles of Consolidation
The consolidated financial statements include the accounts of HALIS,
Inc. and its wholly owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated.
The combined financial statements of the Predecessor include the
accounts of AHS, ASI, HSI and ProHealth Solutions, Inc. All significant
intercompany accounts and transactions have been eliminated.
Merger Agreements:
Subsequent to the end of the accounting period, the Company closed the
following merger transactions:
Physicians Resource Network (PRN) 3,733,333 shares
PhySource Ltd. 2,632,611 shares
Legal expenses associated with completed mergers and acquisitions are
capitalized and amortized over 5 years. All other merger and acquisition costs
are expensed in the period incurred.
F-33
<PAGE> 73
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Shareholders
The Compass Group, Inc.
We have audited the accompanying balance sheet of THE COMPASS GROUP, INC. as of
December 31, 1996, and the related statements of operations, stockholder's
equity and cash flows for the year ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of THE COMPASS GROUP, INC. at
December 31, 1996, and the results of its operations and its cash flows for the
year ended December 31, 1996 in conformity with generally accepted accounting
principles.
/s/ Habif, Arogeti & Wynne, P.C.
Atlanta, Georgia
March 20, 1997
F-34
<PAGE> 74
THE COMPASS GROUP, INC.
BALANCE SHEET
DECEMBER 31, 1996
ASSETS
------
Current assets
- --------------
Cash and cash equivalents $28,287
Trade accounts receivable, net of allowance for
doubtful accounts of $-0- 22,580
Prepaid expenses 752
-------
Total current assets 51,619
-------
Furniture and equipment, at cost, less accumulated
- ------------------------
Depreciation of $4,866 4,475
-------
$56,094
=======
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
Current liabilities
- -------------------
Accounts payable $ 5,310
Payroll taxes payable 12,651
Accrued retirement plan 10,146
-------
Total current liabilities 28,107
-------
Stockholders' equity
- --------------------
Common stock - $.50 par value,
1,000 shares authorized , issued and
outstanding 500
Retained earnings 27,487
-------
27,987
-------
$56,094
=======
See auditor's report and accompanying notes
F-35
<PAGE> 75
THE COMPASS GROUP, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
Revenues, net $ 234,696
---------
Costs and expenses
- ------------------
Contract consulting fees 165,854
Selling, general and administrative 100,922
---------
266,776
---------
Loss from operations [32,080]
Other income 1,016
---------
Net loss $ [31,064]
=========
See auditor's report and accompanying notes
F-36
<PAGE> 76
THE COMPASS GROUP, INC.
STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996
Common Retained
Stock Earnings Total
--------- ---------- ---------
Balance, January 1, 1996 500 $ 153,328 $ 153,828
Net loss - [31,064] [31,064]
Distributions - [94,777] [94,777]
---- --------- ---------
Balance December 31, 1996 $ 500 $ 27,487 $ 27,987
==== ========= =========
See auditor's report and accompanying notes
F-37
<PAGE> 77
THE COMPASS GROUP, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
Cash flows from operating activities
- ------------------------------------
Net loss $[31,064]
Adjustments to reconcile net loss
to net cash provided by operating activities
Depreciation and amortization 1,794
Changes in assets and liabilities
Decrease in accounts receivable 127,993
Increase in prepaid expenses [135]
Decrease in other current assets 530
Increase in accounts payable 3,982
Decrease in payroll taxes payable [3,079]
Decrease in accrued retirement plan [179]
--------
Total adjustments 130,906
--------
Net cash provided by operating activities 99,842
--------
Cash flows from financing activities
- ------------------------------------
Distributions to shareholder [94,777]
--------
Net increase in cash 5,065
Cash and cash equivalents, beginning of year 23,222
--------
Cash and cash equivalents, end of year $ 28,287
========
See auditor's report and accompanying notes
F-38
<PAGE> 78
THE COMPASS GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
------------------------------------------
Nature of Operations:
--------------------
THE COMPASS GROUP, INC. a Georgia corporation, provides implementation
training and other consulting services related to computer systems. The
Company does not develop or license proprietary software.
Revenue Recognition and Accounts Receivable:
---------------------------------------
Revenue is comprised primarily of consulting fees and is recognized as
services are provided. The Company considers all accounts receivable to be
fully collectible; therefore, no allowance for doubtful accounts has been
provided. The Company does not have a secured interest in its accounts
receivable; however, it does have legal recourse for defaulted amounts.
Cash and Cash Equivalents:
-------------------------
The Company classifies all highly liquid instruments with maturities of
ninety days or less as cash equivalents.
Income Taxes:
------------
The Company had elected to be treated as an S corporation pursuant to the
Internal Revenue Code for federal and state income tax purposes. The income
of an S corporation is taxable and distributable to the individual
stockholders of a corporation without further tax consequences to the
Company. As discussed further in Note B, the Company ceased to be an S
corporation subsequent to year end upon consummation of a merger with
another company.
Use of Estimates:
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, and
disclosures including the allowance for doubtful accounts and useful lives
and recoverability of long-term assets. Actual amounts could differ from
those estimates. Any adjustments applied to estimated amounts are recognized
in the year in which such adjustments are determined.
B. SUBSEQUENT EVENT - MERGER AGREEMENT:
-----------------------------------
On January 10, 1997, the shareholders of the Company effected a merger
agreement with HALIS, Inc. (HALIS), whereby the Company was merged into a
subsidiary of HALIS in a transaction accounted for as a purchase by HALIS.
It is the opinion of management and legal counsel that this transaction
qualifies as a tax-free reorganization within the meaning of Section 368(a)
of the Internal Revenue Code of 1986.
F-39
<PAGE> 79
THE COMPASS GROUP, INC.
NOTES TO FINANCIAL STATEMENTS [CONTINUED]
DECEMBER 31, 1996
B. SUBSEQUENT EVENT - MERGER AGREEMENT: [Continued]
-----------------------------------
All 1,000 issued and outstanding shares were exchanged by the shareholders
in consideration for 350,000 of HALIS' shares. Additional consideration
given by HALIS consists of options to purchase 85,000 shares of HALIS stock
at $2.00 per share, exercisable for 10 years from the closing date. The
agreement also provides for contingent merger consideration, paid in the
form of HALIS common stock based upon certain, specified operating results
of the period ended December 31, 1997.
The managements of both companies represent that they have no plans or
intentions that would affect the operations of the Company.
C. FURNITURE AND EQUIPMENT:
-----------------------
Furniture and equipment is carried at cost. Expenditures for maintenance and
repairs are expensed currently, while renewals and betterments that
materially extend the life of an asset are capitalized. The cost of assets
sold, retired, or otherwise disposed of, and the related allowance for
depreciation, are eliminated from the accounts, and any resulting gain or
loss is included in operations.
Depreciation is provided using the straight-line method based on the
estimated useful lives of the assets which are as follows:
Historical
Description Life Cost
----------- ---------- ----------
Computer software 3 years $ 453
Computer equipment 5 years 5,914
Office furniture and equipment 5 - 7 years 2,974
------
9,341
Less accumulated depreciation 4,866
------
$4,475
======
Depreciation expense was $1,781 for the year ended December 31, 1996.
D. ORGANIZATIONAL COSTS:
--------------------
The Company recognized $13 of amortization expense in 1996 related to $100
of capitalized organizational costs which have been fully amortized at
December 31, 1996.
E. RETIREMENT PLAN CONTRIBUTION:
----------------------------
The Company made a discretionary contribution to the retirement plan of the
managing director of $10,146 for 1996, which was recorded as a current
liability at year end.
F-40
<PAGE> 80
THE COMPASS GROUP, INC.
NOTES TO FINANCIAL STATEMENTS [CONTINUED]
DECEMBER 31, 1996
F. MAJOR CUSTOMERS - ECONOMIC DEPENDENCY:
-------------------------------------
The Company derived 77% of its sales from 2 major customers, defined as
those who comprise ten percent or greater of annual revenues. Individually,
annual revenues from those customers, Intel, Inc. and Siemens, Inc., were
$133,967 (57%), and $46,341 (20%), respectively, with no related accounts
receivable at year end.
F-41
<PAGE> 81
[LETTERHEAD OF HABIF, AROGETI & WYNNE, P.C.]
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors
Software Manufacturing Group, Inc.
We have audited the accompanying balance sheet of SOFTWARE MANUFACTURING GROUP,
INC., as of December 31, 1996, and the related statements of operations, changes
in stockholders' deficit and cash flows for the years ended December 31, 1996
and 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SOFTWARE MANUFACTURING GROUP,
INC., at December 31, 1996, and the results of its operations and its cash flows
for the years ended December 31, 1996 and 1995 in conformity with generally
accepted accounting principles.
/s/ Habif, Arogeti & Wynne, PC.
Atlanta, Georgia
March 5, 1997
MEMBERS
GEORGIA SOCIETY OF
CERTIFIED PUBLIC ACCOUNTANTS
AMERICAN INSTITUTE OF
CERTIFIED PUBLIC ACCOUNTANTS
AICPA DIVISION FOR CPA FIRMS
PRIVATE COMPANIES PRACTICE SECTION
SEC PRACTICE SECTION
--------------------------------------------------------------
1073 West Peachtree Street, N.E. Atlanta, Georgia 30309-3837
(404) 892-9651 Fax (404) 876-3913
F-42
<PAGE> 82
SOFTWARE MANUFACTURING GROUP, INC.
BALANCE SHEET
DECEMBER 31, 1996
ASSETS
------
Current assets
- --------------
Cash and cash equivalents $ 97,784
Receivables, less allowance for
doubtful accounts of $15,052 272,071
Prepaid expenses 13,297
-----------
Total current assets 383,152
-----------
Property and equipment, at cost
- -------------------------------
Computer equipment 391,789
Office furniture and equipment 151,970
-----------
543,759
Less accumulated depreciation [392,251]
-----------
151,508
-----------
Other assets
- ------------
Deposits 7,267
Capitalized software development costs,
net of accumulated amortization of $27,762 138,810
Other 1,150
-----------
147,227
-----------
$ 681,887
===========
LIABILTIES AND STOCKHOLDERS' DEFICIT
------------------------------------
Current liabilities
- -------------------
Line-of-credit payable $ 200,000
Current portion of long-term debt 70,694
Current portion of capital lease obligations 16,248
Note payable - related party 260,000
Accounts payable 153,803
Accrued expenses 118,512
Deferred revenue 506,591
Customer deposits and prepayments 124,355
-----------
Total current liabilities 1,450,203
-----------
Long-term liabilities
- ---------------------
Long-term debt, net of current potion 266,535
Capital lease obligations, net of current portion 35,185
-----------
301,720
-----------
Stockholders' deficit
- ---------------------
Common stock - $1.00 par value,
100,000 shares authorized; 4,000 shares
issued and outstanding 4,000
Additional paid-in capital 9,250
Accumulated deficit [1,083,286]
-----------
[1,070,036]
-----------
$ 681,887
===========
See auditors' report and accompanying notes.
F-43
<PAGE> 83
SOFTWARE MANUFACTURING GROUP, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
1996 1995
---------- ----------
Systems sales and services $2,923,629 $3,461,832
- -------------------------- ---------- ----------
Costs and expenses
- ------------------
Cost of sales 1,102,388 1,262,409
Selling, general, and administrative 2,108,094 2,198,804
Research and development 312,430 211,342
--------- ---------
3,522,912 3,672,555
--------- ---------
Operating loss [599,283] [210,723]
--------- ---------
Other income [expense]
- ----------------------
Miscellaneous income 53,999 63,887
Interest income 731 1,268
Interest expense [83,360] [20,729]
Loss on disposal of property and equipment [77,468] [14,050]
---------- ----------
[106,098] 30,376
---------- ----------
Net loss $[705,381] $[180,347]
========== ==========
See auditors' report and accompanying notes.
F-44
<PAGE> 84
SOFTWARE MANUFACTURINIG GROUP, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
Additional
Common Paid-in Accumulated
Stock Capital Deficit Total
------ ------ ----------- -----------
Balances, December 31, 1994 $4,000 $9,250 $ [197,558] $ [184,308]
Net loss - - [180,347] [180,347]
------ ------ ----------- -----------
Balances, December 31, 1995 4,000 9,250 [377,905] [364,655]
Net loss - - [705,381] [705,381]
------ ------ ----------- -----------
Balances, December 31, 1996 $4,000 $9,250 $[1,083,286] $[1,070,036]
====== ====== =========== ===========
See auditors' report and accompanying notes.
F-45
<PAGE> 85
SOFTWARE MANUFACTURING GROUP, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
1996 1995
-------- ---------
Cash flows from operating activities
- ------------------------------------
Net loss [705,381] [180,347]
Adjustments to reconcile net loss to net
cash used by operating activities
Depreciation and amortization 130,071 93,722
Loss on sale of property and equipment 77,468 14,050
Bad debt 12,000 -
Inventory reserve 20,000 -
Changes in assets and liabilities
Decrease [Increase] in receivables 56,220 [16,399]
Decrease [Increase] in inventory 143,087 [58,780]
Increase in prepaid expenses [3,663] [9,634]
Decrease [Increase] in deposits 1,355 [1,712]
Increase in other assets - [4,504]
Increase [Decrease] in accounts payable [62,377] 85,201
Increase [Decrease] in accrued expenses 4,320 [38,395]
Increase [Decrease] in deferred revenue [46,404] 73,127
Increase [Decrease] in customer deposits 102,794 [9,498]
--------- ---------
Total adjustments 434,871 127,178
--------- ---------
Net cash used by operating activities [270,510] [53,169]
--------- ---------
Cash flows from investing activities
- ------------------------------------
Purchase of property and equipment [82,157] [192,592]
Proceeds from sale of equipment and furniture 13,395 -
Increase in software development costs [47,849] [118,723]
--------- ---------
Net cash used by investing activities [116,611] [311,315]
--------- ---------
Cash flows from financing activities
- ------------------------------------
Proceeds from note payable - related party 205,000 100,000
Payments on note payable - related party [45,000] -
Proceeds from issuance of long-term debt 7,923 445,680
Principal payments on long-term debt [70,694] [151,995]
Proceeds from line-of-credit 200,000 75,679
Principal payments on line-of-credit - [75,679]
Principal payments on capital lease obligations [15,097] [5,790]
--------- ---------
Net cash provided by financing activities 282,132 387,895
--------- ---------
Net increase [decrease] in cash and cash
equivalents [104,989] 23,411
Cash and cash equivalents, beginning of year 202,773 179,362
--------- ---------
Cash and cash equivalents, end of year $ 97,784 $ 202,773
========= =========
NONCASH INVESTING ACTIVITIES
- ----------------------------
In 1995, capital lease obligations of $72,320 were incurred when the Company
entered into a lease for new equipment.
See auditors' report and accompanying notes.
F-46
<PAGE> 86
SOFTWARE MANUFACTURING GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
------------------------------------------
Nature of Operations:
--------------------
SOFTWARE MANUFACTURING GROUP, INC., a Georgia corporation, develops,
licenses, and supports computer software for use by orthodontic practices
within North America. The Company provides training for the software and
offers service contracts which include technical telephone support and
software updates.
Revenue Recognition:
-------------------
Revenue consists primarily of licensing fees, sales of related computer
hardware, and post contract customer support. The Company accounts for such
revenue in accordance with the American Institute of Certified Public
Accountants' (AICPA) Statement of Position 91-1, Software Revenue
Recognition, as follows:
<TABLE>
<S> <C><C>
License Revenue - Revenue from the sales of software licenses
is recognized after shipment of the product
and fulfillment of acceptance terms, provided
no significant obligations remain and collection
of resulting receivable is deemed probable.
Support contract - Ratably over the life of the contract from the
effective date.
Installation, training and education - When the services are provided.
Hardware - Upon shipment of computer equipment to the
customer, provided no significant obligations
remain and collection of resulting receivable
is deemed probable.
</TABLE>
Cash and Cash Equivalents:
-------------------------
The Company classifies all highly liquid instruments with maturities of
ninety days or less as cash equivalents.
Property and Equipment:
----------------------
Property and equipment is carried at cost. Expenditures for maintenance and
repairs are expensed currently, while renewals and betterments that
materially extend the life of an asset are capitalized. The cost of assets
sold, retired, or otherwise disposed of, and the related allowance for
depreciation, are eliminated from the accounts, and any resulting gain or
loss is included in operations.
F-47
<PAGE> 87
SOFTWARE MANUFACTURING GROUP, INC.
NOTES TO FINANCIAL STATEMENTS [CONTINUED]
DECEMBER 31, 1996 AND 1995
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: [Continued]
------------------------------------------
Property and Equipment: [Continued]
----------------------
Depreciation is provided using the straight-line method based on the
estimated useful lives of the assets which are as follows:
Computer equipment 5 years
Office furniture and equipment 5 - 7 years
Software Development Costs:
--------------------------
In accordance with Statement of Financial Accounting Standards No. 86,
Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed, research and development costs incurred prior to the attainment of
technological and marketing feasibility of products are charged to operations.
Thereafter, the Company capitalizes the direct costs and associated allocated
overhead incurred in the development of products, until the point of market
release of such products, wherein costs incurred are again charged to
operations.
Capitalized costs are amortized over a period of five years, the estimated
product life, on a straight line basis, and amortization commenced when the
product became available for market release. Unamortized costs are carried at
the lower of book value or net realizable value.
Income Taxes:
------------
The Company had elected to be treated as an S corporation pursuant to the
Internal Revenue Code for federal and state income tax purposes. The income of
an S corporation is taxable and distributable to the individual stockholders
of a corporation without further tax consequences to the Company. As discussed
further in Note C, the Company ceased to be an S corporation subsequent to
year end upon consummation of a merger with another company.
Use of Estimates:
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, and
disclosures including the allowance for doubtful accounts, inventory reserve,
useful lives and recoverability of long term assets. Actual amounts could
differ from those estimates. Any adjustments applied to estimated amounts are
recognized in the year in which such adjustments are determined.
F-48
<PAGE> 88
SOFTWARE MANUFACTURING GROUP, INC.
NOTES TO FINANCIAL STATEMENTS [CONTINUED]
DECEMBER 31, 1996 AND 1995
B. SOFTWARE DEVELOPMENT COSTS:
--------------------------
Years ended December 31, 1 9 9 6 1 9 9 5
-------- ---------
Balances, beginning of year $118,723 $ -0-
Amounts capitalized 47,849 118,723
Amortization [27,762] -0-
-------- ---------
Balances, end of year $138,810 $ 118,723
======== =========
Research and development costs incurred $360,279 $ 330,065
Less amounts capitalized [47,849] [118,723]
-------- ---------
Research and development charged to expense $312,430 $ 211,342
======== =========
No amortization of capitalized research and development costs was
provided during 1995 as market release of the product did not occur until
February 1996.
C. SUBSEQUENT EVENT - MERGER AGREEMENT:
-----------------------------------
On January 24, 1997, the shareholders of the Company effected a merger
agreement with HALIS, Inc. (HALIS) whereby the Company was merged into a
subsidiary of HALIS in a transaction accounted for as a purchase by HALIS. It
is the opinion of management and legal counsel that this transaction
qualifies as a tax-free reorganization within the meaning of Section 368(a)
of the Internal Revenue Code of 1986.
All 4,000 issued and outstanding shares were exchanged by the shareholders in
consideration for 3,072,000 of HALIS's shares. Additionally, contingent
merger consideration may be paid in the form of HALIS common stock, based
upon certain, specified operating results for the year ended December 31,
1997.
The merger agreement included an employment agreement with the president of
the Company which expires in January 1999 and provides for a base salary of
$192,000 plus certain variable incentive compensation.
As a subsidiary of HALIS, a publicly traded company, the Company
will no longer be taxed as an S corporation for income tax purposes.
The Company issued its stock in payment of the Company's $260,000 liability
to a majority shareholder (Note J) upon closing.
Subsequent Events - Other:
-------------------------
Two shareholders of the Company personally assumed the amounts due under the
long-term debt and line-of-credit to Fidelity National Bank in January 1997.
Both instruments were paid in full and closed in February 1997. The balances
at December 31, 1996 of the long-term debt and line-of-credit were $337,229
and $200,000, respectively.
F-49
<PAGE> 89
SOFTWARE MANUFACTURING GROUP, INC.
NOTES TO FINANCIAL STATEMENTS [CONTINUED]
DECEMBER 31, 1996 AND 1995
D. RECEIVABLES:
-----------
Receivables as of December 31, 1996 consist of the following:
Trade $ 266,156
Other 20,967
---------
287,123
Allowance for doubtful accounts [15,052]
---------
$ 272,071
=========
E. LONG-TERM DEBT:
--------------
The Company has the following note payable:
Fidelity National Bank - Secured note payable in the original amount of
$400,000, at prime plus 2% per annum, with monthly payments in the amount of
$8,500 which include interest. The note was originally due December 28,
2000. Fidelity National Bank has a blanket lien on the assets of the
Company.
Maturities of the note payable as of December 31, 1996 are as follows:
December 31, Amount
- -------------- --------
1997 $ 70,694
1998 78,290
1999 86,703
2000 101,542
--------
$337,229
========
As discussed in Note C, this note was paid in full subsequent to year end.
F. LINE-OF-CREDIT:
--------------
The Company has a $200,000 revolving line-of-credit with Fidelity National
Bank, of which $200,000 was owed at December 31, 1996. Bank advances on the
credit line are payable on demand and carry an interest rate of prime plus 2%
per annum. The credit line is secured by substantially all corporate assets.
As discussed in Note C, this instrument was paid in full subsequent to year
end.
G. CAPITAL LEASES PAYABLE:
----------------------
The Company leases equipment under two capital leases. The economic substance
of the leases is that the Company is financing the acquisition of the assets
through the leases, and, accordingly, they are recorded in the Company's
assets and liabilities. The leases contain a bargain purchase option at the
end of the lease term.
F-50
<PAGE> 90
SOFTWARE MANUFACTURING GROUP, INC.
NOTES TO FINANCIAL STATEMENTS [CONTINUED]
DECEMBER 31, 1996 AND 1995
G. CAPITAL LEASES PAYABLE: [Continued]
----------------------
The following is an analysis of the leased assets included in property and
equipment:
1 9 9 6
----------
Office furniture and equipment $ 72,320
Less accumulated depreciation [30,111]
--------
$ 42,209
========
The following is a schedule by year of future minimum payments required under
the leases together with their present value as of December 31, 1996:
December 31, Amount
- -------------- --------
1997 $ 23,113
1998 23,968
1999 13,698
2000 3,425
--------
Total minimum lease payments 64,204
Less amount representing interest [12,771]
Present value of minimum lease payments 51,433
Less amounts currently payable [16,248]
--------
Long term portion $ 35,185
========
H. COMMITMENTS AND CONTINGENCIES:
-----------------------------
The Company does not have a secured interest in its accounts receivable;
however, it does have legal recourse for defaulted amounts. There were no
significant receivables from any single customer at December 31, 1996.
The Company maintains all of its cash deposits at three financial depository
institutions. The amount of the accounting loss due to credit risk the
Company would incur if the financial depository institution failed would be
the cash deposits in excess of the $100,000 amount per depositor that is
federally insured. The amount at risk totalled $18,350 at December 31, 1996.
Operating Leases:
----------------
The Company leases office space and equipment under several operating
agreements. Rent expense for the office space and equipment totalled $129,836
and $112,580 for the years ended December 31, 1996 and 1995, respectively.
F-51
<PAGE> 91
SOFTWARE MANUFACTURING GROUP, INC.
NOTES TO FINANCIAL STATEMENTS [CONTINUED]
DECEMBER 31, 1996 AND 1995
H. COMMITMENTS AND CONTINGENCIES: [Continued]
-----------------------------
Operating Leases: [Continued]
----------------
At December 31, 1996, future minimum lease payments under non-cancellable
leases having remaining terms in excess of one year are as follows:
December 31, Amount
- -------------- --------
1997 $117,056
1998 117,052
1999 6,498
--------
$240,606
========
Employee Benefit Plan:
---------------------
The Company sponsors an age-based profit-sharing plan for all employees who
meet certain eligibility requirements. The Company may elect to make
discretionary contributions. Employees are subjected to a five-year vesting
schedule. The Company made no contributions to the plan during the previous
two fiscal years.
Litigation:
----------
The Company is defendant in a number of claims relating to matters arising in
the ordinary course of business. Management contends that the Company has no
liability under these claims. The amount of liability, if any, from the
claims cannot be determined with certainty; however, management is of the
opinion that the outcome of the claims will not have a material adverse
impact on the financial position. Due to uncertainties in the settlement
process, it is at least reasonably possible that management's estimate of the
outcome will change within the next year.
I. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
------------------------------------------------
Supplemental information required by Statement of Financial Accounting
Standards No. 95, relative to the statement of cash flows, is as follows:
1 9 9 6 1 9 9 5
--------- ---------
Interest paid $81,766 $20,729
F-52
<PAGE> 92
SOFTWARE MANUFACTURING GROUP, INC.
NOTES TO FINANCIAL STATEMENTS [CONTINUED]
DECEMBER 31, 1996 AND 1995
J. NOTE PAYABLE - RELATED PARTY:
----------------------------
The Company has an unsecured note payable to a majority shareholder of the
Company as of December 31, 1996 in the amount of $260,000. The note is due on
demand and interest is being accrued at 8% per annum. Total interest paid
during 1996 was $14,770. Interest incurred but not paid at December 31, 1995
was $3,627. In connection with the merger agreement, the Company issued its
stock in payment of this liability to this shareholder subsequent to
year end (Note C).
Amount due to a partnership which shares common ownership was $842 at
December 31, 1996.
F-53
<PAGE> 93
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
American Benefit Administrative Services, Inc. and
Third Party Administrators, Inc.
We have audited the accompanying combined balance sheet of AMERICAN BENEFIT
ADMINISTRATIVE SERVICES, INC. and THIRD PARTY ADMINISTRATORS, INC. as of
October 31, 1996 and the related combined statements of operations,
changes in stockholders' equity and cash flows for the years ended October 31,
1996 and 1995. These combined financial statements are the responsibility of the
Companies' management. Our responsibility is to express an opinion on these
combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the combined financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the combined financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of AMERICAN BENEFIT
ADMINISTRATIVE SERVICES, INC. and THIRD PARTY ADMINISTRATORS, INC. at October
31, 1996, and the results of their operations and their cash flows for the
years ended October 31, 1996 and 1995 in conformity with generally accepted
accounting principles.
/s/ Habif, Arogeti & Wynne, P.C.
Atlanta, Georgia
April 4, 1997
F-54
<PAGE> 94
AMERICAN BENEFIT ADMINISTRATIVE SERVICES, INC.
AND THIRD PARTY ADMINISTRATORS, INC.
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
[Unaudited]
January 31, October 31,
1997 1996
---------- ----------
<S> <C> <C>
Current assets
Cash $ 7,065 $ 10,877
Customer claims and premium funds 297,887 273,189
Accounts receivable, less allowance for
doubtful accounts of $-0-
for both January 31, 1997 and
October 31, 1996 66,286 85,213
Prepaid and other current assets 17,486 6,635
---------- ----------
Total current assets 388,724 375,914
---------- ----------
Property and equipment, at cost
Furniture and fixtures 55,824 55,824
Leasehold improvements 28,470 28,470
Computer equipment and software 136,123 136,123
Vehicles 36,495 36,495
Equipment 221,699 221,699
Building and improvements 22,797 22,797
---------- ----------
501,408 501,408
Less accumulated depreciation [432,939] [425,307]
---------- ----------
68,469 76,101
---------- ----------
Other assets
Accounts receivable - related party 5,608 5,608
Note receivable - shareholder 555,386 558,500
Goodwill, less $155,614 and
$152,522 of accumulated amortization
at January 31, 1997 and October 31, 1996,
respectively 9,275 12,367
Deposits and other noncurrent assets 9,887 9,887
Capitalized merger costs 27,291 -0-
---------- ----------
607,447 586,362
---------- ----------
$1,064,640 $1,038,377
========== ==========
</TABLE>
See auditors' report and accompanying notes
F-55
<PAGE> 95
AMERICAN BENEFIT ADMINISTRATIVE SERVICES, INC.
AND THIRD PARTY ADMINISTRATORS, INC.
COMBINED BALANCE SHEETS [CONTINUED].
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
[Unaudited]
January 31, October 31,
1997 1996
<S> <C> <C>
Current liabilities
Checks written in excess of funds on deposit $ 52,005 $ 34,403
Notes payable 65,706 57,500
Accounts payable 121,120 119,976
Customer funds on deposit to
pay claims and premiums 297,887 273,189
Unearned commissions 73,822 56,348
Payroll, commissions and related taxes payable 63,915 93,016
Deferred rent - short-term 57,573 77,088
Interest payable - related party 3,393 2,386
---------- ----------
Total current liabilities 735,421 713,906
---------- ----------
Long-term liabilities
Deferred rent - long-term 41,691 56,091
---------- ----------
Stockholders' equity
Common stock - ABAS, Inc., no par value, 10,000
shares authorized; 3,000 shares issued and outstanding 411,000 411,000
Common stock - TPA, Inc., no par value, 100,000
shares authorized; 300 shares issued and
outstanding 1,000 1,000
Stock subscription receivable - TPA, Inc. [1,000] [1,000]
---------- ----------
411,000 411,000
Accumulated deficit [123,472] [142,620]
---------- ----------
287,528 268,380
---------- ----------
$1,064,640 $1,038,377
========== ==========
</TABLE>
See auditors' report and accompanying notes
F-56
<PAGE> 96
AMERICAN BENEFIT ADMINISTRATIVE SERVICES, INC. AND
THIRD PARTY ADMINISTRATORS, INC.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
[Unaudited]
For the
Three Months Ended For the Years Ended
January 31, October 31,
-------------------------- -------------------------
1997 1996 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues $ 686,559 $ 653,228 $2,710,207 $2,596,939
---------- ---------- ---------- ----------
Expenses
Cost of revenues 223,422 228,838 880,940 806,809
Selling, general and administrative 448,670 455,274 1,848,119 1,815,945
---------- --------- ---------- ----------
672,092 684,112 2,729,059 2,622,754
---------- --------- ---------- ----------
Income [Loss] from operations 14,467 [30,884] [18,852] [25,815]
---------- --------- ---------- ----------
Other income [expense]
Interest income 6,888 6,786 27,175 36,614
Interest expense [2,207] [4,258] [10,626] [16,374]
Other expense -0- -0- [75] [52]
---------- --------- ---------- ----------
4,681 2,528 16,474 20,188
---------- --------- ---------- ----------
Net income [loss] $ 19,148 $ [28,356] $ [2,378] $ [5,627]
========== ========= ========== ==========
</TABLE>
See auditors' report and accompanying notes.
F-57
<PAGE> 97
AMERICAN BENEFIT ADMINISTRATIVE SERVICES, INC. AND
THIRD PARTY ADMINISTRATORS, INC.
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 31, 1996 AND 1995 AND
THE THREE MONTH PERIOD ENDED JANUARY 31, 1997
<TABLE>
<CAPTION>
ABAS, Inc. TPA, Inc. Total
Common Stock Common Stock Stock Share-
---------------- -------------- Subscription Accumulated holders'
Shares Amount Shares Amount Receivable Deficit Equity
------ ------ ------ ------ ---------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, October 31, 1994 3,000 $401,000 300 $1,000 $[1,000] $[134,615] $266,385
Issuance of stock -- 10,000 -- -- -- -- 10,000
Net loss -- -- -- -- -- [5,627] [5,627]
----- -------- --- ------ ------- --------- --------
Balances, October 31, 1995 3,000 411,000 300 1,000 [1,000] [140,242] 270,758
Net loss -- -- -- -- -- [2,378] [2,378]
----- -------- --- ------ ------- --------- --------
Balances, October 31, 1996 3,000 411,000 300 1,000 [1,000] [142,620] 268,380
Net income - three months ended
January 31, 1997 [unaudited] -- -- -- -- -- 19,148 19,148
----- -------- --- ------ ------- --------- --------
Balances, January 31, 1997 [unaudited] 3,000 $411,000 300 $1,000 [1,000] $[123,472] $287,528
===== ======== === ====== ======= ========= ========
</TABLE>
See auditors' report and accompanying notes
F-58
<PAGE> 98
AMERICAN BENEFIT ADMINISTRATIVE SERVICES, INC.
AND THIRD PARTY ADMINISTRATORS, INC.
COMBINED STATEMENTS OF CASH FLOWS
Increase [Decrease] in Cash
<TABLE>
<CAPTION>
[Unaudited]
For the
Three Months Ended For the Years Ended
January 31, October 31,
------------------------ ---------------------------
1997 1996 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income [loss] $ 19,148 $ [28,356] $ [2,378] $ [5,627]
---------- --------- --------- ----------
Adjustments to reconcile net income [loss]
to net cash provided by operating activities
Depreciation and amortization 11,187 [21,083] 70,131 101,189
Changes in assets and liabilities
Decrease [Increase] in customer receivables 18,927 [56,954] [891] 64,770
Increase in due from related party -0- -0- [511] [463]
Decrease in prepaid insurance and
other current assets [10,851] [18,184] 1,370 [4,034]
[Increase] Decrease in customer deposit funds [24,698] 174,756 202,455 170,241
Decrease in deposits and other
noncurrent assets -0- -0- 25,558 -0-
Increase [Decrease] in accounts payable 1,144 [25,114] [32,818] [7,473]
Increase [Decrease] in checks written in
excess of funds on deposit 17,602 5,682 34,403 [118,271]
[Decrease] Increase in payroll, commissions
and related taxes payable [29,100] [41,980] [33,754] 7,130
Increase in unearned commissions 17,474 107,371 28,339 22,617
Increase [Decrease] in customer claims
and premiums liability 24,698 [180,710] [202,455] [170,241]
Decrease in deferred rent [33,915] [15,367] [42,318] [16,350]
Increase [Decrease] in interest payable - related party 1,007 1,156 1,892 [1,270]
---------- -------- --------- ----------
Total adjustments [6,525] [28,261] 51,401 47,845
---------- -------- --------- ----------
Net cash provided [used] by operating activities 12,623 [56,617] 49,023 42,218
---------- -------- --------- ----------
Cash flows from investing activities
Purchases of property and equipment -0- [4,122] [22,914] [2,184]
Advances to shareholder, net 3,114 [7,508] [23,200] 19,700
Capitalized merger costs [27,754] -0- -0- -0-
---------- -------- --------- ----------
Net cash provided [used] by investing activities [24,640] [11,625] [46,114] 17,516
---------- -------- --------- ----------
Cash flows from financing activities
Proceeds of notes payable 8,205 34,596 -0- 67,500
Payments on notes payable and long-term debt -0- -0- [28,730] [112,469]
---------- -------- --------- ----------
Net cash provided [used] by financing activities 8,205 34,596 [28,730] [44,969]
---------- -------- --------- ----------
Net (decrease) increase in cash [3,812] [33,646] [25,821] 14,765
Cash, beginning of period 10,877 36,698 36,698 21,933
---------- -------- --------- ----------
Cash, end of period $ 7,065 $ 3,052 $ 10,877 $ 36,698
========== ======== ========= ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the periods for
Interest $ 1,200 $ 3,102 $ 8,736 $ 17,644
</TABLE>
See auditor's report and accompanying notes
F-59
<PAGE> 99
AMERICAN BENEFIT ADMINISTRATIVE SERVICES, INC.
AND THIRD PARTY ADMINISTRATORS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND 1995
[Unaudited with respect to January 31, 1997 and
the three months ended January 31, 1997]
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of Operations:
American Benefits Administrative Services, Inc. (ABAS) and Third Party
Administrators, Inc. (TPA) were formed to administer self or partially
self-funded medical insurance plans and broker small group insurance
plans. The Companies, which have identical ownership and do business as
Third Party Administrators, Inc., operate out of leased facilities in
Naperville, Illinois.
Principles of Combination:
The accompanying financial statements are presented on a combined basis
due to the common ownership and business activities of the Companies. The
combined financial statements include the accounts of each of the
Companies.
Cash:
At times, the Companies' cash balances exceed FDIC insurance limits. The
amount at risk was $471,660 at October 31, 1996.
Accounts Receivable:
The Companies consider all accounts receivable to be fully collectible;
therefore, no allowance for doubtful accounts has been provided. The
Companies do not have a secured interest in their accounts receivable;
however, they do have legal recourse for defaulted amounts.
Depreciation:
Depreciation is computed using the straight-line method for financial
reporting purposes at rates based on the following estimated useful lives:
Furniture and fixtures 7 years
Leasehold improvements 10 years
Computer hardware 5 years
Computer software 3 years
Vehicles 3 years
Equipment 5 - 7 years
Building and improvements 25 years
F-60
<PAGE> 100
AMERICAN BENEFIT ADMINISTRATIVE SERVICES, INC.
AND THIRD PARTY ADMINISTRATORS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS [CONTINUED]
OCTOBER 31, 1996 AND 1995
[Unaudited with respect to January 31, 1997 and
the three months ended January 31, 1997]
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: [Continued]
Depreciation: [Continued]
Depreciation expense for the years ended October 31, 1996 and 1995 is
$53,642 and $84,700, respectively. For federal income tax purposes,
depreciation is computed using the modified accelerated cost recovery
system. Expenditures for major renewals and betterments that extend the
useful lives of property and equipment are capitalized.
Expenditures for maintenance and repairs are charged to expense as
incurred.
Goodwill:
Goodwill is being amortized on a straight-line basis over ten years for
financial reporting purposes. Amortization expense for the years ended
October 31, 1996 and 1995 is $16,489, respectively. Goodwill is not
amortized for federal income tax purposes.
Capitalized Merger Costs:
Costs associated with the merger (Note B) are capitalized and will be
amortized on a straight-line basis over a year life commencing in the
first period subsequent to the merger.
Customer Funds on Deposit to Pay Claims and Premiums:
These cash deposit accounts and the related liability represent funds
which have been received from customers either to pay benefit claims for
self-insurance plans or to remit to third-party insurance carriers. The
Companies function as an agent on behalf of the customers in handling
these monies.
Unearned Commissions:
Unearned commissions are recognized as revenue as the related services are
provided.
Deferred Rent:
Deferred rent represents the amount by which cumulative lease expense for
financial reporting purposes has exceeded the actual cash payments made
under the leases.
Income Taxes:
The Companies had elected to be treated as S corporations pursuant to the
Internal Revenue Code for federal and state income tax purposes. The
income of an S corporation is taxable to the individual stockholders
without any further tax consequences to the Companies. As discussed
further in Note B, the Companies ceased to be S corporations subsequent to
year end upon consummation of a merger with another company.
F-61
<PAGE> 101
AMERICAN BENEFIT ADMINISTRATIVE SERVICES, INC.
AND THIRD PARTY ADMINISTRATORS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS [CONTINUED]
OCTOBER 31, 1996 AND 1995
[Unaudited with respect to January 31, 1997 and
the three months ended January 31, 1997]
A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: [Continued]
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from these estimates.
Interim Financial Statements:
The accompanying financial statements for the three month periods ended
January 31, 1997 and 1996 are unaudited but, in the opinion of management
of ABAS and TPA, reflect all adjustments (consisting only of normal and
recurring adjustments) necessary for a fair presentation. The results of
operations for the three-month period are not necessarily indicative of
the results that may be expected for the full year ending October 31, 1997.
B. SUBSEQUENT EVENT - MERGER AGREEMENT:
On January 31, 1997, the shareholders of the Companies effected a merger
agreement with HALIS, Inc. (HALIS), whereby the Companies were merged into
a subsidiary of HALIS in a transaction accounted for as a purchase by
HALIS. It is the opinion of management and legal counsel that this
transaction qualifies as a tax-free reorganization within the meaning of
Section 368(a) of the Internal Revenue Code of 1986.
All 3,300 issued and outstanding shares were surrendered by the
shareholders in consideration for 1,875,000 of HALIS' shares.
Additionally, the merger agreement included noncompetition agreements
between HALIS and the president and vice president of the Companies. The
merger agreement also provides that the president may repay a loan from
the Companies, which had a balance of $558,500 at October 31, 1996 in the
form of HALIS common stock commencing at the end of 1997, provided
certain, specific operating conditions are met.
In addition, the merger agreement provides employment agreements for the
president and vice president as well as incentive compensation and
guaranteed payments in the event of termination or change in control of
the Companies. HALIS also executed agreements with both of these parties
which provide for the issuance of 1,350,000 fully-vested HALIS common
stock options, exercisable at $2.00 per share for a period of ten years
from the date of the agreement.
F-62
<PAGE> 102
AMERICAN BENEFIT ADMINISTRATIVE SERVICES, INC.
AND THIRD PARTY ADMINISTRATORS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS [CONTINUED]
OCTOBER 31, 1996 AND 1995
[Unaudited with respect to January 31, 1997 and
the three months ended January 31, 1997]
C. NOTES PAYABLE:
Notes payable consisted of the following as of October 31, 1996:
<TABLE>
<CAPTION>
Payee and Description Collateral Amount
--------------------- ---------- ------
<S> <C> <C>
National Hospital and Health Care Services, Inc.:
Related party working capital loan. Interest at Security interest
8%. Due on demand. Interest expense was in substantially
$4,596 and $1,921 in 1996 and 1995, respectively. all business assets $50,000
Note payable, payable in 24 monthly installments
of $900, including simple interest at 7%. Due in
1997. Interest expense was $800 and $267 in
1996 and 1995, respectively. Unsecured 7,500
-------
$57,500
=======
</TABLE>
D. LITIGATION:
The Companies are defendants in a number of claims relating to matters
arising in the ordinary course of business. Management contends that the
Companies have no liability under these claims. The amount of liability,
if any, from the claims cannot be determined with certainty; however,
management is of the opinion that the outcome of the claims will not have
a material adverse impact on the financial position. Due to uncertainties
in the settlement process, it is at least reasonably possible that
management's estimate of the outcome will change within the next year.
E. LEASES:
During the years ended October 31, 1996 and 1995, furniture, equipment,
storage space rentals and office rent under long-term lease obligations
were $216,366 and $219,529, respectively. Future obligations over the
primary terms of the Companies' long-term leases as of October 31, 1996
are as follows:
<TABLE>
<CAPTION>
Year Ended
October 31, Amount
----------- ------
<S> <C>
1997 $ 270,052
1998 213,933
1999 26,280
2000 25,610
2001 18,240
---------
$ 554,115
=========
</TABLE>
F-63
<PAGE> 103
AMERICAN BENEFIT ADMINISTRATIVE SERVICES, INC.
AND THIRD PARTY ADMINISTRATORS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS [CONTINUED]
OCTOBER 31, 1996 AND 1995
[Unaudited with respect to January 31, 1997 and
the three months ended January 31, 1997]
E. LEASES: [Continued]
In addition to the base rent for the Companies' office, located in
Naperville, Illinois, the Companies are liable for their pro rata share of
operating expenses and real estate taxes in excess of a base amount for
each calendar year.
F. RELATED PARTY TRANSACTIONS:
As of October 31, 1996, an officer/shareholder of the Companies has drawn
$558,500 more than dividend distributions and salary. A promissory note,
due October 31, 2001, with interest at 5% payable annually was drawn to
evidence the debt. During the year ended October 31, 1996, $26,587 of
interest accrued on the note. As discussed in Note B, this note may be
repaid in the form of HALIS stock depending upon certain specified
operating results of future periods.
On June 8, 1995, American Benefit Administrative Services, Inc. received
$60,000 from National Hospital and Health Care Services, Inc., a
corporation which shares common ownership, as a working capital loan. As
of October 31, 1996, the unpaid balance was $50,000 [Note C].
G. DEFINED CONTRIBUTION PLAN:
The Companies sponsor a defined contribution (401(k)) plan for all regular
full-time employees who have completed a minimum of one year of
employment. Under the plan, employees may elect to defer up to 15% of
their gross compensation, up to statutory limits. Employer contributions
are discretionary. Employer contributions for the years ended October 31,
1996 and 1995 totaled $5,779 and $2,742, respectively.
H. ECONOMIC DEPENDENCY:
During the years ended October 31, 1996 and 1995, the Companies had sales
to one major customer, defined as a customer from which 10% or greater of
annual sales revenue is derived. During 1996, $360,255 (13%) of revenue
was earned from Boston Mutual Life Insurance Company, with related trade
accounts receivable of $2,722 at October 31, 1996. During 1995, $534,425
(21%) of revenue was earned from Durham Life Insurance Company, with
related trade accounts receivable of $25,292 at October 31, 1995.
F-64
<PAGE> 104
[HABIF, AROGETI & WYNNE, P.C. LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
To the Stockholder
TG Marketing Systems, Inc.
We have audited the accompanying balance sheet of TG MARKETING SYSTEMS, INC.,
as of December 31, 1996, and the related statements of income, changes in
stockholder's equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of TG MARKETING SYSTEMS, INC., at
December 31, 1996, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
/s/ Habif, Arogeti & Wynne, P.C.
Atlanta, Georgia
June 18, 1997
F-65
<PAGE> 105
TG MARKETING SYSTEMS, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
[Unaudited]
December 31, 1996 March 31, 1997
----------------- --------------
<S> <C> <C>
Current assets
Cash $ 7,690 $ 59,013
Customer receivables, less allowance for
doubtful accounts of $17,661 156,761 163,420
Employee receivables 123 1,655
Accounts receivable - related party 29,176 37,944
--------- ---------
Total current assets 193,750 262,032
--------- ---------
Property and equipment, at cost
Equipment 119,940 132,705
Furniture and fixtures 10,196 10,196
--------- ---------
130,136 142,901
Less accumulated depreciation [22,372] [29,442]
--------- ---------
107,764 113,459
--------- ---------
Other assets 2,081 2,081
--------- ---------
$ 303,595 $ 377,572
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Line of credit $ 34,140 $ -0-
Current portion of capital lease obligations 18,019 17,883
Accounts payable and other current liabilities 34,948 11,366
--------- ---------
Total current liabilities 87,107 29,249
--------- ---------
Long-term liabilities
Capital lease obligations,
net of current portion 28,086 23,594
--------- ---------
Stockholder's equity
Common stock, $1 par value,
1,000 shares authorized; 1,000
shares issued and outstanding 1,000 1,000
Retained earnings 187,402 323,729
--------- ---------
188,402 324,729
--------- ---------
$ 303,595 $ 377,572
========= =========
</TABLE>
See auditors' report and accompanying notes.
F-66
<PAGE> 106
TG MARKETING SYSTEMS, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
[Unaudited]
For the
Three Months Ended
For the March 31,
Year Ended --------------------
December 31, 1996 1996 1997
----------------- -------- ----------
<S> <C> <C> <C>
Net revenues
Services $750,083 $ 157,786 $ 368,827
Reimbursed expenses 66,937 30,860 25,515
-------- --------- ---------
817,020 188,646 394,342
-------- --------- ---------
Costs and expenses
Cost of services 402,600 84,622 148,244
Selling and marketing 104,322 33,288 40,184
General and administrative 188,036 32,906 66,921
-------- --------- ---------
694,958 150,816 255,349
-------- --------- ---------
Income from operations 122,062 37,830 138,993
-------- --------- ---------
Other income [expense]
Other income 5,551 3,227 -0-
Interest expense [ 4,092] [ 292] [ 2,666]
-------- --------- --------
1,459 2,935 [ 2,666]
-------- --------- --------
Net income - Historical 123,521 40,765 136,327
Pro Forma provision for income taxes 49,000 16,000 55,000
-------- --------- --------
Pro Forma net income $ 74,521 $ 24,765 $ 81,327
======== ========= ========
</TABLE>
See auditors' report and accompanying notes.
F-67
<PAGE> 107
TG MARKETING SYSTEMS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996
AND THE THREE MONTH PERIOD ENDED MARCH 31, 1997 [UNAUDITED]
<TABLE>
<CAPTION>
Common Retained
Stock Earnings Total
------- --------- -----
<S> <C> <C> <C>
Balances, January 1, 1996 1,000 $ 63,881 $ 64,881
Net income - 123,521 123,521
----- ------- --------
Balances, December 31, 1996 1,000 187,402 188,402
Net income - three months ended
March 31, 1997 [Unaudited] - 136,327 136,327
----- ------- --------
Balances, March 31, 1997 [Unaudited] 1,000 $323,729 $324,729
===== ======== ========
</TABLE>
See auditors' report and accompanying notes.
F-68
<PAGE> 108
TG MARKETING SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
Increase [Decrease] in Cash
<TABLE>
<CAPTION>
[Unaudited]
For the
Three Months Ended
For the Year Ended March 31,
-----------------------
December 31, 1996 1996 1997
------------------ -------- ---------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 123,521 $ 40,765 $ 136,327
--------- -------- ---------
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 13,561 2,526 7,070
Changes in assets and liabilities
[Increase] in customer receivables [ 124,700] [ 1,227] [ 6,659]
Decrease [Increase] in employee receivables 5,195 2,739 [ 1,532]
Decrease [Increase] in accounts receivable -
related party 19,442 -0- [ 8,768]
Decrease in prepaid expenses 2,800 2,800 -0-
[Increase] in other assets [ 2,003] [ 1,431] -0-
[Decrease] in accounts payable and other
current liabilities [ 21,867] [ 16,380] [23,582]
--------- -------- ---------
Total adjustments [ 107,572] [ 10,973] [ 33,471]
--------- -------- ---------
Net cash provided by operating activities 15,949 29,792 102,856
--------- --------- ---------
Cash flows from investing activities
Purchases of property and equipment [ 35,284] [ 8,264] [ 12,765]
--------- -------- ---------
Cash flows from financing activities
Proceeds [Repayment] of line of credit 34,140 7,500 [ 34,140]
Payments of capital leases [ 7,115] - [ 4,628]
Deposit paid to secure capital lease - [ 863] -
--------- --------- ---------
Net cash provided [used] by financing activities 27,025 6,637 [ 38,768]
--------- --------- ---------
Net increase in cash 7,690 28,165 51,323
Cash, beginning of period -0- -0- 7,690
--------- --------- ---------
Cash, end of period $ 7,690 $ 28,165 $ 59,013
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the periods for
Interest $ 4,092 $ 292 $ 2,666
Income taxes 8,190 8,190 -0-
</TABLE>
During the year ended December 31, 1996, the Company purchased $53,220 of
equipment by entering into capital leases.
See auditor's report and accompanying notes.
F-69
<PAGE> 109
TG MARKETING SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
AND MARCH 31, 1997 [UNAUDITED]
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of Operations:
TG MARKETING SYSTEMS, INC., a Georgia corporation, provides consulting and
programming services and information management software to customers to
assist them in the development of marketing systems.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, and
disclosures including the allowance for doubtful accounts, useful lives
and recoverability of long term assets. Actual amounts could differ from
those estimates. Any adjustments applied to estimated amounts are
recognized in the year in which such adjustments are determined.
Revenue Recognition:
Revenue consists primarily of consulting and programming services. The
Company accounts for such revenue in accordance with the American
Institute of Certified Public Accountants' (AICPA) Statement of Position
91-1, Software Revenue Recognition.
Property and Equipment:
Property and equipment is carried at cost. Expenditures for maintenance
and repairs are expensed currently, while renewals and betterments that
materially extend the life of an asset are capitalized. The cost of assets
sold, retired, or otherwise disposed of, and the related allowance for
depreciation, are eliminated from the accounts, and any resulting gain or
loss is included in operations.
Depreciation is provided using the straight-line method based on the
useful lives of the assets, which have been estimated to be five years.
Income Taxes:
On January 1, 1995, the Company elected to be treated as an S corporation
pursuant to the Internal Revenue Code for federal and state income tax
purposes. The income of an S corporation is taxable and distributable to
the individual stockholders of a corporation without further tax
consequences to the Company. However, during February 1996 the Company
paid $8,190 of income taxes related to pre-S election items recognized as
taxable income in 1995. As discussed further in Note B, the Company ceased
to be an S corporation in May 1997.
F-70
<PAGE> 110
TG MARKETING SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS [CONTINUED]
DECEMBER 31, 1996
AND MARCH 31, 1997 [UNAUDITED]
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: [Continued]
Income Taxes: [Continued]
A pro forma provision for income taxes has been presented which represents
income taxes which would have been provided had the Company operated as a
C Corporation.
Interim Financial Statements:
The accompanying financial statements for the three month period ended
March 31, 1996 and 1997 are unaudited but, in the opinion of management,
reflect all adjustments (consisting only of normal and recurring
adjustments) necessary for a fair presentation. The results of operations
for the three-month period are not necessarily indicative of the results
that may be expected for the full years ending 1996 and 1997.
B. SUBSEQUENT EVENT - MERGER AGREEMENT:
On May 2, 1997, the stockholder of the Company effected a merger agreement
with HALIS, Inc. (HALIS), whereby the Company was merged into a subsidiary
of HALIS in a transaction accounted for as a purchase by HALIS. All 1,000
issued and outstanding shares were surrendered by the stockholder in
consideration for 2,388,060 of HALIS' shares.
Additionally, the merger agreement included a two year employment
agreement between HALIS and the stockholder of the Company as president
which provides for an annual base salary of $150,000. HALIS also executed
agreements with certain Company employees which provide for the issuance
of 500,000 fully-vested HALIS common stock options, exercisable at $1.50
per share for a period of ten years.
It is the opinion of management and legal counsel that this transaction
qualifies as a tax-free reorganization within the meaning of section
368(a) of the Internal Revenue Code of 1986. As a subsidiary of HALIS, a
publicly traded company, the Company will no longer enjoy its status as an
S corporation for income tax purposes.
C. ACCOUNTS RECEIVABLE - RELATED PARTY:
At December 31, 1996, the Company had advanced to the stockholder $29,176
under an informal arrangement with no written agreement, stated interest
rate or repayment terms. In April 1997, this advance was satisfied by the
transfer of certain personally-owned equipment at book value by the
stockholder to the Company.
F-71
<PAGE> 111
TG MARKETING SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS [CONTINUED]
DECEMBER 31, 1996
AND MARCH 31, 1997 [UNAUDITED]
D. LINES OF CREDIT:
At December 31, 1996, the Company had drawn $34,140 under a $60,000 line
of credit from a bank. Interest is payable monthly and bears a variable
interest rate of prime plus 1% (an effective rate of 9.25% at December 31,
1996). Interest expense related to this facility was $604 during 1996. The
line of credit is collateralized by all accounts receivable, equipment,
furniture and fixtures of the company and bears the personal guarantee of
the stockholder and matures September 10, 1997.
In January 1997, the Company obtained a line of credit from a bank, which
provides for borrowing of up of $60,000. This line of credit bears a
variable interest rate of prime plus 1.5% (an effective rate of 9.75% upon
inception), and certain, specified financial covenants. Collateral pledged
for this instrument includes all assets of the Company as well as the
assignment of benefits a life insurance policy of the stockholder, and the
personal guarantees of the stockholder and his wife.
E. CAPITAL LEASES PAYABLE:
In 1996, the Company acquired equipment under two long-term leases which
are capital leases. These leases expire in 1999. Amortization of the
equipment purchased under these leases is reported as a component of
depreciation expense. The leased property had a cost of $53,220,
accumulated depreciation of $2,201, and a net book value of $51,019 as of
December 31, 1996.
The future minimum leases payments under the capital lease for each of the
next three years and in total and the net present value of the future
minimum lease payments at December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997 $ 24,391
1998 18,872
1999 13,326
--------
56,589
Less amount representing interest [10,484]
--------
Present value of net minimum lease payments 46,105
Current portion of capital lease obligation [18,019]
--------
Long-term capital lease net of current portion $ 28,086
========
</TABLE>
F. OPERATING LEASE COMMITMENTS:
During 1996, the Company leased office space and an automobile under
operating lease agreements. Rent expense under these agreements was
$34,600 in 1996.
F-72
<PAGE> 112
TG MARKETING SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS [CONTINUED]
DECEMBER 31, 1996
AND MARCH 31, 1997 [UNAUDITED]
F. OPERATING LEASE COMMITMENTS: [Continued]
The Company has entered into a new office lease agreement, effective March
of 1997, which will commence upon the completion and loan closing of the
new building, expected in June 1997. The lessor is the Company's
stockholder, who is the owner of the buildings. The old lease will be
canceled upon inception of the new lease. The annual future minimum lease
commitments under the new building lease and the automobile lease are as
follows:
<TABLE>
<CAPTION>
December 31,
------------
<S> <C>
1997 $ 58,800
1998 77,000
1999 72,000
2000 36,000
--------
Total $243,800
========
</TABLE>
Rent paid to the stockholder was $33,600 during 1996.
G. ECONOMIC DEPENDENCY - MAJOR CUSTOMERS:
A major customer is defined as one from whom ten percent or greater of
annual revenues is derived. During 1996, the Company had four such
customers. Individually, revenues from G. E. Capital, Inc. were $195,577
(26%), from National Linen Services, Inc. were $141,064 (19%), from
Wachovia, Inc. were $93,992 (13%), and $83,536 from HBOC Corporation were
(11%) with related trade accounts receivable of $5,416, $42,283, $24,979,
and $2,188, respectively, at December 31, 1996.
The Company does not have a secured interest in any customer accounts
receivable; however, it does have legal recourse for defaulted accounts.
F-73
<PAGE> 113
INDEPENDENT AUDITORS' REPORT
To the Stockholder
Physicians Resource Network, Inc.
We have audited the accompanying balance sheet of PHYSICIANS RESOURCE NETWORK,
INC., as of December 31, 1996, and the related statements of operations, changes
in stockholder's deficit, and cash flows for the years ended December 31, 1996
and 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PHYSICIANS RESOURCE NETWORK,
INC., at December 31, 1996, and the results of its operations and its cash flows
for the years ended December 31, 1996 and 1995 in conformity with generally
accepted accounting principles.
/s/ Habif, Arogeti & Wynne, P.C.
Atlanta, Georgia
August 29, 1997
F-74
<PAGE> 114
PHYSICIANS RESOURCE NETWORK, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
December 31, [Unaudited]
1996 June 30, 1997
------------ -------------
<S> <C> <C>
Current assets
Cash $ -0- $ 24,566
Accounts receivables, net of allowance for
doubtful accounts of $20,000 691,558 286,857
---------- ----------
Total current assets 691,558 311,423
---------- ----------
Property and equipment, at cost
Equipment 542,461 546,229
Furniture and fixtures 399,776 399,776
Leasehold improvements 57,115 57,115
---------- ----------
999,352 1,003,120
Less accumulated depreciation [466,185] [546,769]
---------- ----------
533,167 456,351
---------- ----------
Other assets 6,214 6,214
---------- ----------
$1,230,939 $ 773,988
========== ==========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities
Cash overdraft $ 41,989 $ -0-
Notes payable 179,000 179,000
Current portion of capital lease obligations 106,854 122,991
Current portion of long-term debt 418,488 418,488
Accounts payable and other current liabilities 467,583 251,092
Notes payable - related parties 404,500 285,000
---------- ----------
Total current liabilities 1,618,414 1,256,571
---------- ----------
Long-term liabilities
Capital lease obligations, net of current portion 213,148 158,728
---------- ----------
Stockholder's deficit
Common stock, 1,000 shares of voting and 10,000
non-voting shares authorized; 1,000 shares $.10
par value and 1,000 non-voting shares $.10 par
value issued and outstanding 200 200
Additional paid-in capital 85,923 85,923
Accumulated deficit [686,746] [727,434]
---------- ----------
[600,623] [641,311]
---------- ----------
$1,230,939 $ 773,988
========== ==========
</TABLE>
See auditors' report and accompanying notes.
F-75
<PAGE> 115
PHYSICIANS RESOURCE NETWORK, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
[Unaudited]
For the For the
Years Ended Six Months Ended
December 31, June 30,
------------------------- ------------------------
1995 1996 1996 1997
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues from services $ 3,171,271 $6,526,822 $3,397,720 $2,879,782
----------- ---------- ---------- ----------
Costs and expenses
Cost of services 2,190,349 5,029,433 2,513,336 2,246,381
General and administrative 1,097,415 1,459,477 823,716 624,991
----------- ---------- ---------- ----------
3,287,764 6,488,910 3,337,052 2,871,372
----------- ---------- ---------- ----------
Income [Loss] from operations [116,493] 37,912 60,668 8,410
----------- ---------- ---------- ----------
Other income [expense]
Other income 11,192 10,773 4,496 20,327
Interest expense [87,817] [132,616] [50,901] [69,425]
Loss on asset disposal [15,534] [8,793] [8,793] -0-
----------- ---------- ---------- ----------
[92,159] [130,636] [55,198] [49,098]
----------- ---------- ---------- ----------
Net income [loss] $ [208,652] $ [92,724] $ 5,470 $ [40,688]
=========== ========== ========== ==========
</TABLE>
See auditors' report and accompanying notes.
F-76
<PAGE> 116
PHYSICIANS RESOURCE NETWORK, INC.
STATEMENTS OF CHANGES IN STOCKHOLDER'S DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
AND THE SIX MONTH PERIOD ENDED JUNE 30, 1997 [UNAUDITED]
<TABLE>
<CAPTION>
Common Stock
------------- Additional
Number Paid-In Accumulated
of shares Amount Capital Deficit Total
------------ ---- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1995 2,000 $200 $85,923 $[385,370] $[299,247]
Net loss [208,652] [208,652]
----- ---- ------- --------- ---------
Balances, December 31, 1995 2,000 200 85,923 [594,022] [507,899]
Net loss [92,724] [92,724]
----- ---- ------- --------- ---------
Balances, December 31, 1996 2,000 200 85,923 [686,746] [600,623]
Net loss - six months ended
June 30, 1997 [Unaudited] [40,688] [40,688]
----- ---- ------- --------- ---------
Balances, June 30, 1997
[Unaudited] 2,000 $200 $85,923 $[727,434] $[641,311]
===== ==== ======= ========= =========
</TABLE>
See auditors' report and accompanying notes.
F-77
<PAGE> 117
PHYSICIANS RESOURCE NETWORK, INC.
STATEMENTS OF CASH FLOWS
Increase [Decrease] in Cash
<TABLE>
<CAPTION>
[Unaudited]
For the For the
Years ended Six Months Ended
December 31, June 30,
----------------------- -----------------------
1995 1996 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income [loss] $[208,652] $ [92,724] $ 5,470 $ [40,688]
--------- --------- --------- ---------
Adjustments to reconcile net income [loss] to net
cash provided [used] by operating activities
Depreciation 105,278 134,221 63,967 80,523
Loss on asset disposal 15,534 8,793 8,793 -0-
Changes in assets and liabilities
Decrease [Increase] in accounts receivables [126,410] [481,254] [176,952] 404,700
Increase in other assets [2,015] [3,119] [3,119] -0-
Increase [Decrease] in cash overdraft -0- 41,989 -0- [41,989]
Increase [Decrease] in accounts payable
and other current liabilities 94,387 266,201 122,185 [216,491]
--------- --------- --------- ---------
Total adjustments 86,774 [33,169] 14,874 226,743
--------- --------- --------- ---------
Net cash provided [used] by
operating activities [121,878] [125,893] 20,344 186,055
--------- --------- --------- ---------
Cash flows from investing activities
Acquisitions of property and equipment [160,133] [111,646] [67,479] [3,707]
--------- --------- --------- ---------
Cash flows from financing activities
Proceeds [Repayment] of notes payable [42,101] 99,000 99,000 -0-
Payments of capital lease obligations [41,879] [55,524] [27,639] [38,282]
Proceeds [payments] on long-term debt 158,639 21,155 [28,824] -0-
Proceeds [payment] of notes payable - related
parties 235,000 104,500 [7,500] [119,500]
--------- --------- --------- ---------
Net cash provided [used] by financing activities 309,659 169,131 35,037 [157,782]
--------- --------- --------- ---------
Net increase [decrease] in cash 27,648 [68,408] [12,098] 24,566
Cash, beginning 40,760 68,408 68,408 -0-
--------- --------- --------- ---------
Cash, ending $ 68,408 $ -0- $ 56,310 $ 24,566
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the years and periods for
Interest $ 82,660 $ 126,524 $ 69,397 $ 52,619
</TABLE>
During the years ended December 31, 1996 and 1995, the Company purchased
$141,392 and $71,347 of equipment by entering into capital leases,
respectively.
See auditors' report and accompanying notes.
F-78
<PAGE> 118
PHYSICIANS RESOURCE NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995 [AUDITED]
AND JUNE 30, 1997 [UNAUDITED]
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of Operations:
PHYSICIANS RESOURCE NETWORK, INC., a Florida Corporation, provides
management, consulting, billing and staffing services on a contract basis
to medical practices in the Tampa, Florida area.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, and
disclosures including the allowance for doubtful accounts, useful lives and
recoverability of long term assets. Actual amounts could differ from those
estimates. Any adjustments applied to estimated amounts are recognized in
the year in which such adjustments are determined.
Revenue Recognition:
Revenue consists primarily of fees earned from employee leasing, practice
management and consulting services.
Accounts Receivable:
The Company does not have a secured interest in its accounts receivable;
however, it does have legal recourse for defaulted amounts.
Property and Equipment:
Property and equipment is carried at cost. Expenditures for maintenance and
repairs are expensed currently, while renewals and betterments that
materially extend the life of an asset are capitalized. The cost of assets
sold, retired, or otherwise disposed of, and the related allowance for
depreciation, are eliminated from the accounts, and any resulting gain or
loss is included in operations.
Depreciation is provided using the straight-line method based on the useful
lives of the assets, which have been estimated to be five to seven years.
Income Taxes:
On October 1, 1988, the Company elected to be treated as an S corporation
pursuant to the Internal Revenue Code for federal and state income tax
purposes. The income of an S corporation is taxable and distributable to
the individual stockholder of a corporation without further tax
consequences to the Company. As discussed further in Note B, the Company
ceased to be an S corporation in July 1997.
F-79
<PAGE> 119
PHYSICIANS RESOURCE NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS [CONTINUED]
DECEMBER 31, 1996 AND 1995 [AUDITED]
AND JUNE 30, 1997 [UNAUDITED]
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: [Continued]
Compensated Absences:
Employees must be full time, permanent employees to accrue sick leave.
Employees earn 48 hours of sick leave a year and can carry over any unused
hours. Hours not used upon termination, voluntary or involuntary, will be
paid out. Effective January 1, 1997, only three days could be carried over
to the next year and three days may be surrendered for cash.
Interim Financial Statements:
The accompanying financial statements for the six month period ended June
30, 1996 and 1997 are unaudited but, in the opinion of management, reflect
all adjustments (consisting only of normal and recurring adjustments)
necessary for a fair presentation. The results of operations for the six
month period are not necessarily indicative of the results for the full
years ending 1996 and 1997.
B. SUBSEQUENT EVENT - MERGER AGREEMENT:
On July 7, 1997, the stockholder of the Company effected a merger agreement
with HALIS, Inc. (HALIS), whereby the Company was merged into a subsidiary
of HALIS in a transaction accounted for as a purchase by HALIS. All issued
and outstanding shares of the Company were surrendered by the stockholder
in consideration for 3,733,333 shares of common stock of HALIS.
Additionally, the merger agreement included a two year employment agreement
between HALIS and the stockholder of the Company which provides for an
annual base salary of $125,000 and incentive compensation as determined by
the Board of Directors of HALIS.
It is the opinion of management and legal counsel that this transaction
qualifies as a tax-free reorganization within the meaning of section 368(a)
of the Internal Revenue Code of 1986. As a subsidiary of HALIS, a publicly
traded company, the Company will no longer enjoy its status as an S
corporation for income tax purposes.
C. RELATED PARTY TRANSACTIONS AND ECONOMIC DEPENDENCY:
The Company is affiliated with a collection agency, Accounts Management,
Inc. of Tampa Bay (AMI), in which the Company's sole shareholder has a 50%
ownership. The Company does not pay AMI fees, but AMI earns fees from the
medical practices directly. Included in revenues for the years ended
December 31, 1996 and 1995 are $8,913 and $6,438 from AMI, respectively.
Related accounts receivable at December 31, 1996 was $1,431.
Interest expense to related parties (See Note H) for the years ended
December 31, 1996 and 1995 was $24,387 and $5,401, respectively. Accrued
interest at December 31, 1996 was $13,828.
F-80
<PAGE> 120
PHYSICIANS RESOURCE NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS [CONTINUED]
DECEMBER 31, 1996 AND 1995 [AUDITED]
AND JUNE 30, 1997 [UNAUDITED]
C. RELATED PARTY TRANSACTIONS AND ECONOMIC DEPENDENCY: [Continued]
The Company also had transactions with a construction company which is
owned 50% by the shareholder. The construction company provided
construction services of which approximately $43,500 is included in
leasehold improvements at December 31, 1996.
The Company earned revenues from five medical practices in which the
shareholder's sibling has ownership. As of October 31, 1996, three of the
five medical practices are no longer considered related. Revenues
attributed to these three medical practices for the ten months ended
October 31, 1996 were $303,698 (see Notes D and K).
D. ACCOUNTS RECEIVABLES:
Accounts receivables as of December 31, 1996 consist of the following:
<TABLE>
<S> <C>
Customer receivables - Trade $ 631,686
Customer receivables - Related Parties 79,822
Employee receivables 50
---------
711,558
Allowance for doubtful accounts [20,000]
---------
$ 691,558
=========
</TABLE>
E. NOTES PAYABLE:
Line-of-Credit:
The Company has a $100,000 revolving line-of-credit with Central Bank of
Tampa, of which $99,000 was owed at December 31, 1996. The line-of-credit
is being refinanced and is expected to mature December 25, 1997. Bank
advances on the credit line are payable on demand and carry an interest
rate of prime plus 1.25% per annum. The credit line is secured by
substantially all corporate assets and is personally guaranteed by the
shareholder.
Mulberry Street Investment Company - secured note payable in the amount of
$80,000 at 10% per annum. Principal plus interest was paid in full on July
7, 1997.
F-81
<PAGE> 121
PHYSICIANS RESOURCE NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS [CONTINUED]
DECEMBER 31, 1996 AND 1995 [AUDITED]
AND JUNE 30, 1997 [UNAUDITED]
F. CAPITAL LEASES PAYABLE:
The Company acquired computer equipment and office furniture under seven
long-term capital leases. These leases begin to expire in 1998.
Depreciation of the equipment and furniture purchased under these leases is
reported as a component of depreciation expense. The leased property had a
cost of $454,214, accumulated depreciation of $193,581, and a net book
value of $260,633 as of December 31, 1996.
The future minimum leases payments under the capital lease for each of the
next three years and in total and the net present value of the future
minimum lease payments at December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997 $ 146,951
1998 135,068
1999 110,179
---------
392,198
Less amount representing interest [72,196]
---------
Present value of net minimum lease payments 320,002
Less current portion of capital lease obligation [106,854]
---------
Long-term capital lease obligation net of current portion $ 213,148
=========
</TABLE>
G. LONG-TERM DEBT:
Central Bank of Tampa - Secured note payable in the amount of $525,000 at
10.5% per annum, with monthly payments in the amount of $11,328 which
includes interest. Central Bank of Tampa has a blanket lien on the assets
of the Company and personal guarantee of Anthony Maniscalco. This note is
being refinanced and is expected to be called for a balloon payment due
December 25, 1997.
H. NOTES PAYABLE - RELATED PARTIES:
Shareholder: Amount
The Company has an unsecured note payable to the sole
shareholder of the Company as of December 31, 1996. The note
is due on demand and interest is being accrued at 8% per
annum. During the six months ended June 30, 1997, $27,500 of
principal was paid. The remaining $285,000 was converted to
equity on July 3, 1997. $312,500
F-82
<PAGE> 122
PHYSICIANS RESOURCE NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS [CONTINUED]
DECEMBER 31, 1996 AND 1995 [AUDITED]
AND JUNE 30, 1997 [UNAUDITED]
H. NOTES PAYABLE - RELATED PARTIES: [Continued]
Anthony & Associates:
Unsecured note payable to a company owned 100% by the
shareholder. The note accrued interest at 8% per annum.
The outstanding principal amount and related interest
were paid in full on February 11, 1997. 42,000
TDM OF TAMPA, INC.:
Unsecured note payable to a company owned 50% by the
shareholder. The note accrued interest at 10.5%. The
outstanding principal amount and related interest
were paid in full on February 11, 1997. 50,000
---------
$ 404,500
=========
I. OPERATING LEASE COMMITMENTS:
The Company leases office space, automobiles and office equipment under
operating lease agreements. Rent expense under these agreements was
$171,015 in 1996.
The annual future minimum lease commitments under the building, automobile,
and the office equipment leases are as follows:
<TABLE>
<CAPTION>
December 31,
------------
<S> <C>
1997 $167,103
1998 170,358
1999 137,713
2000 11,928
---- --------
Total $487,102
========
</TABLE>
J. EMPLOYEE BENEFIT PLAN:
The Company sponsors a profit-sharing plan for all employees who meet
certain eligibility requirements. The Company may elect to make
discretionary contributions up to 2% of an employee's gross salary.
Employees are subjected to a five-year vesting schedule. The Company made
contributions to the plan of approximately $40,000 in 1996 and $17,000 in
1995.
F-83
<PAGE> 123
PHYSICIANS RESOURCE NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS [CONTINUED]
DECEMBER 31, 1996 AND 1995 [AUDITED]
AND JUNE 30, 1997 [UNAUDITED]
K. ECONOMIC DEPENDENCY - MAJOR CLIENTS:
A major client is defined as one from whom ten percent or greater of annual
revenues is derived. During 1996 and 1995, the Company had three and one
such customers, respectively.
Individually, revenues from Maniscalco, Alagona, & Elchahal, MDs, PA (MAE)
were $1,197,496 (18%) in 1996 and $1,021,770 (32%) in 1995. The related
trade accounts receivable at December 31, 1996 was $66,958. As a group,
including MAE, five clients in which the shareholder's sibling has
ownership accounted for $2,267,555 (35%) and $1,976,370 (62%) of revenues
in 1996 and 1995, respectively.
During 1996, revenues from Associated Primary Care, PA were $1,686,413
(26%) and from Access Medical Care, Inc. were $1,189,128 (18%) with related
trade accounts receivable of $45,204 and $252,493, respectively, at
December 31, 1996.
F-84
<PAGE> 124
INDEPENDENT AUDITORS' REPORT
To the Stockholder of
Physource Ltd. and
Theodore M. Homa M.D., S.C.
We have audited the accompanying combined balance sheet of PhySource Ltd. and
Theodore M. Homa, M.D., S.C. as of December 31, 1996 and the related combined
statements of operations, changes in stockholders' equity [deficit], and cash
flows for the period from inception [February 28, 1996] of PhySource, Ltd. and
for the year ended December 31, 1996 for Theodore M. Homa, M.D., S.C. These
combined financial statements are the responsibility of the Companies'
management. Our responsibility is to express an opinion on these combined
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the combined financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the combined financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of PhySource Ltd. and
Theodore M. Homa, M.D., S.C. at December 31, 1996, and the results of their
operations and their cash flows from inception [February 28, 1996] for PhySource
Ltd. and for the year ended December 31, 1996 for Theodore M. Homa, M.D., S.C.
in conformity with generally accepted accounting principles.
/s/ Habif, Arogeti & Wynne, P.C.
Atlanta, Georgia
September 26, 1997
F-85
<PAGE> 125
PHYSOURCE LTD. and THEODORE M. HOMA, M.D., S.C.
COMBINED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
December 31, [Unaudited]
1996 June 30, 1997
------------ -------------
<S> <C> <C>
Current assets
Cash $ 41,621 $ 18,420
Accounts receivable, net of allowance for
doubtful accounts of $8,690 26,146 304,502
Prepaid expenses 6,620 -0-
Current portion of lease receivable 5,304 5,575
-------- ----------
Total current assets 79,691 328,497
-------- ----------
Property and equipment, at cost
Computer equipment 141,476 143,394
Furniture and fixtures 27,007 49,464
-------- ----------
168,483 192,858
Less accumulated depreciation [46,521] [75,113]
-------- ----------
121,962 117,745
-------- ----------
Other assets
Organization costs, net of accumulated
amortization of $1,644 10,683 10,683
Lease receivable, net of current portion 25,882 23,024
-------- ----------
36,565 33,707
-------- ----------
$238,218 $ 479,949
======== ==========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities
Notes payable - related parties $786,542 $1,043,240
Retirement plan payable 12,479 12,479
Current portion of long-term debt - related parties 5,386 7,051
Accounts payable and accrued expenses 78,980 33,338
Accounts payable and accrued expenses -
related parties 29,858 221,568
-------- ----------
Total current liabilities 913,245 1,317,676
-------- ----------
Long-term liabilities
Long-term debt - related party, net of current portion 23,454 20,125
-------- ----------
Stockholder's deficit
Common stock - PhySource, Ltd. no par value,
12,000 shares authorized; 6,000 shares issued
and outstanding 1,000 1,000
Common stock - Homa, S.C. no par value, 20,000
shares authorized; 1,000 shares issued and
outstanding 3,000 3,000
Stock subscription receivable [1,000] [1,000]
Accumulated deficit [701,481] [860,852]
-------- ----------
[698,481] [857,852]
-------- ----------
$238,218 $ 479,949
======== ==========
</TABLE>
See auditors' report and accompanying notes.
F-86
<PAGE> 126
PHYSOURCE LTD. and THEODORE M. HOMA, M.D., S.C.
COMBINED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM INCEPTION [FEBRUARY 28, 1996]
THROUGH DECEMBER 31, 1996 FOR PHYSOURCE, LTD. AND
FOR THE YEAR ENDED DECEMBER 31, 1996 FOR THEODORE M. HOMA, M.D., S.C.
<TABLE>
<CAPTION>
[Unaudited]
For the For the
Year Ended Six Months Ended
December 31, 1996 June 30,
----------------- ---------------------------
1996 1997
---------- -----------
<S> <C> <C> <C>
Revenues from services $ 601,983 $ 188,302 $1,223,115
---------- ---------- ----------
Cost of services 469,986 111,464 667,204
General and administrative 770,363 299,028 662,663
---------- ---------- ----------
1,240,349 410,492 1,329,867
---------- ---------- ----------
Loss from operations [638,366] [222,190] [106,752]
---------- ---------- ----------
Other income [expense]
Interest income 1,875 -0- 3,063
Interest expense [31,769] [4,641] [50,548]
Gain on asset disposal 21,285 2,070 -0-
---------- ---------- ----------
[8,609] [2,571] [47,485]
---------- ---------- ----------
Net loss $[646,975] $[224,761] $[154,237]
========== ========== ==========
</TABLE>
See auditors' report and accompanying notes.
F-87
<PAGE> 127
PHYSOURCE LTD. and THEODORE M. HOMA, M.D., S.C.
COMBINED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY [DEFICIT]
FOR THE PERIOD FROM INCEPTION [FEBRUARY 28, 1996]
THROUGH DECEMBER 31, 1996 FOR PHYSOURCE, LTD. AND
FOR THE YEAR ENDED DECEMBER 31, 1996 FOR THEODORE M. HOMA, M.D., S.C. AND
FOR THE SIX MONTHS ENDED JUNE 30, 1997 [UNAUDITED]
<TABLE>
<CAPTION>
Theodore M. Total
PhySources, Ltd. Homa, M.D., S.C. Share-
Common Stock Common Stock Stock Retained holders'
-------------------- ------------------ Subscription Earnings Equity
Shares Amount Shares Amount Receivable [Deficit] [Deficit]
------ ------ ------- ------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1,
1996 -0- $ -0- 1,000 $3,000 $ -0- $ 21,344 $ 24,344
Issuance of stock 6,000 1,000 -0- -0- [1,000] -0- -0-
Dividends paid -0- -0- -0- -0- -0- [75,850] [75,850]
Net loss -0- -0- -0- -0- -0- [646,975] [646,975]
------ ------ ------- ------- ------------ --------- ----------
Balances, December 31,
1996 6,000 1,000 1,000 3,000 [1,000] [701,481] [698,481]
Dividends paid [unaudited] -0- -0- -0- -0- -0- [5,134] [5,134]
Net loss - six months
ended June 30,
1997 [unaudited] -0- -0- -0- -0- -0- [154,237] [154,237]
----- ------ ------ ------- ------- --------- ---------
Balances, June 30,
1997 [unaudited] 6,000 $1,000 1,000 $3,000 $[1,000] $[860,852] $[857,852]
----- ------ ------ ------- ------- --------- ---------
</TABLE>
See auditors' report and accompanying notes.
F-88
<PAGE> 128
PHYSOURCE LTD. and THEODORE M. HOMA, M.D., S.C.
COMBINED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION [FEBRUARY 28, 1996]
THROUGH DECEMBER 31, 1996 FOR PHYSOURCE, LTD. AND
FOR THE YEAR ENDED DECEMBER 31, 1996 FOR THEODORE M. HOMA, M.D., S.C.
Increase [Decrease] in Cash
<TABLE>
<CAPTION>
[Unaudited]
For the For the
Year ended Six Months Ended
December 31, 1996 June 30,
----------------- -----------------------
1996 1997
--------- ---------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $[646,975] $[224,761] $[154,237]
--------- --------- ---------
Adjustments to reconcile net loss to net cash
used by operating activities
Depreciation and amortization 21,158 5,164 28,592
Gain on disposal of assets [21,285] [2,070] -0-
Changes in assets and liabilities
Increase in accounts receivable [26,146] [22,652] [278,356]
Decrease [Increase] in prepaid expenses [6,173] [15,954] 6,620
Decrease [Increase] in shareholder advances 21,919 [31,518] -0-
Increase in organizational costs [12,327] [2,005] -0-
Increase in retirement plan payable 12,479 -0- -0-
Increase [Decrease] in accounts payable
and accrued expenses 78,690 37,050 [45,642]
Increase in accounts payable and other
accrued expenses - related party 29,858 4,641 191,710
--------- --------- ---------
Total adjustments 98,173 [27,344] [97,076]
--------- --------- ---------
Net cash used by operating
activities [548,802] [252,105] [251,313]
--------- --------- ---------
Cash flows from investing activities
Acquisitions of property and equipment [83,588] [28,496] [24,375]
--------- --------- ---------
Cash flows from financing activities
Proceeds from repayment of lease receivable 2,919 -0- 2,587
Proceeds from notes payable - related parties 727,988 280,409 256,698
Payments on long-term debt [2,529] [665] [1,664]
Dividends [56,635] -0- [5,134]
--------- --------- ---------
Net cash provided by financing activities 671,743 279,744 252,487
--------- --------- ---------
Net increase [decrease] in cash 39,353 [857] [23,201]
Cash, beginning 2,268 2,268 41,621
--------- --------- ---------
Cash, ending $ 41,621 $ 1,411 $ 18,420
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the years and periods for
Interest $ 6,772 $ -0- $ 1,130
</TABLE>
See auditor's report and accompanying notes.
F-89
<PAGE> 129
PHYSOURCE LTD. and THEODORE M. HOMA, M.D., S.C.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND JUNE 30, 1997 [UNAUDITED]
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of Operations:
PhySource LTD. (PhySource), an Illinois Corporation, started business and
was incorporated on February 28, 1996. PhySource provides management,
consulting, billing and staffing services on a contract basis to medical
practices.
Theodore M. Homa, M.D., S.C., (Homa), an Illinois Corporation, was
incorporated in 1979 and is a medical practice providing internal medicine
services.
Principles of Combination:
The accompanying financial statements of PhySource and Homa (collectively,
the Companies) are presented on a combined basis due to the common
ownership and business activities of the Companies [Note B]. The combined
financial statements include the accounts of each of the Companies. All
significant intercompany accounts and transactions have been eliminated.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, and
disclosures including the allowance for doubtful accounts, useful lives and
recoverability of long term assets. Actual amounts could differ from those
estimates. Any adjustments applied to estimated amounts are recognized in
the year in which such adjustments are determined.
Accounts Receivable:
The Company does not have a secured interest in its accounts receivable;
however, it does have legal recourse for defaulted amounts.
Property and Equipment:
Property and equipment is carried at cost. Expenditures for maintenance and
repairs are expensed currently, while renewals and betterments that
materially extend the life of an asset are capitalized. The cost of assets
sold, retired, or otherwise disposed of, and the related allowance for
depreciation, are eliminated from the accounts, and any resulting gain or
loss is included in operations.
F-90
<PAGE> 130
PHYSOURCE LTD. and THEODORE M. HOMA, M.D., S.C.
NOTES TO COMBINED FINANCIAL STATEMENTS [CONTINUED]
DECEMBER 31, 1996 AND JUNE 30, 1997 [UNAUDITED]
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: [Continued]
Property and Equipment: [Continued]
Depreciation is provided using the straight-line method based on the useful
lives of the assets, which have been estimated to be five years.
Depreciation expense for the year ended December 31, 1996 was $19,514.
Income Taxes:
PhySource and Homa elected to be treated as S corporations pursuant to the
Internal Revenue Code for federal and state income tax purposes on February
28, 1996 and January 1, 1989, respectively. The income of an S corporation
is taxable and distributable to the individual stockholders of a
corporation without further consequences to PhySource or Homa. As discussed
further in Note B, the Companies ceased to be S corporations in July 1997,
in connection with Homa's merger into PhySource and PhySource's subsequent
merger into HALIS, Inc. (HALIS).
Interim Financial Statements:
The accompanying financial statements for the period from inception to June
30, 1996 for PhySource, for the six month period ended June 30, 1996 for
Homa, and for the six month period ended June 30, 1997 for the Companies
are unaudited but, in the opinion of management, reflect all normal and
recurring adjustments necessary for a fair presentation. The results of
operations for the six month period are not necessarily indicative of the
results for the periods ended December 31, 1997.
B. SUBSEQUENT EVENT - MERGER AGREEMENT:
On July 31, 1997, the stockholder of Homa effected a merger agreement with
Physource, pursuant to which Homa was merged into PhySource. All issued and
outstanding shares of the common stock of Homa were surrendered by the
stockholder in consideration for 788 shares of common stock of PhySource.
On July 31, 1997, the stockholders of PhySource effected a merger agreement
with HALIS, pursuant to which PhySource was merged into a subsidiary of
HALIS. All issued and outstanding shares of PhySource were surrendered by
the stockholders in consideration for 1,502,963 shares of common stock of
HALIS.
These mergers were accounted for as purchase by HALIS.
Additionally, in connection with the merger, HALIS issued 1,129,648 shares
of common stock and 37,742 incentive stock options to satisfy certain
liabilities.
F-91
<PAGE> 131
PHYSOURCE LTD. and THEODORE M. HOMA, M.D., S.C.
NOTES TO COMBINED FINANCIAL STATEMENTS [CONTINUED]
DECEMBER 31, 1996 AND JUNE 30, 1997 [UNAUDITED]
C. RELATED PARTY TRANSACTIONS:
In 1996, Homa received revenues from Buffalo Grove Internal Medicine (BGIM)
in the amount of $239,586. The sole shareholder of Homa is a 50%
shareholder of BGIM. The balance due from BGIM as of December 31, 1996 was
$-0-. Effective January 1, 1997, the shareholder no longer provided
services in BGIM and billed all services through Homa.
In 1996, PhySource purchased property and equipment in the amount of
$89,923 from Indeck Engery Services, Inc. (Indeck), which is majority owned
by Mr. Gerald R. Forsythe, a director of PhySource who is also the father
of four PhySource shareholders. The Companies also bank at American
Enterprise Bank, which is also majority owned by Mr. Forsythe.
In 1996, Homa paid billing fees to Medical Practice Management in the
amount of $15,728, which is owned 100% by the wife of the sole shareholder
of Homa.
In 1996, Homa sold property and equipment to the shareholder of Homa for
$19,215. The book value of the vehicle was $-0- and the gain is included in
gain from asset disposals in the statement of operations.
D. LEASE RECEIVABLES:
PhySource leases property and equipment under the provisions of a long-term
lease. For financial reporting purposes, the asset has been removed from
the books and a gain on the sale in the amount of $2,070 has been
recognized. The lease expires in May 2001.
The future minimum lease repayments under the capital lease and the net
present value of the future minimum lease repayments at December 31, 1996
are as follows:
<TABLE>
<S> <C>
Total minimum lease repayments $39,349
Less amount representing interest [8,163]
-------
Present value of minimum lease payments 31,186
Current portion of capital lease [5,304]
-------
Long-term capital lease less current portion $25,882
=======
</TABLE>
F-92
<PAGE> 132
PHYSOURCE LTD. and THEODORE M. HOMA, M.D., S.C.
NOTES TO COMBINED FINANCIAL STATEMENTS [CONTINUED]
DECEMBER 31, 1996 AND JUNE 30, 1997 [UNAUDITED]
D. LEASE RECEIVABLES: [Continued]
Maturities of the lease receivable as of December 31, 1996 are as
follows:
<TABLE>
<S> <C>
1997 $ 5,304
1998 5,860
1999 6,474
2000 7,152
2001 6,396
-------
$31,186
=======
</TABLE>
E. NOTES PAYABLE - RELATED PARTIES:
The Company has the following unsecured notes payable to related parties as
of:
<TABLE>
<CAPTION>
December 31, June 30,
------------ -----------
<S> <C> <C>
Director - note payable with interest
of prime + 2% payable on demand
This note is unsecured. $677,000 $ 802,000
Indeck - note payable with interest
of prime + 2% payable on demand.
This note is unsecured. 84,542 84,542
Shareholder/Director - note payable with interest
of prime + 2% payable on demand; due on
demand. This note is unsecured. 25,000 25,000
Shareholder - note payable with interest at 7%
per annum; interest and principal due April
1998. This note is unsecured. -0- 18,000
Fawcett Insurance Agency, Inc. - note payable
with interest of prime + 2% payable on demand;
due on demand. This note is unsecured. -0- 85,000
Shareholder/Director - note payable with interest
of prime + 2% payable on demand; due on
demand. This note is unsecured. -0- 28,698
-------- ----------
$786,542 $1,043,240
======== ==========
</TABLE>
F-93
<PAGE> 133
PHYSOURCE LTD. and THEODORE M. HOMA, M.D., S.C.
NOTES TO COMBINED FINANCIAL STATEMENTS [CONTINUED]
DECEMBER 31, 1996 AND JUNE 30, 1997 [UNAUDITED]
E. NOTES PAYABLE - RELATED PARTIES: [Continued]
The above debt, excluding the note payable of $18,000, was subsequently
satisfied at the merger [Note B] with HALIS stock. Fawcett Insurance
Agency, Inc. is wholly-owned by a shareholder/director of PhySource.
Accrued interest relating to the above notes at December 31, 1996 and June
30, 1997 was $29,858 and $79,276, respectively.
F. LONG-TERM DEBT - RELATED PARTY:
<TABLE>
<S> <C>
Director - installment loan with interest of 10% payable in monthly
installments of $665; due May 31, 2001.
This note in secured by an x-ray machine. $28,840
Less current portion [5,386]
-------
$23,454
=======
</TABLE>
Maturities of the installment note as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
December 31,
------------
<S> <C>
1997 $ 5,386
1998 5,950
1999 6,573
2000 7,261
2001 3,670
-------
$28,840
=======
</TABLE>
G. OPERATING LEASE COMMITMENTS:
The Companies lease equipment and office space under operating lease
agreements. Rent expense under these agreements was $49,131 in 1996.
The annual future minimum lease commitments under these leases are as
follows:
<TABLE>
<CAPTION>
December 31,
------------
<S> <C>
1997 $ 26,518
1998 28,761
1999 29,205
2000 29,227
2001 24,860
Thereafter 51,737
--------
$190,308
========
</TABLE>
F-94
<PAGE> 134
PHYSOURCE LTD. and THEODORE M. HOMA, M.D., S.C.
NOTES TO COMBINED FINANCIAL STATEMENTS [CONTINUED]
DECEMBER 31, 1996 AND JUNE 30, 1997 [UNAUDITED]
H. EMPLOYEE BENEFIT PLAN:
PhySource sponsors a 401(k) retirement savings plan for all employees who
meet certain eligibility requirements. Employees may contribute to the plan
up to 15% of their salary or the maximum allowed by the IRS. The Company
may elect to make matching and/or discretionary contributions. Employees'
contributions are immediately 100% vested while the Company contributions
are subject to a six-year vesting schedule. The Company made a contribution
to the plan during 1996 for $12,479.
I. ECONOMIC DEPENDENCY - MAJOR CLIENTS:
A major client is defined as one from whom ten percent or greater of annual
revenues is derived. During 1996, the Companies had one such customer.
Homa received revenues of $239,586 from BGIM, a related party [Note C],
in 1996 which accounted for 40% of revenues.
J. SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES:
The Companies acquired property and equipment of $58,554 and $31,369 by
issuance of notes payable and long-term debt.
The Companies sold property and equipment by issuing a note receivable in
the amount of $34,105.
The Company sold property and equipment with a net book value of $-0- for
$19,215 which is included in dividends.
K. SUBSEQUENT EVENTS:
The Companies are currently negotiating a new operating lease for office
space.
In conjunction with the merger [Note B], the Companies have entered
into an employment agreement with Theodore M. Homa, M. D. which expires
in July 31, 1999. The agreement provides for an annual base salary of
$144,000 plus certain incentive compensation.
F-95
<PAGE> 135
HALIS, INC.
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
The following Unaudited Pro Forma Condensed Consolidated Balance Sheet of
HALIS, Inc. gives effect to the following transactions as if they occurred on
December 31, 1996: the acquisitions of The Compass Group, Inc. (Compass)
Software Manufacturing Group, Inc. (SMG), and the combined entity of American
Benefit Administrative Services, Inc. and Third Party Administrators, Inc.
(ABAS) by HALIS, Inc. and Subsidiaries (HALIS) accounted for as purchases. The
Unaudited Pro Forma Condensed Consolidated Statement of Operations for HALIS
for the year ended December 31, 1996 gives retroactive effect to the
acquisitions as if they had occurred January 1, 1996. The Unaudited Pro Forma
Condensed Consolidated Financial Statements do not purport to be indicative of
the actual financial position or the results of operations of HALIS had the
acquisition been completed, and should be read in conjunction with the audited
financial statements of HALIS, Compass, SMG, and ABAS and the related notes
thereto.
F-96
<PAGE> 136
HALIS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<CAPTION>
American
Benefit
Administrative
HALIS, Inc. The Software Services, Inc.
and Compass Manufacturing and Third Party
Subsidiaries Group, Inc. Group, Inc. Administrators, Inc. Adjustments Pro Forma
------------------------ ------------- -------------------- ----------- ---------
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Current assets $ 798,341 $ 51,619 $ 383,152 $ 375,914 $ -- $1,609,026
Property and equipment 60,154 4,475 151,508 76,101 [a] [2,609] 289,629
Other assets 118,639 -- 8,417 586,362 [a] [32,659] 680,759
Capitalized software
development costs 160,995 -- 138,810 -- [a] 1,561,190 1,860,995
Goodwill -- -- -- -- [a] 4,952,166 4,952,166
---------- ---------- ---------- ---------- ---------- ----------
Total assets $1,138,129 $ 56,094 $ 681,887 $1,038,377 $6,478,088 $9,392,575
========== ========== ========== ========== ========== ==========
</TABLE>
See notes to unaudited pro forma condensed consolidated financial
statements.
F-97
<PAGE> 137
HALIS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET [CONTINUED]
DECEMBER 31, 1996
<TABLE>
<CAPTION>
American
Benefit
Administrative
HALIS, Inc. The Software Services, Inc.
and Compass Manufacturing and Third Party
Subsidiaries Group, Inc. Group, Inc. Administrators, Inc. Adjustments Pro Forma
------------ ----------- ------------- -------------------- ----------- ----------
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Current liabilities $ 1,723,955 $ 28,107 $ 1,450,203 $ 713,906 [b] $ [530,694] $ 3,385,477
Long-term debt -- -- 301,720 56,091 [b] [266,535] 91,276
Convertible promissory notes 1,506,000 -- -- -- -- 1,506,000
------------ ------------ ------------ ---------- ------------ ------------
Total liabilities 3,229,955 28,107 1,751,923 769,997 [797,229] 4,982,753
------------ ------------ ------------ ---------- ------------ ------------
Stockholders' deficit
Net stockholders' equity [deficit] -- 27,987 [1,070,036] 268,380 [c] 773,669 --
Common stock, par value $.01 239,726 -- -- [a] 52,970 292,696
Additional paid-in capital 10,881,151 -- -- [a] 4,877,780 17,329,829
-- [b] 797,229
-- -- [c] 773,669
--
Stock subscription receivable [240,000] -- -- -- [240,000]
Accumulated deficit [12,965,953] -- -- -- [12,965,953]
Less: Treasury stock at cost [6,750] -- -- -- -- [6,750]
------------ ------------ ------------ ---------- ------------ ------------
Total stockholders' [deficit]
equity [2,091,826] 27,987 [1,070,036] 268,380 7,275,317 4,409,822
------------ ------------ ------------ ---------- ------------ ------------
Total liabilities and stock-
holders' deficit $ 1,138,129 $ 56,094 $ 681,887 $1,038,377 $ 6,478,088 $ 9,392,575
============ ============ ============ ========== ============ ============
Common stock issued and
outstanding (c) 23,972,621 29,269,621
============ ============
</TABLE>
See notes to unaudited pro forma condensed consolidated financial
statements.
F-98
<PAGE> 138
HALIS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
American
Benefits
Administrative
HALIS, Inc. The Software Services, Inc.
and Compass Manufacturing and Third Party
Subsidiaries Group, Inc. Group, Inc. Administrators, Inc. Adjustments Pro Forma
------------ ------------- -------------- ------------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Systems sales and services $ 1,925,412 $ 234,696 $ 2,923,629 $ 2,710,207 $ -- $ 7,793,944
------------- ------------- ------------- ------------- ----------- ------------
Costs and expenses
Cost of goods sold 1,656,113 165,854 1,102,388 880,940 -- 3,805,295
Research and development 1,516,572 -- 312,430 -- -- 1,829,002
Selling, general, and -- -- -- -- [d] 1,385,896
administrative 325,699 100,922 2,108,094 1,848,119 [e] 124,359 5,893,089
------------- ------------- ------------- ------------- ----------- ------------
3,498,384 266,776 3,522,912 2,729,059 1,510,255 11,527,386
------------- ------------- ------------- ------------- ----------- ------------
Operating loss [1,572,972] [32,080] [599,283] [18,852] [1,510,255] [3,733,442]
------------- ------------- ------------- ------------- ----------- ------------
Other income [expense]
Loss on asset disposal [8,228] -- [77,468] -- -- [85,696]
Rental income 27,600 -- -- -- -- 27,600
Interest expense [67,613] -- [83,360] [10,626] [f] 71,087 [90,512]
Interest income 546 1,016 731 27,175 -- 29,468
Other income and (expense) 9,559 -- 53,999 [75] -- 63,483
Other expenses [378,588] -- -- -- -- [378,588]
------------- ------------- ------------- ------------- ----------- ------------
[416,724] 1,016 [106,098] 16,474 71,087 [434,245]
------------- ------------- ------------- ------------- ----------- ------------
Net loss $ [1,989,696] $ [31,064] $ [705,381] $ [2,378] $[1,439,168] [4,167,687]
============= ============= ============= ============= =========== ============
Net loss per share $ [0.12] [.22]
============= ============
Weighed average shares
outstanding 15,956,824 19,378,824
============= ============
</TABLE>
F-99
<PAGE> 139
HALIS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Balance Sheet - December 31, 1996:
[a] To record the issuance by HALIS of 350,000, 3,072,000 and 1,875,000
(5,297,000 shares in aggregate) shares of common stock to the shareholders
of Compass, SMG, and ABAS, respectively, in exchange for 100% of the
outstanding stock of Compass, SMG, and ABAS in transactions to be
accounted for as purchases by HALIS. Additionally, 85,000 and 136,363
options were issued in connection with the Compass and proposed to be
issued in connection with the ABAS acquisitions, respectively.
Management estimates the value of the 5,297,000 shares to be $1.20 per
share. Management has allocated the purchase price to the assets and
liabilities acquired based upon their relative fair values. The
adjustments to reflect these estimated fair values of the assets and
liabilities acquired are as follows:
<TABLE>
<CAPTION>
Compass SMG ABAS Total
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Property and equipment $ -0- $ [1,508] $ [1,101] $ [2,609]
Capitalized software
development -0- 1,561,190 -- 1,561,190
Goodwill 415,964 2,399,525 2,104,018 4,919,507
-------- ---------- ---------- ----------
$415,964 $3,959,207 $2,102,917 $6,478,088
======== ========== ========== ==========
</TABLE>
Management continues to study the allocation of the purchase prices; upon
completion of such study, the allocation may change.
Additionally, HALIS incurred $32,659 of merger costs prior to December 31,
1996 which have been capitalized as part of the cost of the acquisitions.
[b] To reflect the assumption and forgiveness of a total of $797,229 of loans
from a bank and a shareholder by certain shareholders of SMG in connection
with the merger.
[c] To eliminate the equity [deficit] of Compass, SMG, and ABAS in
consolidation.
Statement of Operations:
For the year ended December 31, 1996:
[d] To reflect twelve months of amortization of goodwill and capitalized
software development costs and capitalized acquisition costs. Goodwill
generated in the Compass, SMG, and ABAS mergers is amortized on a
straight-line basis over three, five, and five year lives, respectively.
Capitalized software development costs related to the SMG acquisition are
amortized on a straight-line basis over a five year life. Capitalized
acquisition costs are amortized on a straight-line basis over a five year
life.
[e] To reflect incremental expense related to employment contracts entered
into with officers of Compass, SMG, and ABAS.
[f] To remove interest expense related to the debt assumed and forgiven in the
SMG merger.
F-100
<PAGE> 140
HALIS, INC.
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997 AND DECEMBER 31, 1996
The following Unaudited Pro Forma Condensed Consolidated Balance Sheet of
HALIS, Inc. gives effect to the following transaction as if it occurred on
March 31, 1997: the acquisition of 100% of the capital stock of TG Marketing
Systems, Inc. (TGM) by HALIS, Inc. and Subsidiaries (HALIS) accounted for as a
purchase. All 1,000 issued and outstanding shares of TGM were surrendered by
the stockholder in consideration for 2,388,060 of HALIS' shares. The Unaudited
Pro Forma Condensed Consolidated Statements of Operations for HALIS for the
year ended December 31, 1996 and for the three month period ended March 31,
1997 give retroactive effect to the acquisition of TGM as if it had occurred
January 1, 1996. The Unaudited Pro Forma Condensed Consolidated Financial
Statements do not purport to be indicative of the actual financial position or
the results of operations of HALIS had the acquisition been completed, and
should be read in conjunction with the unaudited financial statements of TGM
and the related notes thereto.
F-101
<PAGE> 141
HALIS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1997
<TABLE>
<CAPTION>
ASSETS
HALIS, Inc.
and TG Marketing
Subsidiaries Systems, Inc. Adjustments Pro Forma
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Current assets $ 751,198 $262,032 [a] $[ 37,944] $ 975,286
Property and equipment 303,974 113,459 [a] 37,944 455,377
Other assets 632,780 2,081 - 634,861
Capitalized software development
costs 1,794,902 - [b] 2,000,000 3,794,902
Goodwill 4,163,788 - [b] 230,495 4,394,283
---------- ------- ---------- -----------
Total assets $7,646,642 $377,572 $2,230,495 $10,254,709
========== ======= ========== ===========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT
HALIS, Inc.
and TG Marketing
Subsidiaries Systems, Inc. Adjustments Pro Forma
------------ ------------- -------------- -------------
<S> <C> <C> <C> <C>
Current liabilities $ 4,462,310 $ 29,249 $ - $ 4,491,559
Long-term debt 75,551 23,594 - 99,145
Convertible promissory notes - - - -
------------ --------- ----------- -------------
Total liabilities 4,537,861 52,843 - 4,590,704
------------ --------- ----------- -------------
Stockholders' equity
Stockholders' equity - 324,729 [c] [324,729] -
Common stock, par value $.01 299,415 - [b] 23,881 323,296
Additional paid-in capital 18,645,667 - [b] 2,206,614 21,177,010
[c] 324,729
Stock subscription receivable [ 681,122] - - [ 681,122]
Accumulated deficit [15,148,429] - - [ 15,148,429]
Less: Treasury stock at cost [ 6,750] - - [ 6,750]
------------ --------- ----------- -------------
Total stockholders' equity 3,108,781 324,729 2,230,495 5,664,005
------------ --------- ----------- -------------
Total liabilities and stock-
holders' equity $ 7,646,642 $ 377,572 $ 2,230,495 $ 10,254,709
============ ========= =========== =============
Common stock issued and
outstanding (c) 29,941,551 2,388,060 32,329,611
============ =========== =============
</TABLE>
See notes to unaudited pro forma condensed consolidated financial statements.
F-102
<PAGE> 142
HALIS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
HALIS, Inc.
and TG Marketing
Subsidiaries Systems, Inc. Adjustments Pro Forma
--------------- --------------- -------------- -------------
<S> <C> <C> <C> <C>
Systems sales and other
revenues $ 7,793,944 $ 817,020 [d]$ [ 21,536] $ 8,589,428
------------- ------------ -------------- -------------
Costs and expenses
Cost of sales and revenues 3,805,295 402,600 [d] [ 21,536] 4,186,359
Research and development 1,829,002 - - 1,829,002
Selling, general, and
administrative 5,893,089 292,358 [e] 446,099 6,778,035
------------- ------------
[f] 7,589
[g] 100,500
11,527,386 694,958 [g] 38,400
------------- ------------ -------------- -------------
571,052 12,793,396
Operating income [loss] [ 3,733,442] 122,062 [ 592,588] [ 4,203,968]
------------- ------------ -------------- -------------
Other income [expense]
Loss on asset disposal [ 85,696] - - [ 85,696]
Rental income 27,600 - - 27,600
Interest expense [ 90,512] [ 4,092] - [ 94,604]
Interest income 29,468 - - 29,468
Other income [expense] 63,483 5,551 - 69,034
Other expenses [ 378,588] - - [ 378,588]
------------- ------------ ------------- -------------
[ 434,245] 1,459 - [ 432,786]
------------- ------------ -------------
Net income [loss] $[ 4,167,687] $ 123,521 $ [ 592,588] [ 4,636,754]
============= ============ ============== =============
Net loss per share [ .22] - [ .25] [ .21]
============= ============ ============== =============
Weighed average shares
outstanding 19,378,824 - 2,388,060 21,766,884
============= ============ ============== =============
</TABLE>
See notes to unaudited pro forma condensed consolidated financial statements.
F-103
<PAGE> 143
HALIS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
HALIS, Inc.
and TG Marketing
Subsidiaries Systems, Inc. Adjustments Pro Forma
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Systems sales and other
revenues $ 1,320,353 $ 394,342 [d] $[ 5,494] $ 1,709,201
------------- ------------- -------------- ------------
Costs and expenses
Cost of sales and revenues 431,085 148,244 [d] [ 5,494] 573,835
Research and development 284,674 - - 284,674
Selling, general, and administrative 1,486,291 107,105 [e] 111,525 1,741,543
------------- ------------- ------------
[f] 1,897
[g] 25,125
[g] 9,600
--------------
2,202,050 255,349 142,653 2,600,052
------------- ------------- -------------- ------------
Operating loss [ 881,697] 138,993 [ 148,147] [ 890,851]
------------- ------------- -------------- ------------
Other income [expense]
Gain on asset disposal 8,678 - - 8,678
Interest expense [ 38,379] [ 2,666] - [ 41,045]
Interest income 8,334 - - 8,334
Other income 8,668 - - 8,668
Merger costs [ 13,904] - - [ 13,904]
------------- ------------- -------------- ------------
[ 26,603] [ 2,666] - [ 29,269]
------------- ------------- -------------- ------------
Net income [loss] $[ 908,300] $ 136,327 $[ 148,147] $[ 920,120]
============= ============= ============== ============
Net loss per share [ .03] - [ .06] [ .03]
============= ============== ============
Weighed average shares outstanding 27,744,693 - 2,388,060 30,132,753
============= ============== ============
</TABLE>
See notes to unaudited pro forma condensed consolidated financial statements.
F-104
<PAGE> 144
HALIS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
PRO FORMA FINANCIAL STATEMENTS
Balance Sheet - March 31, 1997:
[a] To reflect the repayment of advances to the former stockholder of TGM by
TGM, by the transfer of certain personally-owned equipment at book value
by the former stockholder to the Company.
[b] To record the issuance by HALIS of 2,388,060 shares of common stock to the
stockholder of TGM, in exchange for 100% of the outstanding stock of TGM
in a transaction to be accounted for as a purchase by HALIS.
Management estimates the value of the 2,388,060 shares to be $1.07 per
share. Management has allocated the purchase price to the assets and
liabilities acquired based upon their relative fair values. This
transaction generated goodwill of $230,495 which will be amortized on a
straight-line basis over a five year life. Additionally, management has
attributed $2 million of the purchase price to software previously
developed by TGM under fee-for-service arrangements. The value of such
software will be capitalized and amortized on a straight-line basis over a
five year life.
Management continues to study the allocation of the purchase prices; upon
completion of such study, the allocation may change.
[c] To eliminate the equity of TGM in consolidation.
Statement of Operations:
The operations of HALIS as of December 31, 1996 include the pro forma effect of
the acquisitions of The Compass Group, Inc., Software Manufacturing Group, Inc.
and the combined entity of American Benefit Administrative Services, Inc. and
Third Party Administrators, Inc., all of which occurred in January 1997.
For the year ended December 31, 1996:
[d] To reflect the elimination of actual revenues and related costs for sales
occurring between HALIS and TGM.
[e] To reflect one year of amortization of capitalized software development
costs and goodwill generated in TGM acquisition.
[f] To reflect one year of depreciation related to equipment transferred by the
former stockholder of TGM to the Company.
[g] To reflect incremental compensation and rent expense related to an
employment agreement and a lease entered into with the former stockholder
of TGM in the amounts of $100,500 and $38,400, respectively.
F-105
<PAGE> 145
HALIS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED [CONTINUED]
PRO FORMA FINANCIAL STATEMENTS
Statement of Operations [Continued]:
For the three months ended March 31, 1997:
[d] To reflect the elimination of actual revenues and related costs for sales
occurring between HALIS and TGM.
[e] To reflect three months of amortization of capitalized software development
costs and goodwill generated in the TGM acquisition.
[f] To reflect three months of depreciation related to equipment transferred by
the former stockholder of TGM to the Company.
[g] To reflect three months of incremental compensation and rent expense
related to an employment agreement and lease entered into with the former
stockholder of TGM in the amounts of $25,125 and $9,600, respectively.
F-106
<PAGE> 146
HALIS, INC.
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND DECEMBER 31, 1996
The following Unaudited Pro Forma Condensed Consolidated Balance Sheet of HALIS,
Inc. gives effect to the following transaction as if it occurred on June 30,
1997: the acquisition of 100% of the capital stock of Physicians Resource
Network, Inc. (PRN) by HALIS, Inc. and Subsidiaries (HALIS) accounted for as a
purchase. All issued and outstanding shares of PRN were surrendered by the
stockholder in consideration for 3,733,333 of HALIS' shares. The Unaudited Pro
Forma Condensed Consolidated Statements of Operations for HALIS for the year
ended December 31, 1996 and for the six month period ended June 30, 1997 give
retroactive effect to the acquisition of PRN as if it had occurred January 1,
1996. The Unaudited Pro Forma Condensed Consolidated Financial Statements do not
purport to be indicative of the actual financial position or the results of
operations of HALIS had the acquisition been completed, and should be read in
conjunction with the audited financial statements of HALIS and PRN as of and for
the year ended December 31, 1996 and the related notes thereto.
F-107
<PAGE> 147
HALIS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
<TABLE>
<CAPTION>
ASSETS
------
HALIS, Inc. Physicians
and Resource
Subsidiaries Network, Inc. Adjustments Pro Forma
------------ ------------- --------------- -----------
<S> <C> <C> <C> <C>
Current assets $ 2,266,307 $ 311,423 [c]$ [80,000] $ 2,497,730
Property and equipment 453,039 456,351 909,390
Other assets 746,085 6,214 752,299
Capitalized software development
costs 3,625,348 3,625,348
Goodwill 5,536,274 [a]5,396,311 10,932,585
----------- ------------ ------------ -----------
Total assets $12,627,053 $ 773,988 $ 5,316,311 $18,717,352
=========== ============ ============ ===========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY [DEFICIT]
----------------------------------------------
HALIS, Inc. Physicians
and Resource
Subsidiaries Network, Inc. Adjustments Pro Forma
------------ ------------- ------------ -----------
<S> <C> <C> <C> <C>
Current liabilities $ 4,918,569 $ 1,256,571 [c]$[365,000] $ 5,810,140
Long-term debt 195,820 158,728 354,548
----------- ------------ ------------ -----------
Total liabilities 5,114,389 1,415,299 [365,000] 6,164,688
----------- ------------ ------------ -----------
Stockholders' equity [deficit]
Stockholders' equity [deficit] [641,311] [b] 641,311 -0-
Common stock, par value $.01 329,794 [a] 37,333 367,127
Additional paid-in capital 22,098,793 [a]5,358,978 27,101,460
[b] [641,311]
[c] 285,000
Common stock subscribed 13,417 13,417
Accumulated deficit [14,922,590] [14,922,590]
Less: Treasury stock at cost [6,750] [6,750]
----------- ------------ ------------ -----------
Total stockholders' equity 7,512,664 [641,311] 5,681,311 12,552,664
----------- ------------ ------------ -----------
Total liabilities and stock-
holders' equity $12,627,053 $ 773,988 $ 5,316,311 $ 18,717,352
=========== ============ ============ ===========
Common stock issued and
outstanding [a] 32,979,413 3,733,333 36,712,746
=========== ============ ===========
</TABLE>
See notes to unaudited pro forma condensed consolidated financial statements.
F-108
<PAGE> 148
HALIS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
HALIS, Inc. Physicians
and Resource
Subsidiaries Network, Inc. Adjustments Pro Forma
-------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Systems sales and other
revenues $ 8,589,428 $ 6,526,822 $ -0- $ 15,116,250
------------ ------------ ------------ ------------
Costs and expenses
Cost of sales and revenues 4,186,359 5,029,433 9,215,792
Research and development 1,829,002 1,829,002
Selling, general, and
administrative 6,778,035 1,459,477 [d]1,079,262 9,341,890
[f]25,116
------------ ------------ ------------ ------------
12,793,396 6,488,910 1,104,378 20,386,684
------------ ------------ ------------ ------------
Operating income [loss] [4,203,968] 37,912 [1,104,378] [5,270,434]
------------ ------------ ------------ ------------
Other income [expense]
Loss on asset disposal [85,696] [8,793] [94,489]
Rental income 27,600 27,600
Interest expense [94,604] [132,616] [e]22,800 [204,420]
Interest income 29,468 29,468
Other income [expense] 69,034 10,773 79,807
Other expenses [378,588] [378,588]
------------ ------------ ------------ ------------
[432,786] [130,636] 22,800 [540,622]
------------ ------------ ------------ ------------
Net Loss $ [4,636,754] $ [92,724] $ [1,081,578] $ [5,811,056]
============ ============ ============ ============
Net loss per share $ [.21] $ [.23]
============ ============
Weighed average shares
outstanding 21,766,884 3,733,333 25,500,217
============ ============ ============
</TABLE>
See notes to unaudited pro forma condensed consolidated financial statements.
F-109
<PAGE> 149
HALIS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
HALIS, Inc. Physicians
and Resource
Subsidiaries Network, Inc. Adjustments Pro Forma
------------ ----------- ------------- ------------
<S> <C> <C> <C> <C>
Systems sales and other
revenues $ 3,605,926 $ 2,879,782 $ -0- $ 6,485,708
------------ ----------- ------------- ------------
Costs and expenses
Cost of sales and revenues 1,399,064 2,246,381 3,645,445
Research and development 708,334 708,334
Selling, general, and administrative 3,379,773 624,991 [d]539,631 4,549,580
[f]5,185
------------ ----------- ------------- ------------
5,487,171 2,871,372 544,816 8,903,359
------------ ----------- ------------- ------------
Operating income (loss) [1,881,245] 8,410 [544,816] [2,417,651]
------------ ----------- ------------- ------------
Other income [expense]
Gain on asset disposal 8,678 8,678
Interest expense [77,492] [69,425] [e]15,400 [131,517]
Interest income 22,307 22,307
Other income 3,253 20,327 23,580
Merger costs [32,137] [32,137]
------------ ----------- ------------- ------------
[75,391] [49,098] 15,400 [109,089]
------------ ----------- ------------- ------------
Net loss $ [1,956,636] $ [40,688] $ [529,416] $ [2,526,740]
============ =========== ============= ============
Net loss per share $ [.07] $ [.08]
============ ============
Weighed average shares outstanding 29,822,386 3,733,333 33,555,719
============ ============= ============
</TABLE>
See notes to unaudited pro forma condensed consolidated financial statements.
F-110
<PAGE> 150
HALIS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
PRO FORMA FINANCIAL STATEMENTS
Balance Sheet - June 30, 1997:
[a] To record the issuance by HALIS of 3,733,333 shares of common stock on
July 7, 1997, to the stockholder of PRN and the principal payment of
$80,000 to Mulberry Street Investment Company, representing an
indebtedness of PRN, in exchange for 100% of the outstanding stock of
PRN in a transaction to be accounted for as a purchase by HALIS.
Management estimates the value of the 3,733,333 shares to be $1.35 per
share. Management has allocated the purchase price to the assets and
liabilities acquired based upon their relative fair values. This
transaction generated goodwill of $5,396,311 which will be amortized on a
straight-line basis over a five year life.
Management continues to study the allocation of the purchase prices; upon
completion of such study, the allocation may change.
[b] To eliminate the equity of PRN in consolidation.
[c] To record the conversion of $285,000 notes payable to sole shareholder of
PRN, into capital of PRN which occurred on July 3, 1997.
To record the payoff of $80,000 notes payable to Mulberry Street Investment
Company, in July 1997, in connection with the merger.
Statement of Operations:
The operations of HALIS as of December 31, 1996 include the pro forma effect of
the acquisitions of The Compass Group, Inc., Software Manufacturing Group, Inc.,
the combined entity of American Benefit Administrative Services, Inc. and Third
Party Administrators, Inc., all of which occurred in January 1997, and TG
Marketing Systems, Inc., which occurred in May 1997.
For the year ended December 31, 1996:
[d] To reflect one year of amortization of goodwill generated in PRN
acquisition.
[e] To reflect one year of reduction in interest expense as a result of the
conversion of $285,000 in notes payable to equity by the sole shareholder
of PRN, prior to the merger.
To reflect one year of reduction in interest expense as a result of the
payoff of the Mulberry Street Investment Company debt, in connection with
the merger.
[f] To reflect incremental compensation expense related to an employment
agreement entered into with the former stockholder of PRN.
F-111
<PAGE> 151
HALIS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED [CONTINUED]
PRO FORMA FINANCIAL STATEMENTS
Statement of Operations [Continued]:
For the six months ended June 30, 1997:
[d] To reflect six months of amortization of goodwill generated in the PRN
acquisition.
[e] To reflect six months of reduction in interest expense as a result of the
conversion of $285,000 in notes payable to equity by sole shareholder of
PRN, prior to the merger.
To reflect six months of reduction in interest expense as a result of the
payoff of the Mulberry Street Investment Company debt, in connection with
the merger.
[f] To reflect six months of incremental compensation expense related to an
employment agreement entered into with the former stockholder of PRN.
F-112
<PAGE> 152
HALIS, INC.
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND DECEMBER 31, 1996
The following Unaudited Pro Forma Condensed Consolidated Balance Sheet of HALIS,
Inc. gives effect to the following transactions as if they occurred on June 30,
1997: the acquisitions of 100% of the capital stock of Physicians Resource
Network, Inc. (PRN) and of PhySource Ltd. (PhySource) by HALIS, Inc. and
Subsidiaries (HALIS) accounted for as a purchase. All issued and outstanding
shares of PRN and PhySource were surrendered by their stockholders in
consideration for 3,733,333 and 1,502,963, respectively of HALIS' shares; and
certain liabilities of PhySource were satisfied with 1,129,648 shares of common
stock and 37,742 incentive stock options. The Unaudited Pro Forma Condensed
Consolidated Statements of Operations for HALIS for the year ended December 31,
1996 and for the six month period ended June 30, 1997 give retroactive effect to
the acquisitions of PRN and PhySource as if they had occurred January 1, 1996.
The Unaudited Pro Forma Condensed Consolidated Financial Statements do not
purport to be indicative of the actual financial position or the results of
operations of HALIS had the acquisition been completed, and should be read in
conjunction with the audited financial statements of HALIS, PRN and the combined
statements of PhySource and Homa, as of and for the year ended December 31, 1996
and the related notes thereto.
F-113
<PAGE> 153
HALIS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
<TABLE>
<CAPTION>
ASSETS
PhySource
HALIS, Inc. Physicians Ltd. and
and Resource Theodore M.
Subsidiaries Network, Inc. Homa, M.D., S.C. Adjustments ProForma
------------ ------------- ---------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Current assets $2,266,307 $ 311,423 $ 328,497 [a] $ 123,087 $ 2,949,314
[c] $ [80,000]
Property and equipment 453,039 456,351 117,745 [d] [33,333] 993,802
Other assets 746,085 6,214 33,707 786,006
Capitalized software
development costs 3,625,348 3,625,348
Goodwill 5,536,274 [a] 8,452,566 13,988,840
----------- ----------- ----------- ---------- -----------
Total assets $12,627,053 $ 773,988 $ 479,949 $8,462,320 $22,343,310
----------- ----------- ----------- ---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY [DEFICIT]
<CAPTION>
PhySource
HALIS, Inc. Physicians Ltd. and
and Resource Theodore M.
Subsidiaries Network, Inc. Homa, M.D., S.C. Adjustments ProForma
------------ ------------- ---------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Current liabilities $ 4,918,569 $ 1,256,571 $ 1,317,676 [a]$[1,222,002] $ 5,905,814
[c] [365,000]
Long-term debt 195,820 158,728 20,125 374,673
----------- ----------- ----------- ----------- ----------
Total liabilities 5,114,389 1,415,299 1,337,801 [1,587,002] 6,280,487
----------- ----------- ----------- ----------- ----------
Stockholders' equity [deficit]
Stockholders' equity [deficit] [641,311] [857,852] [b] 1,499,163 --
Common stock, par value $.01 329,794 [a] 63,659 393,453
Additional paid-in capital 22,098,793 [a] 9,733,996 30,618,626
[b] [1,499,163]
[c] 285,000
Common stock subscribed 13,417 13,417
Accumulated deficit [14,922,590] [d] [33,333] [14,955,923]
Less: Treasury stock
at cost [6,750] [6,750]
----------- ----------- ----------- ----------- ----------
Total stockholders' equity 7,512,664 [641,311] [857,852] 10,049,322 16,062,823
----------- ----------- ----------- ----------- ----------
Total liabilities and stock-
holders' equity $12,627,053 $ 773,988 $ 479,949 $ 8,462,320 $22,343,310
----------- ----------- ----------- ----------- ----------
Common stock issued and
outstanding (a) 32,979,413 6,365,944 39,345,357
----------- ----------- ----------
</TABLE>
See notes to unaudited pro forma condensed consolidated financial statements.
F-114
<PAGE> 154
HALIS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
PhySource
HALIS, Inc. Physicians Ltd. and
and Resource Theodore M.
Subsidiaries Network, Inc. Homa, M.D., S.C. Adjustments ProForma
------------ ------------- ---------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Systems sales and
other revenues $ 8,589,428 $ 6,526,822 $ 601,983 [h] $ [75,000] $ 15,643,233
----------- ----------- ----------- ----------- ------------
Costs and expenses
Cost of sales and revenues 4,186,359 5,029,433 469,986 9,685,778
Research and development 1,829,002 1,829,002
Selling, general, and
administrative 6,778,035 1,459,477 770,363 [e] 1,690,513 10,687,504
[g] 14,116
[h] [25,000]
----------- ----------- ----------- ----------- ------------
12,793,396 6,488,910 1,240,349 1,679,629 22,202,284
----------- ----------- ----------- ----------- ------------
Operating loss [4,203,968] 37,912 [638,366] [1,754,629] [6,559,051]
----------- ----------- ----------- ----------- ------------
Other income [expense]
Gain [Loss] on asset
disposal [85,696] [8,793] 21,285 [73,204]
Rental income 27,600 27,600
Interest expense [94,604] [132,616] [31,769] [f] 54,569 [204,420]
Interest income 29,468 1,875 31,343
Other income [expense] 69,034 10,773 79,807
Other expenses [378,588] [378,588]
----------- ----------- ----------- ----------- ------------
[432,786] [130,636] [8,609] 54,569 [517,462]
----------- ----------- ----------- ----------- ------------
Net loss $[4,636,754] $ [92,724] $ [646,975] $[1,700,060] $ [7,076,513]
----------- ----------- ----------- ----------- ------------
Net loss per share $[.21] $ [.25]
=========== ============
Weighted average shares
outstanding 21,766,884 6,365,944 28,132,828
=========== =========== ============
</TABLE>
See notes to unaudited pro forma condensed consolidated financial statements
F-115
<PAGE> 155
HALIS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
PhySource
HALIS, Inc. Physicians Ltd. and
and Resource Theodore M.
Subsidiaries Network, Inc. Homa, M.D., S.C. Adjustments ProForma
------------ ------------- ---------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Systems sales and other
revenues $ 3,605,926 $ 2,879,782 $ 1,223,115 $ [31,800] $ 7,677,023
----------- ----------- ----------- --------- -----------
Costs and expenses
Cost of sales and revenues 1,399,064 2,246,381 667,204 4,312,649
Research and development 708,334 [h] [31,800] 676,534
Selling, general, and
administrative 3,379,773 624,991 662,663 [e] 845,257 5,557,869
[g] 45,185
----------- ----------- ----------- --------- -----------
5,487,171 2,871,372 1,329,867 858,642 10,547,052
----------- ----------- ----------- --------- -----------
Operating income [loss] [1,881,245] 8,410 [106,752] [890,442] [2,870,029]
----------- ----------- ----------- --------- -----------
Other income [expense]
Gain on asset disposal 8,678 3,063 11,741
Interest expense [77,492] [69,425] [50,548] [f] 65,948 [131,517]
Interest income 22,307 22,307
Other income 3,253 20,327 23,580
Merger costs [32,137] [32,137]
----------- ----------- ----------- --------- -----------
[75,391] [49,098] [47,485] 65,948 [106,026]
----------- ----------- ----------- --------- -----------
Net loss $[1,956,636] $ [40,688] $ [154,237] $[824,494] $[2,976,055]
=========== =========== =========== ========= ===========
Net loss per share $ [.07] $ [.08]
=========== ===========
Weighted average shares
outstanding 29,822,386 6,365,944 36,188,330
=========== ========= ===========
</TABLE>
F-116
See notes to unaudited pro forma condensed consolidated financial statements
<PAGE> 156
HALIS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
PRO FORMA FINANCIAL STATEMENTS
Balance Sheet - June 30, 1997:
[a] To record the issuance by HALIS of 3,733,333 shares of common stock on
July 7, 1997, to the stockholder of PRN and the payment of $80,000 to
Mulberry Street Investment Company, representing an indebtedness of
PRN, in exchange for 100% of the outstanding stock of PRN in a
transaction to be accounted for as a purchase by HALIS.
To record the issuance of 788 shares of PhySource common stock on July
31, 1997, to the shareholder of Theodore M. Homa, M.D., S.C. (Homa) in
exchange for 100% of the outstanding stock of Homa; and to record the
issuance by HALIS of: a) 1,502,963 shares of common stock on July 31,
1997, to the shareholders of PhySource, in exchange for 100% of the
outstanding stock of PhySource; b) 1,129,648 shares of common stock and
37,742 incentive stock options of HALIS common stock to satisfy certain
liabilities and prepay certain expenses of PhySource; all in a
transaction to be accounted for as a purchase by HALIS.
Management estimates the value of the 6,365,944 shares to be $1.35 per
share. Management has allocated the purchase prices to the assets and
liabilities acquired based upon their relative fair values. These
transactions generated goodwill of $5,396,310 and $3,056,256 for PRN
and PhySource, respectively, to be amortized on a straight-line basis
over a five year life.
Management continues to study the allocation of the purchase prices;
upon completion of such study, the allocation may change.
[b] To eliminate the equity of PRN and PhySource in consolidation.
[c] To record the conversion of $285,000 notes payable to sole shareholder
of PRN, into capital of PRN which occurred on July 3, 1997.
To record the payoff of $80,000 notes payable to Mulberry Street
Investment Company, in July 1997, in connection with the acquisition of
PRN.
[d] To eliminate the book value of software PhySource purchased from HALIS.
F-117
<PAGE> 157
HALIS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED [CONTINUED]
PRO FORMA FINANCIAL STATEMENTS
Statement of Operations:
The operations of HALIS as of December 31, 1996 include the pro forma effect of
the acquisitions of The Compass Group, Inc., Software Manufacturing Group, Inc.,
the combined entity of American Benefit Administrative Services, Inc. and Third
Party Administrators, Inc., all of which occurred in January 1997, and TG
Marketing Systems, Inc., which occurred in May 1997.
For the year ended December 31, 1996:
[e] To reflect amortization of goodwill generated in the PRN and PhySource
acquisitions.
[f] To reflect the reduction in interest expense as a result of the
conversion of $285,000 in notes payable to equity by the sole
shareholder of PRN, prior to the merger.
To reflect the reduction in interest expense as a result of the payoff
of the Mulberry Street Investment Company debt, in connection with the
PRN merger.
To reflect the reduction of interest expense as a result of the
satisfaction of approximately $1,000,000 in notes payable, in
connection with the PhySource merger.
[g] To reflect incremental compensation expense related to employment
agreements entered into with former stockholders of PRN and
PhySource.
[h] To eliminate HALIS revenues from the license of software to PhySource
of $50,000. To eliminate PhySource revenues and HALIS expenses for fees
HALIS paid to PhySource in the amount $25,000.
For the six months ended June 30, 1997:
[e] To reflect amortization of goodwill generated in the PRN acquisition
and PhySource acquisitions.
[f] To reflect the reduction in interest expense as a result of the
conversion of $285,000 in notes payable to equity by sole shareholder
of PRN, prior to the merger.
To reflect the reduction in interest expense as a result of the payoff
of the Mulberry Street Investment Company debt, in connection with the
PRN merger.
To reflect the reduction of interest expense as a result of the
satisfaction of approximately $1,000,000 in notes payable, in
connection with the PhySource merger.
[g] To reflect the incremental compensation expense related to employment
agreements entered into with former stockholders of PRN and
PhySource.
[h] To eliminate PhySource revenues and HALIS expenses for fees HALIS paid
Physource in the amount of $31,800.
F-118
<PAGE> 158
===================================================
NO DEALER, SALESPERSON, OR OTHER PERSON HAS
BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE
ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION AND REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF
THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION
OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE
SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL UNDER ANY CIRCUMSTANCES CREATE AN
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
FACTS SET FORTH IN THIS PROSPECTUS OR IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
--------------------------
TABLE OF CONTENTS
Page
----
Available Information . . . . . . . . . . . . 2
Incorporation of Certain
Documents by Reference . . . . . . . . . . 2
The Company . . . . . . . . . . . . . . . . . 3
Risk Factors . . . . . . . . . . . . . . . . 4
Business . . . . . . . . . . . . . . . . . . 8
Use of Proceeds . . . . . . . . . . . . . . . 21
Price Range of Common Stock and Dividends . . 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . 21
Selling Shareholders . . . . . . . . . . . . 27
Description of Capital Stock . . . . . . . . 35
Plan of Distribution . . . . . . . . . . . . 37
Legal Matters . . . . . . . . . . . . . . . . 37
Experts . . . . . . . . . . . . . . . . . . . 37
Index to Financial Statements . . . . . . . . F-1
===================================================
===================================================
HALIS, INC.
45,335,709 SHARES
COMMON STOCK
P R O S P E C T U S
OCTOBER 15, 1997
9040 ROSWELL ROAD
SUITE 470
ATLANTA, GEORGIA 30350
(770) 641-5555
===================================================
<PAGE> 159
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below are estimates of the fees and expenses payable by the
Company in connection with the offer and sale of the Common Stock:
<TABLE>
<S> <C>
SEC Registration Fee . . . . . . . . . . . . . . . . . . . $ 29,453
Blue Sky Qualification Fees and Expenses . . . . . . . . . 5,000
Legal Fees and Expenses . . . . . . . . . . . . . . . . . 20,000
Accounting Fees and Expenses . . . . . . . . . . . . . . . 5,000
Transfer Agent Fees . . . . . . . . . . . . . . . . . . . 1,000
Printing, Materials, and Postage . . . . . . . . . . . . . 2,500
Miscellaneous Expenses . . . . . . . . . . . . . . . . . . 1,000
--------
Total . . . . . . . . . . . . . . . . . . . . . . $ 63,953
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As provided under Georgia law, the Company's Articles of Incorporation
provide that a Director shall not be liable to the Company or its shareholders
for monetary damages, for breach of his or her duties care as a Director,
except that such provisions shall not eliminate or limit the liability of a
Director (a) for any appropriation, in violation of his or her duties, of any
business opportunity of the Company; (b) for acts or omissions not in good
faith or which involve intentional misconduct or knowing violation of law; (c)
for unlawful corporate distributions; or (d) for any transaction from which the
Director received an improper personal benefit. Article VI of the Company's
Bylaws provides that the Company shall indemnify a Director who has been
successful in the defense of any proceeding to which he or she was a party or
in defense of any claim, issue or matter therein because he or she is or was a
Director of the Company, against reasonable expenses incurred by him or her in
connection with such defense.
The Company's Bylaws also provide that the Company may indemnify any
Director, officer, employee or agent made a party to a proceeding because he or
she is or was a Director, officer, employee or agent against liability incurred
in the proceeding if he or she acted in a manner he or she reasonably believed
to be in or not opposed to the best interests of the Company and, in the case
of any criminal proceeding, he or she had no reasonable cause to believe his or
her conduct was unlawful. Determination concerning whether or not the
applicable standard of conduct has been met can be made by (a) a disinterested
majority of the Board of Directors or (b) independent legal counsel. No
indemnification may be made to or on behalf of a Director, officer, employee or
agent in connection with (i) a proceeding by or in the right of the Company,
except for reasonable expenses incurred in connection with the proceeding, if
it is determined that the Director has met the standard of conduct specified in
the Bylaws, or (ii) any proceeding with respect to conduct for which the
Director was adjudged liable on the basis that personal benefit was improperly
received by such Director, whether or not involving action in his official
capacity.
II-1
<PAGE> 160
ITEM 16. EXHIBITS.
The following exhibits are filed with or incorporated by reference into
this report. The exhibits which are denominated by an (*) were previously
filed as a part of, and are hereby incorporated by reference from either (i) a
Registration Statement on Form S-18 under the Securities Act of 1933 for the
Registrant, Registration No. 33-14114-A, initially filed with the Securities
and Exchange Commission on May 7, 1987, as amended ("S-18"); (ii) the Annual
Report on Form 10-K for the year ended January 31, 1991 ("1991 10-K"); (iii)
the Annual Report on Form 10-KSB for the year ended January 31, 1996 ("1996
10-KSB"); (iv) the Current Report on Form 8-K dated November 19, 1996 ("8-K")
or (v) the Annual Report on Form 10-KSB for the year ended December 31, 1996
("December 10-KSB").
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
<S> <C> <C>
+3.3 - Amended and Restated Bylaws
* 4.1 - Form of Common Stock Certificate (S-18, Exhibit 4.1)
+5.1 - Opinion of Smith, Gambrell & Russell, LLP
*10.1 - Employment Agreement dated November 18, 1996, as amended on January 3, 1997, by and
between the Registrant HALIS and Paul W. Harrison (December 10-KSB, Exhibit 10.1)
*10.2 - Employment Agreement dated November 18, 1996, as amended on January 3, 1997, by and
between the Registrant and Larry Fisher (December 10-KSB, Exhibit 10.2)
*10.3 - Sublease dated January 10, 1997 by and between VeriFone, Inc. and the Registrant for
lease of office space in Atlanta, Georgia (December 10-KSB, Exhibit 10.3)
*10.4 - Warrant Agreement, dated November 19, 1996, by and between the Registrant and SunTrust
Bank, Atlanta (December 10-KSB, Exhibit 10.4)
*10.5 - Form of Employee Trade Secret Agreement (S-18, Exhibit 10.19)
*10.6 - License Agreement, dated November 18, 1996, by and between Paul Harrison Enterprises,
Inc. and the Registrant (December 10-KSB, Exhibit 10.6)
+10.7 - Form of Note Purchase Agreement
*10.14 - 401(k) Plan of Registrant adopted January 1, 1991 (1991 10-K, Exhibit 10.16)
*10.19 - Stock Purchase Agreement, dated as of March 29, 1996 and amended as of September 27,
1996, between Fisher Business Systems, Inc., HALIS, L.L.C., Paul W. Harrison and James
Askew. (8-K, Exhibit 2.2)
*10.20 - 1996 Stock Option Plan of the Company (1996 10-KSB)
23.1 - Consent of Habif, Arogeti & Wynne, P.C.
+23.3 - Consent of Smith, Gambrell & Russell, LLP (contained in their opinion filed as
Exhibit - 5.1 hereto)
+24.1 - Power of Attorney (included on the original signature page to this Registration Statement)
</TABLE>
__________________
+Previously filed.
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales
are being made, a post-effective amendment to this
Registration Statement to:
(i) include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
II-2
<PAGE> 161
(ii) reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in
the information set forth in the Registration Statement; and
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering
of such securities at that time shall be deemed to be the
initial bona fide offering thereof; and
(3) To remove from registration by means of a
post-effective amendment any of the securities being
registered which remain unsold at the termination of the
offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referred to in Item 15
above, or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is therefore unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question of whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
II-3
<PAGE> 162
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-2 and has duly caused this
Registration Statement Amendment to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Atlanta, State of Georgia, on the 14th
day of October, 1997.
HALIS, INC.
By:/s/ Paul W. Harrison
----------------------------------------
Paul W. Harrison, Chairman of the Board,
Chief Executive Officer and President
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement Amendment has been signed below by the following persons
in the following capacities on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Paul W. Harrison Chairman of the Board, October 14, 1997
- ------------------------------------------------ Chief Executive Officer and President
Paul W. Harrison
* Director, Executive Vice President,
- ------------------------------------------------Chief Administrative Officer and Secretary October 14, 1997
Larry Fisher
/s/ Harold J. Williams, III Chief Financial Officer October 14, 1997
- ------------------------------------------------ (Principal Financial
Harold J. Williams, III and Accounting Offier)
* Director October 14, 1997
- ------------------------------------------------
Nate Lipson
* Director October 14, 1997
- ------------------------------------------------
Joe Neely
* Director October 14, 1997
- ------------------------------------------------
Chuck Broes
/s/ Trevor Hicks Director October 14, 1997
- ------------------------------------------------
Trevor Hicks
</TABLE>
* By: /s/ Paul W. Harrison
--------------------
Paul W. Harrison, as attorney-in-fact
pursuant to a power of attorney
contained on the original signature
page to this Registration Statement.
<PAGE> 163
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Sequential
Number Description of Exhibit Page No.
------ ---------------------- --------
<S> <C> <C>
23.1 Consent of Habif, Arogeti & Wynne, P.C.
</TABLE>
<PAGE> 1
EXHIBIT NO. 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated March 7, 1997 accompanying the consolidated
financial statements of HALIS, Inc. and Subsidiaries (the "Company") included in
the Annual Report on Form 10-KSB for the year ended December 31, 1996 which is
incorporated by reference in this Registration Statement. We also have issued
(i) our report dated March 20, 1997 accompanying the financial statements of The
Compass Group, Inc. included in the Company's Current Report on Form 8-K
(Amendment No. 1) dated March 28, 1997, (ii) our report dated March 5, 1997
accompanying the financial statements of Software Manufacturing Group, Inc.
included in the Company's Current Report on Form 8-K (Amendment No. 1) dated
April 7, 1997, (iii) our report dated April 4, 1997 accompanying the financial
statements of American Benefit Administrative Services, Inc. and Third Party
Administrators, Inc. included in the Company's Current Report on Form 8-K
(Amendment No. 1) dated April 16, 1997, (iv) our report dated June 18, 1997
accompanying the financial statements of TG Marketing Systems, Inc. included in
the Company's Current Report on Form 8-K (Amendment No. 1) dated July 16, 1997,
(v) our report dated August 29, 1997 accompanying the financial statements of
Physicians Resource Network, Inc. included in the Company's Current Report on
Form 8-K (Amendment No. 1) dated September 18,1997 and (vi) our report dated
September 26, 1997 accompanying the combined financial statements of PhySource
Ltd. and Theodore M. Homa, M.D., S.C. included in the Company's Current Report
on Form 8-K (Amendment No. 1) dated October 13, 1997 which reports are
incorporated by reference in this Registration Statement. We consent to the
incorporation by reference in the Registration Statement of the aforementioned
reports and to the use of our name as it appears under the caption "Experts."
HABIF, AROGETI & WYNNE, P.C.
/S/ Habif, Arogeti & Wynne, P.C.
Atlanta, Georgia
October 15, 1997
