SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended Commission File Number:
September 30, 1999 0-16288
HALIS, INC.
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(Exact name of small business issuer as specified in its charter)
Georgia 58-1366235
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9040 Roswell Road, Suite 470, Atlanta, Georgia 30350
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(Address of principal executive offices) (Zip Code)
(770) 641-5555
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Issuer's telephone number, including area code:
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the last 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
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State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Common Stock, $.01 Par Value, 53,621,668 shares are outstanding
at October 31, 1999
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HALIS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
ASSETS
------
CURRENT ASSETS
- --------------
Cash $ 0
Customer claims and premium funds 1,163,171
Receivables, less allowance for possible losses
of $178,998 313,178
Other receivables 0
Other current assets 72,208
----------
Total current assets 1,548,557
PROPERTY AND EQUIPMENT
- ----------------------
Computer equipment 414,384
Vehicles 36,588
Office furniture and fixtures 64,617
Leasehold improvements 29,770
Less: accumulated depreciation (117,368)
----------
Total property and equipment, net 427,990
OTHER ASSETS
- ------------
Deposits 99,250
Goodwill, net of accumulated
amortization of $1,041,000 973,413
Capitalized software development costs,
net of accumulated amortization of $88,949 72,046
Other intangibles, net of
accumulated amortization of $54,436 64,334
Notes receivable - related parties 665,769
Long-term investments 39,083
----------
Total other assets 1,913,894
----------
TOTAL ASSETS $3,890,441
==========
The accompanying notes are an integral part of these statements.
2
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HALIS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,189,661
Deferred revenue and customer deposits 1,481,821
Payroll and sales taxes payable 146,334
Notes payable - unrelated parties 324,920
Notes payable - related parties 741
Obligations under capital leases - current portion 58,180
Deferred gain on sale of subsidiary 0
Other current liabilities 418,163
-----------
Total current liabilities 3,619,820
LONG-TERM DEBT
Obligations under capital leases - net of current portion 223,825
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock $.10 par value 5,000,000
authorized; 0 issued and outstanding 0
Common stock $.01 par value 100,000,000
authorized; 52,383,327 issued and outstanding 523,833
Additional paid-in capital 36,654,756
Stock subscription receivable 0
Treasury stock 0
Unrealized loss on investment (85,917)
Accumulated deficit (37,045,875)
-----------
Total stockholders' equity (deficit) 46,796
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 3,890,441
===========
The accompanying notes are an integral part of these statements.
3
<PAGE>
HALIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND
THE THREE MONTHS ENDED SEPTEMBER 30, 1998
1999 1998
------------- --------------
SALES REVENUE $ 1,056,733 $ 1,845,785
- -------------
COST AND EXPENSES
- -----------------
Cost of goods sold 95,767 447,714
Selling, general, and administrative 953,191 1,577,065
Research and development 93,441 198,658
Amortization and depreciation 145,145 275,418
Write down of intangibles 0 0
----------- -----------
1,287,543 2,498,855
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OPERATING INCOME (LOSS) (230,810) (653,070)
- -----------------------
OTHER INCOME (EXPENSES)
- -----------------------
Gain (loss) on sale of subsidiaries 0 0
Gain (loss) on asset disposal 0 0
Interest expense (15,606) (10,790)
Interest income 7,008 6,860
Other income (expense) 11,237 18,183
----------- -----------
2,639 14,253
----------- -----------
NET INCOME (LOSS) $ (228,171) $ (638,817)
=========== ===========
BASIC AND DILUTED INCOME (LOSS) PER
COMMON SHARE $ (0.00) $ (0.01)
=========== ===========
BASIC AND DILUTED WEIGHTED AVERAGE
SHARES OUTSTANDING 52,337,675 56,666,345
=========== ===========
The accompanying notes are an integral part of these statements.
4
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HALIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1998
1999 1998
------------- -------------
SALES REVENUE $ 3,787,304 6,135,153
- -------------
COST AND EXPENSES
- -----------------
Cost of goods sold 766,469 1,492,386
Selling, general, and administrative 2,764,795 7,027,483
Research and development 246,015 635,202
Amortization and depreciation 428,097 697,995
Write down of intangibles 0 0
----------- -----------
4,205,377 9,853,066
----------- ----------
OPERATING INCOME (LOSS) (418,072) 3,717,913)
- -----------------------
OTHER INCOME (EXPENSES)
- -----------------------
Gain (loss) on sale of subsidiaries 0 0
Gain (loss) on asset disposal 0 0
Interest expense (45,950) (45,000)
Interest income 20,341 19,350
Other income (expense) 14,983 12,769
----------- -----------
(10,625) (12,881)
----------- -----------
NET INCOME (LOSS) $ (428,698) $ (3,730,794)
=========== ===========
BASIC AND DILUTED INCOME (LOSS) PER
COMMON SHARE $ (0.01) $ (0.07)
=========== ===========
BASIC AND DILUTED WEIGHTED AVERAGE
SHARES OUTSTANDING 52,335,952 52,264,459
=========== ===========
The accompanying notes are an integral part of these statements.
5
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HALIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
1999 1998
------------- ---------------
<S> <C> <C>
Cash flows from operating activities
Net Income (loss) $ (428,698) $ (3,730,794)
Adjustments to reconcile net loss to
net cash used by operating activities:
Amortization and depreciation 428,097 697,995
Gain on disposal of assets 0 0
Decrease (increase) in allowances for losses
on accounts receivable (16,656) 14,458
Changes in operating assets and liabilities, net
of assets and liabilities acquired and sold:
Decrease (increase) in customer claims and premium funds (225,867) 51,372
Decrease (increase) in accounts receivable 66,409 (395,392)
Decrease (increase) in accounts receivable - related parties 0 (14,824)
Decrease (increase) in notes receivable - related parties (69,477) 0
Decrease (increase) in other current assets (1,337) (22,370)
Increase (decrease) in deposits 70,137 (7,053)
(Decrease) increase in accounts payable and accrued expenses (1,100) 303,966
Decrease in sales & payroll taxes (118,000) (134,389)
Increase in deferred revenues & customer deposits 387,471 467,869
(Decrease) increase in other current liabilities (254,133) 275,854
---------- ------------
Total adjustments 265,544 1,237,486
---------- ------------
Net cash used by operating activities (163,154) (2,493,308)
Cash flows from investing activities:
Purchases of property and equipment (59,988) (36,835)
---------- ------------
Net cash used by investing activities (59,988) (36,835)
Cash flows from financing activities:
Proceeds from issuance of common stock 210,000 65,000
Proceeds from 6% convertible debentures 0 1,505,400
Proceeds from 4% convertible debentures 0 100,000
Private equity rescissions 0 (50,000)
Net payments on 7% convertible promissory notes 0 (190,000)
Net payments on 10% convertible promissory notes 0 (25,000)
Net payments on lines of credit 0 (92,334)
Payments on capital leases (33,976) (98,347)
Net payments (proceeds) from notes payable (50,606) 22,615
Net proceeds from notes payable - related parties 45,241 132,000
---------- ------------
Net cash provided by financing activities 170,659 1,369,334
---------- ------------
Net increase (decrease) in cash (52,483) (1,160,809)
Cash, beginning of the period 52,483 1,160,809
---------- ------------
Cash, end of period $ 0 $ 0
========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
HALIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
management's opinion, all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation have been included. Operating results for the
nine-month period ended September 30, 1999 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1999. For further
information, refer to the consolidated financial statements and the notes
thereto included in the Company's annual report on Form 10-KSB for the year
ended December 31, 1998.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements include the accounts of HALIS, Inc.
and its wholly-owned subsidiaries. All significant inter-company accounts and
transactions have been eliminated.
Revenue Recognition
Revenue consists primarily of physician practice management fees, third
party claims processing fees, consulting services, software licensing fees,
sales of related computer hardware, and post contract customer support and
maintenance.
Practice management, claims When the services are provided.
processing, consulting
services, installation,
training and education
Software Licensing Revenue After shipment of the
product and fulfillment of acceptance
terms, provided no significant
obligations remain and collection of
resulting receivable is deemed probable.
Contract Support Ratably over the life of the
contract from the effective date.
Hardware Upon shipment of computer equipment to
the customer, provided no significant
obligations remain and collection of
resulting receivable is deemed probable.
Subscription Sales Ratably over the life of the
contract from the effective date.
Goodwill
Goodwill represents the excess of cost over the fair value of assets
acquired and is amortized using the straight-line method over a period of 5
years. The Company assesses the recoverability of its goodwill whenever adverse
events or changes in circumstances or business climate indicate that expected
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future cash flows (undiscounted and without interest charges) in individual
business units may not be sufficient to support recorded goodwill. If
undiscounted cash flows are not sufficient to support the recorded asset, an
impairment is recognized to reduce the carrying value of the goodwill based on
the expected future cash flows of the business unit.
Realization of Assets
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate the continuation of
the Company as a going concern. The Company has sustained losses during the
years ended December 31, 1998 and 1997. Such losses have continued for the nine
months ended September 30, 1999. Additionally, the Company has used, rather than
provided, cash in its operating activities during the years ended December 31,
1998 and 1997, and this continues to be the case in 1999, although on a much
reduced basis. The Company had a working capital deficiency as of December 31,
1998 and as of September 30, 1999 of $2,457,627 and $2,071,263, respectively.
Specifically, the Company incurred negative cash flow from operating activities
of approximately $163,154 from December 31, 1998 to September 30, 1999. Due to
its cash flow situation, the Company has negotiated payment terms with vendors
representing a significant portion of the accounts payable and is managing the
payment of the remaining accounts payable on a case-by-case basis. Due to the
Company's weak cash position, it has been forced to renegotiate some of the
payment terms previously agreed upon with some of its vendors.
In view of the matters described in the preceding paragraph, there is
significant doubt about the Company's ability to continue as a going concern.
The recoverability of the recorded assets and satisfaction of the liabilities
reflected in the accompanying balance sheet is dependent upon continued
operation of the Company, which is in turn dependent upon the Company's ability
to meet its financing requirements on a continuing basis and to succeed in its
future operations. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
amounts and classification of liabilities that might be necessary should the
Company be unable to continue in existence.
Management has been successful in reducing its operating overhead which has
resulted in a decrease in its ongoing cash requirements. Additionally, the
Company has been successful in the past in generating cash investment from
various entities to supplement its cash generated from operations. However, if
the Company is unable to produce revenues and maintain its lower overhead
structure during the fourth quarter of 1999, an additional capital infusion will
be required for the Company to meet its obligations.
Thus far in 1999, although interest in its HES enterprise-wide product and
its practice area segmented derivatives continues to increase, the Company has
had virtually no success in entering into contracts for the sale of its software
products due to the long sales cycle involved in the decision process of
potential customers, the hesitancy of customers to convert to new software until
after December 31, 1999 and the poor financial condition and performance of the
Company. However, because of the Company's inability to make inroads in the
medical software distribution systems through conventional methods, the Company
has focused its attention on trying to enter into joint ventures with one or
more entities which the Company hopes will result in one or more alliances with
entities that can assist in the distribution of its software products. The
Company believes that by entering into one or more joint ventures, the Company
will be able to enhance its capital structure, as well as its sales and
marketing infrastructure. Further, the Company has found a general resistance to
the fully integrated nature of it's enterprise-wide product by customers who
view the HES enterprise product as being more comprehensive than their current
needs (regardless of the fact that it is priced significantly lower than
competitors who supply only component parts of the same type of system). As a
result, the Company has decided to separate the HES enterprise-wide product into
nine derivative versions, each specifically designed for a certain market
segment. It is hoped that the separate market segmentation of its product will
enable the Company to identify customers who have specific needs to be addressed
rather than viewing their business on an enterprise-wide basis. No guaranty can
be provided that this new focus of the Company on its products will be
successful in penetrating any one or more of the identified market segments.
However, management is confident that during the first quarter of calendar year
2000 customer concerns regarding the year 2000 issue will subside and the
Company's software products will gain market acceptance.
Additionally, in order to focus more on being a product-oriented company,
the Company has assigned a number of its service and research and development
personnel to its HealthWatch affiliate (which owns approximately 21% of the
Company), and will outsource its service and support functions to other joint
venture partners in an effort to reduce its overhead and conserve its cash
resources. By taking this step, the Company's management has made the decision
to focus the Company on the sale of its HES products and the expansion of its
claims administration business, while its affiliates focus on services and
support to the Company's customers.
While the Company anticipates that the plan it is undertaking will be
successful and is in the best interest of the Company, no assurances can be
given that the Company indeed will be successful and that the Company will
continue as a going concern without either an infusion of cash or a successful
alliance with one or more joint venture partners. Risk factors include, among
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others, (i) timely completion of modifications and enhancements to the Company's
healthcare products requested by customers, (ii) continued working capital
availability while such products are being developed, (iii) continued
availability of key members of management, (iv) acceptance of the Company's
products by customers in the healthcare market, (v) uncertainty of market
acceptance, (vi) reliance on a limited number of products, (vii) effective
integration of acquisitions, if any, (viii) technological change, and (ix)
competition.
Merger Agreements
On July 31, 1998, the Company and HealthWatch, Inc. ("HealthWatch")
(NASDAQ: HEAL) announced the signing of a Letter of Intent to Merge dated as of
July 14, 1998. The merger was expected to be in the form of a tax-free stock
exchange and is subject to, among other things, the completion of due diligence
and approval by the disinterested shareholders of both companies. At the present
time the consummation of the merger as contemplated in the Letter of Intent is
uncertain. In the interim, HALIS and HealthWatch, an information technology
company, are working together to provide the Company's software and services to
the HealthWatch customer base. To date, HealthWatch has been unsuccessful in
selling any of the Company's products to any of its customers. The two companies
share certain expenses pursuant to a business collaboration agreement. Paul W.
Harrison serves as Chairman, President and Chief Executive Officer, and is a
director of both companies. Brian L. Schleicher, served as Chief Financial
Officer, Chief Administrative Officer and General Counsel to HealthWatch from
September 1, 1998 through August 15, 1999. From September 1, 1998 through July
27, 1999, Mr. Schleicher also served as Chief Administrative Officer of the
Company, and continues to serve as its General Counsel. Mr. Schleicher continues
to serve as General Counsel to both companies. As of September 30, 1999,
HealthWatch beneficially owned approximately 21% of the Company's common stock.
Mr. Harrison, who directly owns 5.9% of the Company's common stock, indirectly
controls in excess of 27% of the common stock of the Company by virtue of his
positions at HealthWatch. Mr. Schleicher does not own any shares of the
Company's stock (but holds 300,000 options) and less than 5% of the outstanding
shares of HealthWatch. On June 1, 1999, Larry Fisher, formerly a director of
both the Company and HealthWatch resigned his positions in both Companies to
pursue other ventures.
On November 18, 1996, the Company entered into a license agreement with
Paul Harrison Enterprises, Inc. (now known as MERAD Software, Inc.) relating to
a proprietary application software utility (the "MERAD Technology") that is
owned by MERAD Software, Inc. MERAD Software, Inc. was acquired by HealthWatch
in October 1998, therefore HealthWatch, through its subsidiary, is entitled to
receive from the Company a license fee equal to 10% of the gross revenues
generated from any software products utilizing or incorporating MERAD and any
derivations thereof by the Company or any of its affiliates. The Company's HES
software was created utilizing the MERAD Technology, therefor any sales of the
HES software will result in a royalty payment being due directly to MERAD
Software, Inc. and indirectly to HealthWatch. In addition, the Company was
obligated to pay MERAD Corporation, a MERAD Software, Inc. subsidiary, a
development fee of $15,000 per month pursuant to a license and software
development agreement entered into between MERAD Corporation and HALIS Software,
Inc., the predecessor company of HALIS Services, Inc., a wholly-owned subsidiary
of the Company. This arrangement terminated on June 30, 1998. Mr. Harrison
served as President and was a 21% shareholder of MERAD Corporation, which was
dissolved on July 21, 1999. During 1998, $60,000 was paid to MERAD Corporation
for specific enhancements and maintenance required by the Company to its
software products.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
FINANCIAL CONDITION
Total assets at September 30, 1999 were $3,890,441, an increase of $149,529
from total assets of $3,740,912 at December 31, 1998. An increase of $245,350 is
attributable to the purchase of a new computer by the Company's ABAS subsidiary,
a $225,867 increase in restricted cash, customer claims, and premium funds, a
$69,477 increase in notes receivable - related parties, and a $64,334 increase
in other intangibles, offset by depreciation and amortization for the nine
months ended September 30, 1999 of $428,097.
Current liabilities decreased by $261,396 from $3,881,216 at December 31,
1998 to $3,619,820 at September 30, 1999. The decrease is primarily attributable
to the conversion in the first quarter of a $157,741 note payable due to
HealthWatch into 1,824,645 shares of common stock of the Company and the
conversion of a $255,000 salary deferral by a senior executive into 1,500,000
shares of common stock of the Company. These decreases were supplemented by the
Company reducing accounts payable, accrued expenses, and other current
liabilities by a total of $339,389. During the nine months ended September 30,
1999, the Company paid down $50,606 of notes payable - unrelated parties.
Increases in deferred revenue and customer deposits and in current portions of
capital leases of $387,471 and $50,515, respectively, offset the decreases.
9
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The total increase in obligations under capital leases of $223,543 is due to the
purchase of a new computer system by the Company's ABAS subsidiary.
Stockholders' equity increased from $(176,682) at December 31, 1998 to
$46,796 at September 30, 1999, an increase of $223,478. The increase is
attributable to the sale of 2,066,667 shares of common stock of the Company for
$210,000 in three private placements, and the issuance of 4,056,896 shares of
common stock upon the conversion of related party notes payable, salary
deferrals by a senior executive, and accrued expenses by outside advisors,
during the nine months ended September 30, 1999. These increases are offset by a
net loss for the nine months ended September 30, 1999 of $428,698.
RESULTS OF OPERATIONS
Sales revenue decreased by $789,052 and $2,347,849 for the three- and nine-
month periods ended September 30, 1999, respectively, as compared to the same
periods for the prior year. The changes in the three- and nine-month periods are
primarily the result of lost revenues of $278,422 and $2,125,574, respectively,
from the divestiture of the Company's PRN and Homa subsidiaries. Other decreases
for the three months ended September 30, 1999 are $562,430 in consulting,
$169,163 in HES revenue, offset by increases of $223,985 in ABAS revenue. Other
increases for the nine months ended are $177,879 in HES revenue and $406,978 for
ABAS offset by a decrease in consulting revenue of $807,132. During the second
quarter of 1999, the Company wound down the operations of its Compass Group
consulting services subsidiary as its contracts with its customers expired. Due
to its cash requirements and low profit margins, the Company has decided not to
expend its valuable cash resources on continuing or expanding its consulting
services business.
Cost of goods sold decreased $351,947 and $725,917 for the three- and nine-
month periods ended September 30, 1999, respectively, as compared to the same
periods for the prior year. As a percentage of sales revenue, cost of goods sold
were 9.1% and 24.3% for the three-month periods ended September 30, 1999 and
1998, respectively, and 20.2% and 24.4% for the nine-month periods ended
September 30, 1999 and 1998, respectively. These decreases are largely
attributable to the sale of the PRN and Homa subsidiaries and the loss of their
lower margin revenues as compared to the ongoing software, consulting, and
claims processing businesses.
Selling, general and administrative expenses decreased by $623,874 and
$4,262,688, respectively, for the three- and nine-month periods ended September
30, 1999 as compared to the same periods for the prior year. The decreases are
primarily the result of reduced expenses associated with the disposition of the
Company's PRN and Homa subsidiaries of approximately $245,000 and $2,362,000 and
decreases in corporate overhead of approximately $696,000 and $2,369,000, for
the three- and nine-months ended September 30, 1999, respectively, as compared
to the same periods for the prior year. These decreases were offset by increases
in overhead at ABAS of $190,000 and $476,000 for the three- and nine-month
periods ended September 30, 1999 and 1998, respectively. Decreases in corporate
salaries of $331,000 and 1,110,000 for the three and nine months ended September
30, 1999, respectively, are included in the reductions of corporate overhead in
conjunction with the Company's downsizing. The decrease is further affected by
the Company's business collaboration agreement with HealthWatch. The Company
recorded net reductions of $25,000 and $115,000 in selling, general and
administrative expenses during the three- and nine-month periods ended September
30, 1999, respectively, as a result of this agreement.
Research and development costs decreased by $105,217 and $389,187 for the
three- and nine-month periods ended September 30, 1999, respectively, as
compared to the same periods for the prior year. These reductions are primarily
the result of the movement of the Company's HES system from the initial and beta
phase of development to commercial viability during 1998 and the shift of
certain research and development personnel to work as part of the MERAD Software
services group for HealthWatch effective March 1, 1999.
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Net losses of $228,171 and $428,698 for the three- and nine-month periods
ended September 30, 1999, respectively, as compared to net losses of $638,817
and $3,730,794 for the same periods for 1998 are improvements of $410,646 and
$3,302,096. The improvements are attributable to decreases in the selling,
general and administrative expenses resulting from the downsizing of the Company
and the net effect of its divestiture activity. Unless additional revenue is
generated from product sales or as a result of a joint venture alliance, the
Company anticipates that losses will continue during the fourth quarter of the
current fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
During the nine-month period ended September 30, 1999, operating activities
consumed $163,154 of cash as compared to $2,493,308 for the same period for the
prior year. As discussed in the previous section, the primary reasons for the
improvement are decreases in selling, general and administrative expenses and
research and development expenses, and the results of the Company's divestiture
strategy.
The Company continues to monitor its cash situation very closely. Due to
the down-sizing of the Company, its cash needs are not as acute as they were
during 1998 and the first half of 1999. However, during the first nine months
of 1999 the Company has been unsuccessful in penetrating the medical practices
markets with its HES products, and has seen the winding down of its Compass
consulting services business. This has caused a tremendous drain on the
Company's scarce cash resources. If the Company is unable to increase sales of
its HES products during the fourth quarter of 1999, the Company will not be able
to continue to generate sufficient positive cash flow to meet its obligations
without seeking additional capital infusion. There is no guarantee that the
Company will be able to raise sufficient cash or at what terms such cash, if
available, will be provided to the Company.
YEAR 2000
Software applications that use only two digits to identify a year in the
date field may cause fatal errors in the processing of data (the "Year 2000
Concern"). The Company acknowledges that the failure of its software to
recognize the proper date codes could cause substantial harm to the Company and
its customers. Accordingly, the Company developed its HES software with the Year
2000 Concern in mind and has designed its software to be Year 2000 compliant.
This means that the Company believes that all of the Company's healthcare
software sold to customers will accept and recognize date codes for the Year
2000 and beyond, and process that information recognizing the correct year in
the date field. The Company does not believe that the failure of any of the
software that it utilizes in its operations from third-party vendors to be Year
2000 compliant will have a material effect on the Company, with the exception of
the claims processing software utilized by its ABAS subsidiary. ABAS is a
third-party administrator and has switched to a new claims processing system
that is Year 2000 compliant. The Company believes that, with the exception of
the software that was previously utilized at its ABAS subsidiary, even if the
remaining software it utilizes from vendors is not Year 2000 compliant, there
are sufficient alternatives available that the Company can resolve any issues by
the second quarter of 1999 without incurring any material amounts to resolve any
Year 2000 Concerns.
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FORWARD-LOOKING STATEMENTS
This Form 10-QSB contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
and Exchange Act of 1934, as amended, which are intended to be covered by the
safe harbors created thereby. These statements include the plans and objectives
of the Company for future operations. The forward-looking statements included
herein are based on current expectations that involve numerous risks and
uncertainties. The Company's plans and objectives are based on the assumption
that the Company's entry into the healthcare industry will be successful, that
competitive conditions within the healthcare industry will not change materially
or adversely, and that there will be no material adverse change in the Company's
operations or business. Assumptions relating to the foregoing involve judgments
with respect to, among other things, future economic, competitive and market
conditions, as well as future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the control of the
Company. Although the Company believes that the assumptions underlying the
forward-looking statements included herein are reasonable, the inclusion of such
information should not be regarded as a representation by the Company, or any
other person, that the objectives and plans of the Company will be achieved.
-12-
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Debra B. York v. HALIS, Inc. and Paul Harrison, Fulton Superior
- ----------------------------------------------
Court Civil Action File No. 1999CV06535
On March 22, 1999, the Company and Paul Harrison were sued by Debra York,
the former President of the Company's wholly-owned subsidiary, The Compass
Group, Inc. Ms. York's complaint alleged that the Company breached an Employment
Agreement with Ms. York by failing to pay certain commissions due for fiscal
years 1997 and 1998, the Company breached one or more oral agreements as to the
amount of the alleged commissions owed, and the Company and Mr. Harrison made
false representations regarding the Company and the HES product in an effort to
induce Ms. York to sell her company to the Company in January 1997 and make
further investment in the Company subsequent to that date. Ms. York seeks at
least $250,000 in damages, plus attorneys fees and punitive damages of an
undisclosed amount. In its answer the Company denied that any amounts were due
by the Company to Ms. York under her Employment Agreement, that any oral
agreements were entered with Ms. York, or that any false representations were
made to Ms. York by the Company or Mr. Harrison. The Company vigorously defended
this suit on behalf of itself and Mr. Harrison. In addition, the Company raised
a number of counter-claims against Ms. York in its answer, including that Ms.
York breached the merger agreement entered at the time the Company acquired the
Compass Group, and the terms of her non-competition agreement. Further, on June
8, 1999, three of the Company's operating subsidiaries, The Compass Group, Inc.,
HALIS Services, Inc., and HES Technology, Inc. commenced an action against Ms.
York in the Superior Court of Cobb County, Georgia, Case No. 99-1-4523-28, in
which these companies allege causes of action against Ms. York for breach of
contract, misappropriation of trade secrets and confidential information,
intentional interference with contracts, and breach of fiduciary duties. Ms.
York answered denying liability.
On September 17, 1999, the parties agreed to a settlement of all claims and
counterclaims, with neither party admitting fault, and both cases have been
dismissed with prejudice.
Motivational Marketing, Inc. v. TG Marketing Systems, Inc. et al.,
- -----------------------------------------------------------------
United States District Court of the District of New Jersey, Civil Action Case
No. 99-975 (AJL)
On April 8, 1999, Motivational Marketing filed an action against the
Company, its now defunct subsidiary, TG Marketing Systems, Inc. (TG Marketing"),
and others alleging that Motivational Marketing is owed certain commissions in
excess of $75,000, plus punitive damages and attorneys fees in an undisclosed
amount. The alleged obligation arose from an agreement entered by TG Marketing
prior to its acquisition by the Company in 1997. Additionally, the Company sold
all of the business and assets of TG Marketing in 1998 and agreed to defend and
indemnify the purchaser against unknown claims such as the plaintiff's. As a
result the Company is paying all of the fees and expenses incurred by the
purchaser of the TG Marketing business to defend against this lawsuit. Likewise,
the Company has preserved its rights against the seller from whom the Company
purchased TG Marketing who has agreed to indemnify the Company against such
claims. The Company in its answer denied that it is liable to the plaintiffs and
that it is subject to the jurisdiction of the courts of the State of New Jersey.
Accordingly, on May 27, 1999, the Company filed a motion to dismiss the matter
for lack of personal jurisdiction. On September 28, 1999, the New Jersey court
agreed with the Company's jurisdictional arguments and has transferred the case
to the United States District Court for the Northern District of Georgia. This
matter will be proceeding to the discovery phase in the near future.
-13-
<PAGE>
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
During the three- and nine-month periods ended September 30, 1999, the
Company raised $10,000 and $210,000, respectively, through the private placement
of its common stock, resulting in the Company issuing 100,000 and 2,066,667
shares during these periods. During the nine months ended September 30, 1999, an
additional 1,500,000 shares were issued to Paul Harrison in lieu of $255,000 of
accrued but unpaid salary owed to Mr. Harrison for 1998. Furthermore, 1,824,645
shares of common stock were issued to HealthWatch in satisfaction of $157,741
due to HealthWatch under a 6% convertible debenture entered into in 1998 and
subsequent advances. Lastly, zero and 732,251 shares of common stock were issued
to consultants during the three- and nine-month periods ended September 30,
1999, respectively, for services rendered to the Company during 1998 and 1999.
In total, aggregates of 100,000 and 5,073,563 shares of common stock were issued
during the three- and nine-month periods ended September 30, 1999, respectively.
The issuance of securities described above were made in reliance on the
exemption from registration provided by Section 3(b) and/or 4(2) of the
Securities Act of 1933 as transactions by an issuer not involving a public
offering. All of the securities were acquired by the recipients thereof for
investment and with no view toward the resale or distribution thereof. In each
instance, the offers and sales were made without any public solicitation, the
certificates bear restrictive legends and appropriate stop transfer instructions
have been or will be given to the transfer agent. No underwriter was involved in
the transactions and no commissions were paid.
13
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following exhibits are filed with or incorporated by
reference into this report:
3.1 Certificate of Incorporation, as amended (incorporated by
reference to Exhibit 3.1 of the Company's Registration Statement
on Form S-2 (No. 333-45783) filed February 6, 1998)
3.2 Amended and Restated Bylaws (incorporated by reference to
Exhibit 3.2 of the Company's Registration Statement on Form S-2
(No. 333-34215) filed August 22, 1997)
4.1 Form of Common Stock Certificate (incorporated by reference to
Exhibit 4.1 of the Company's Registration Statement on Form S-18
(No. 33-14114-A), filed May 7, 1987, as amended)
4.2 Form of 6% Convertible Debenture Subscription Agreement and
Convertible Debenture (incorporated by reference to Exhibit 4.2
of the Company's Quarterly Report on Form 10QSB for the period
ended June 30, 1998, filed August 13, 1998)
27.1 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K.
The following reports on Form 8-K were filed during the quarter ended
September 30, 1999.
None
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HALIS, INC.
Dated: November 19, 1999 By: /s/ Paul W. Harrison
----------------------------------------
Paul W. Harrison, Chairman of the Board
Chief Executive Officer and President
(Principal Executive Officer and
Principal Financial Officer)
15
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ---------- ---------------
3.1 Certificate of Incorporation, as amended (incorporated by
reference to Exhibit 3.1 of the Company's Registration Statement
on Form S-2 (No. 333-45783) filed February 6, 1998)
3.2 Amended and Restated Bylaws (incorporated by reference to Exhibit
3.2 of the Company's Registration Statement on Form S-2 (No.
333-34215) filed August 22, 1997)
4.1 Form of Common Stock Certificate (incorporated by reference to
Exhibit 4.1 of the Company's Registration Statement on Form S-18
(No. 33-14114-A), filed May 7, 1987, as amended)
4.2 Form of 6% Convertible Debenture Subscription Agreement and
Convertible Debenture (incorporated by reference to Exhibit 4.2
of the Company's Quarterly Report on Form 10QSB for the period
ended June 30, 1998, filed August 13, 1998)
27.1 Financial Data Schedule (for SEC use only)
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF HALIS, INC. FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER
30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,163,171
<SECURITIES> 0
<RECEIVABLES> 492,176
<ALLOWANCES> 178,998
<INVENTORY> 0
<CURRENT-ASSETS> 1,548,557
<PP&E> 545,358
<DEPRECIATION> 117,368
<TOTAL-ASSETS> 3,890,441
<CURRENT-LIABILITIES> 3,619,820
<BONDS> 0
0
0
<COMMON> 523,833
<OTHER-SE> (477,037)
<TOTAL-LIABILITY-AND-EQUITY> 3,890,441
<SALES> 3,787,304
<TOTAL-REVENUES> 3,787,304
<CGS> 766,469
<TOTAL-COSTS> 4,205,377
<OTHER-EXPENSES> (10,625)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 45,950
<INCOME-PRETAX> (428,698)
<INCOME-TAX> 0
<INCOME-CONTINUING> (428,698)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (428,698)
<EPS-BASIC> (.01)
<EPS-DILUTED> (.01)
</TABLE>
