SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1998
Commission File Number 0-16288
HALIS, INC.
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(Exact name of Registrant as specified in its charter)
Georgia 58-1366235
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
9040 Roswell Road, Suite 470
Atlanta, Georgia 30350
(770) 641-5555
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(Address of principal executive offices,
including zip code, and telephone number, including area code)
Securities registered pursuant to section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: Common Stock,
$.01 par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers in response
to Item 405 of Regulation S-B is not contained herein, and no disclosure
will be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of
this Form 10-KSB or any amendment to this Form 10-KSB. ( )
Revenues for the fiscal year ended December 31, 1998: $7,755,370
The aggregate market value of the Common Stock of the Registrant held
by non-affiliates of the Registrant (approximately 37,204,985 shares) on
March 31, 1999 was approximately $9,859,321. The aggregate market value was
computed by reference to the average of the bid and asked prices of the
Common Stock the NASDAQ Bulletin Board on March 31, 1999. For the purposes
of this response, officers, directors and holders of 5% or more of the
Registrant's Common Stock are considered to be affiliates of the Registrant
at that date.
The number of shares outstanding of the Registrant's Common Stock as of
March 31, 1999 was 48,854,989 shares.
DOCUMENTS INCORPORATED BY REFERENCE
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None
Transitional Small Business Disclosure Format (check one):
Yes No X
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PART I
ITEM 1. DESCRIPTION BUSINESS
GENERAL
HALIS, Inc. ("HALIS" or the "Company") based in Atlanta, Georgia, is a
systems developer of information technology and provider of related services,
focusing on the healthcare industry. The Company also provides third party
administrative services for healthcare plans of large and small companies
throughout the United States. HALIS' offices are located in Atlanta, Georgia
and Chicago, Illinois.
HALIS' system architects have years of experience building large
advanced software systems for the healthcare and other industries. In 1996,
the Company focused its attention on developing a new healthcare software
system that it believed would revolutionize the way that a healthcare
organization operates. Historically, a healthcare organization's system
needs have been met with old legacy systems that are not designed to
interact in an integrated manner across all of the functions that a
healthcare organization may utilize through its encounter with a patient or
other user of their services. By way of example, a single patient visit
results in scheduling, registration, medical records update, billing, claims
processing, etc. In order to handle this type of transaction a typical
system would be made up of many modules or programs that are interfaced
together. What this results in is an inefficient system made up of millions
of lines of code with repetitive processing, with manual intervention occurring
at various points in the processing. In order to install a system of this type
at multiple locations, it is necessary to individualize each installation, a
process that can be very time consuming and costly. The HALIS design team
understood the inefficiencies of the current products available and used in
the healthcare industry and set out to develop the next generation of
integrated healthcare software from scratch that would not be limited by
these old constraints.
As a result the Company has developed the HALIS Enterprise System
("HES"), a comprehensive advanced integrated system capable of being
applicable to all the main participants in the healthcare process:
consumers, providers, payers, office-based physician practices, management
practice companies, hospitals, laboratories, pharmacies, home healthcare,
and long-term care. To accomplish this, the Company's developers modeled
the entire healthcare industry to find all of the commonalties, thus avoiding
duplication of effort. The design of the HES avoids the pitfalls of having
to write and maintain millions of lines of code, and then initiate the
process of "interfacing" them together at each installation. The HES is
integrated by design (not "interfaced") and is contained in one program that
contains 2000 processes, performs 100 functions (the equivalent of up to
several hundred separate programs), and contains 5000 data elements. The
HES is Year 2000 compliant, and contains a longitudinal computerized medical
record (a useful feature for providers with multiple locations). Multiple
locations can share identical data in a master database that is available to
all users, or, depending on security and confidentiality concerns, data can
be shared by only a limited number of locations or users (the user sets the
parameters for access to data). The HES is capable of managing a healthcare
enterprise's resources, patients, finances, and contracts all in one
program. This gives the HES great flexibility in meeting the needs of even
the most complex healthcare delivery systems.
The technical innovation that enables the HES to be as powerful, yet
simple to install and maintain, is the virtual software and information
media processing utility known as "MERAD", that the Company licenses from
its affiliate, HealthWatch, Inc. (Nasdaq: HEAL). MERAD enables the HES to
store programming code as data or information media in a database thereby
removing all of the repetitive processing that conventional programming is
required to perform by design. Because MERAD is completely Internet enabled
(including Intranet and Extranet subsets), the HES can be downloaded over
the Internet and installed in minutes to numerous locations simultaneously.
This means that the HES is not only easier to maintain and support, but
because it is Internet enabled, allows for installation and certain support
and services to be performed over the Internet. The HES can also allow
consumer interaction with the healthcare providers via the Internet.
The HES 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 in which HALIS plans
to compete. HALIS is currently building out the specific features required
by each of these eight markets. Presently, the current version of the HES
is complete for clinics, physician and management practices.
The Company's systems and services business is targeted to healthcare
industry participants such as physician practices, HMO's, home healthcare
providers and hospitals that generally have 100 users or more. The Company
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expects to capitalize on the healthcare industry's demand for more software
variety, updates, convenience, lower pricing, and better support services.
The Company's third party administrator subsidiary provides claims
processing and other administrative services to major companies throughout the
United States.
During fiscal year 1998, HALIS' relationship with HealthWatch, Inc.
(Nasdaq: HEAL), has expanded with HealthWatch now owning approximately 22%
of HALIS' outstanding common stock. HealthWatch owns the MERAD technology
which is licensed to the Company. The Company is obligated to pay
HealthWatch a royalty equal to 10% of the gross revenues generated by the
Company from the HES and services related thereto. During the first quarter
of fiscal year 1999, the Company's Board of Directors decided that in order
to conserve its resources, and to operate more efficiently, the Company
would focus its attention on the sales of the HES and its claims processing
capabilities, and would rely upon HealthWatch to supply support and services
to HALIS' customers. HealthWatch is in the process of expanding this
capability with the goal of supplying to HALIS all of the support and service
personnel that it needs. HALIS' Atlanta office acts as the Company's corporate
headquarters. HealthWatch recently relocated its corporate offices to Atlanta
and shares office space with the Company under a cost sharing arrangement.
The Company's Chicago facility is the location for its ABAS subsidiary which
performs healthcare claims processing and other healthcare related services to
employers.
COMPANY BACKGROUND
The predecessor of HALIS, Fisher Business Systems, Inc. ("Fisher") was
organized in 1979 by Larry Fisher to provide vertical software applications
for potential business users of IBM minicomputers. The initial applications
provided by Fisher 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," Fisher developed its own
proprietary PC-based business applications software in 1984. At the same
time, Fisher's previously diffuse marketing approach was restructured to
focus on its most successful market niche - the restaurant industry.
Due to a downturn in its business in 1994, Fisher was unable to commit
sufficient resources to continue research and development of its products to
keep pace in the hospitality market place, undermining its competitive
position. In 1995, Fisher's Board of Directors concluded that Fisher needed
a significant shift in its strategic plan to continue in business. As a
consequence, Fisher 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, HALIS, (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. ("AHS"), AUBIS Systems
Integration, Inc. ("ASI"), and HALIS Software, Inc. ("HSI"), on November 19,
1996, three companies all under the control of Paul Harrison. The acquisitions
were accounted for as the reverse acquisition of HALIS, Inc. by an "accounting
entity" consisting of AHS, ASI, and HSI (collectively, the "Predecessors")
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 Predecessors 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.
INDUSTRY BACKGROUND
The healthcare industry is undergoing change at an unprecedented rate.
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
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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. According to published research
reports, the industry has historically 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 information intensive
industries. 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 healthcare 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 upon, among other things, effectively managing and delivering
information to caregivers and managers across multiple points of care.
Traditionally, the hospital information systems market has been the
largest segment of healthcare information services. According to industry
analysts, the healthcare industry spent approximately $10 billion for
products and services to support automated information systems in 1995, and
the market is expected to reach $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 to enable them to
access such information. According to the 1996 Annual HIMSS/HP Leadership
Survey, an industry survey conducted by Hewlett Packard at the Healthcare
Information and Management Systems Society conference, 63% of the
respondents stated that their information system investments will increase
at a rate of 20% or more, and 24% indicated budget growth of over 50%.
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 towards 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 the 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
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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 these systems. Each time a change is
made to one application, the other applications, normally written by
different groups of people, have to be changed to maintain the "interface".
This process results in long lead times, and higher costs to acquire,
maintain, and upgrade systems.
It is not uncommon for a hospital to have more than 10 different
application systems (up to 50 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 single software application
(including integration testing and conversion) can cost in excess of
$200,000. Annual software support for multiple applications can run as much
as $600,000 or more, and changes to the software programs create additional
charges to the hospital. Physician practices face the same situation on a
smaller cost scale, spending up to $20,000 or more for initial software
license fees, plus support and customization.
There are estimated to be approximately 120 million combinations of
computer instructions required to support today's healthcare industry with
enterprise-wide application solutions. 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 healthcare information model and a
single program for the healthcare industry, the HALIS Healthcare Enterprise
System ("HES"). Using superior healthcare information models and advanced
database techniques, HALIS offers a totally integrated, not interfaced, top
down approach to healthcare information systems. The HES 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 providers.
The Company's HES uses the MERAD technology developed by its affiliate,
HealthWatch, Inc. that manages and processes data through its Internet-
enabled virtual software and information media processing utility. The HES
technology platform consists of five major integrated parts: (i) the
graphical end-user interface, (ii) the program object processor, (iii) the
multimedia object database, (iv) the SQL relational and open database
driver, and (v) the communications network manager.
The HES provides a direct connection between the consumer or end-user
and the ready-to-use database driven system. Because it is Internet ready, the
interaction can occur from the convenience of the user's computer. Program
data and instruction can be added in an automated manner without traditional
programming knowledge. Currently, competing software technology in the
healthcare industry requires technical expertise to connect data and processing
instructions to a running program.
The HES' 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 the
conditions and processing needs are not included in the currently available
commercial systems, and a great deal of the processing must be handled
manually. The HES is designed to handle the processing conditions and needs
of the healthcare industry.
HALIS has eliminated more than 90% of the programming effort and
duplicity that other systems have required by using MERAD to place most of
the program logic into its database. Instead of literally thousands of
"if/then" programming statements for each healthcare event, which require
significant personnel and computer time to execute, the HES directly locates
the relevant mathematical and decision operations and relationships in the
database. In addition, the HES 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 HES also eliminates the need for the redundant data found in 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
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information required by every other application in the system. The HES
utilizes the relational database 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 continuously add
new features and functions to its system will be substantially below today's
market costs, because there is only one system to modify, not up to 10 or
more disparate systems or modules. HALIS uses the Internet to demonstrate
the HES, and to deliver training, product support, sales support and
customer service. Each of these techniques is designed to improve user
satisfaction and lower costs to the user and the Company.
During 1998, HALIS focused on completing the HES for two of the
eight primary markets it expects to penetrate during 1999: physician and
management practices, including individual, group and combinations; and
clinics. During 1998 the HES was installed in the field as pilot sites, and
is commercially available for sale today to practices and practice
management organizations and clinics. The software enables users to add
day-to-day changes in patient data, billing criteria, and clinical
management in one system. Management believes that the principal benefits
of the HES include: (i) centralization of patient data, (ii) coverage
verification, (iii) increased collections, (iv) lower billing costs, and (v)
higher quality clinical data. Functions provided include registration,
medical records, patient encounters, billing, managed care, reports and
system support. A pilot site is a customer who acknowledges that while the
particular HALIS system being offered is functionally complete, it must be
field tested in an operational environment, where additional features may be
added to further enhance its usability.
In November 1996, the Company entered into a perpetual, non-exclusive
transferable license with Paul Harrison Enterprises, Inc. ("PHE"), a company
organized by Paul W. Harrison, the Chairman, President and CEO of the
Company, to utilize the proprietary technology known as MERAD 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 October 1998, PHE was
acquired by HealthWatch, Inc. At the time of the acquisition by
HealthWatch, PHE had held in excess of 6,000,000 shares of the Company's
common stock as well as the ownership rights to MERAD. HealthWatch now
controls 10,763,655 shares of the Company's common stock, representing
approximately 22% of the shares outstanding, making it the single largest
shareholder of the Company.
COMPANY STRATEGY
The Company is currently focused on the point of service system
business in the healthcare industry (e.g., physician practices, MSO's and
other managed care organizations) and clinics. As resources become
available the Company plans to expand into the other segments of the
healthcare industry. Management believes that the Company is well
positioned to produce and support the Company's products, due to the
flexibility of the Company's technology and the fact that the Company has no
"legacy" systems to maintain, enhance, or otherwise invest in. Management
believes that the flexibility of the Company's HES will allow the Company to
keep up with user demand for updates to health plan changes, management
contract revisions, availability of new pharmaceutical products, and changes
in managed care-driven plans and practices. Moreover, over time, with
sufficient dedication of resources, 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 HES can become the standard platform
allowing all of these providers to transfer data among themselves.
The Company's strategy is to offer its customers a complete solution to
their healthcare information needs. HALIS will use its technological
advantages to produce and sell lower cost application software, and will
provide healthcare information outsourcing and consulting services to
augment its software products. In addition, the Company should be able to
deliver a turnkey solution to healthcare organizations through its ability
to implement customized computer hardware, communication networks, and other
systems integration services.
The Company will address the healthcare 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. Management believes that 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 MERAD technology will be instrumental in automating and integrating the
healthcare industry's information cycle.
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The Company believes that it will have an advantage over its
competitors because its product "engines" -- the integrated health software
product and its information technology core -- are expected to be effective
in keeping pace with the ongoing market changes in healthcare. Management
believes that many competitors currently have fragmented inflexible
healthcare software that fails to meet the changing needs of healthcare
companies.
The Company will manage its operations from its corporate headquarters
in Atlanta, and strategically located regional offices focused on sales and
service in different geographical areas. 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
strategic planning, mergers and acquisitions, accounting, treasury, research
and development, and risk management.
The Company's strategic plan is a significant shift in the Company's
past business direction. There can be no assurance that the Company indeed
will be successful in implementing its strategic plan or that shareholder
value will be enhanced. See "Factors Affecting Future Performance".
FACTORS AFFECTING FUTURE PERFORMANCE
Uncertainty of Market Acceptance; Reliance on a Limited Number of
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Products. HALIS' Healthcare Enterprise System is a new technology.
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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. Because 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.
Working Capital Requirements; Need for Additional Financing. HALIS
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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.
Limited History of Profitability. Although HALIS' financial condition
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has improved during the fourth quarter of fiscal 1998, HALIS has not
reported any profits for a full year of operations since fiscal 1991.
Without market acceptance of its HES software, there can be no certainty
regarding HALIS' ability to achieve or sustain profitability in the future.
Healthcare Industry and Marketing Changes. The healthcare industry is
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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 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, but hopes that any reform will include a need for
better information systems and data gathering, which will make
implementation of the HES more attractive.
Control by Management. Paul Harrison, the Chairman of the Board, Chief
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Executive Officer and President of HALIS, is also the Chairman, CEO and
President of HealthWatch, and as such exercises voting control over the
shares of common stock of HALIS owned by HealthWatch. Consequently, Mr.
Harrison exercises voting control, directly and indirectly, over
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approximately 29% of the outstanding shares of Common Stock of the Company.
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.
Dependence on Management and Key Personnel. The success of HALIS
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depends to a large degree upon the personal efforts and ability of its Chief
Executive Officer and President, Paul Harrison. The loss of the services of
Mr. Harrison would have a materially adverse effect on HALIS. HALIS has
entered into an employment agreement with Mr. Harrison. 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
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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
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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
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
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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
significantly greater resources than HALIS.
Limited Trading Volume: Shares Eligible for Future Sale. On October
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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 effective
registration statements, 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.
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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
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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. 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.
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.
RECENT DEVELOPMENTS
The Company's 1997 operating losses, negative operating cash flow, and
the sale of certain assets resulted in the need for a restructuring program
during fiscal 1998. The Company has implemented a restructuring program to
reduce its fixed costs and move the Company towards profitability. The
Company does not anticipate it will incur any incremental costs to
restructure its operations, therefore the Company has not recorded a
restructuring reserve as of December 31, 1998. As part of this program, the
Company consolidated its three Atlanta offices into a single location on
March 1, 1998. In addition to eliminating certain leases and redundant
occupancy costs, this move is also expected to produce synergistic benefits
among employees. See -"Item 2 Description of Property."
The Company has also realigned its executive structure in two separate
moves. Effective March 1, 1998, Harold J. Williams, III and James E.
Clements, who served during fiscal year 1997 as the Company's Chief Financial
Officer and Controller, respectively, resigned and for a period of time during
fiscal 1998 became consultants to the Company with respect to certain financial
and accounting matters. Also effective March 1, 1998, Joseph H. Neely and Ken
Lopez, who served during fiscal year 1997 as the Company's Chief Operating
Officer and Vice President of Sales, respectively, left the Company to form
their own sales and marketing organization. In addition, the remaining
executive officers have deferred all or part of their salaries until the
Company achieves a positive cash flow. Overhead was further reduced by the
elimination of other corporate office employees.
In September 1998, the Company retained the services of Robinson,
Rappaport, Jampol, Aussenberg & Schleicher, LLP, to act as its attorneys,
and in particular the services of Brian L. Schleicher who, in February 1999,
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was elected the Company's Vice President, Chief Administrative Officer and
Secretary. Mr. Schleicher is also the chief financial officer and chief
administrative officer of HealthWatch. Additionally, in September 1998, the
Company retained the services of Harshman & Phillips, P.C., to provide
supervision of the Company's accounting and finance functions, and in
particular the services of Bruce A. Phillips who has been acting as the
Company's principal financial and accounting officer. Because of the
affiliation between the two companies, Mr. Harrison, Mr. Schleicher and Mr.
Phillips each provide services to both HALIS and HealthWatch.
During fiscal 1998, the Company was fine-tuning the capabilities of the
HES in various pilot sites. The HES is now commercially available, but the
Company has had limited success entering into contracts for the sale of the HES
product to date. Beginning in fiscal 1999, the Company refocused the marketing
of the HES software to larger oriented customers who have a minimum of 100
users. While the Company has started to receive a high degree of interest
in the HES, the sales cycle and decision process is long, and the Company's
past financial performance has been perceived as a negative factor causing
the sales cycle to be stretched even longer. Nonetheless the Company
believes the HES will continue to gain market acceptance, although no
assurances can be given. In addition to focusing on larger physician
practices, management companies and clinics, the Company is seeking
strategic relationships, including possible business combinations, with
companies whose size and resources may be able to assist the Company capture
a larger market presence, enhance the Company's capital structure, as well
as its sales and marketing infrastructure.
RECENT DISPOSITIONS
During fiscal 1997, the Company made a number of acquisitions pursuant
to its strategy of acquiring companies that could assist in the beta testing
and distribution of the HES system (See "Acquisitions" below). At the end
of fiscal 1997 and during fiscal 1998, the Company refocused its business
strategy and decided that the original distribution plan was not going to be
successful and started a program of divesting some of the acquisitions
previously made. As a result, the Company has disposed of a number of the
business units it acquired in 1997 and has reduced its overhead and cost of
operations significantly. Now that the HES is commercially available and
implemented in a number of locations, its new focus and business strategy is
to sell the HES to larger organizations having a requirement of a minimum of
100 users. This has resulted in many of the previous acquisitions of
business units to be unnecessary on a going forward basis. Accordingly,
discussed below are the dispositions made at the end of fiscal 1997 and
during fiscal 1998.
DISPOSITION OF PHYSICIAN'S RESOURCE NETWORK IN FISCAL 1998
On June 30, 1998 the Company effectuated a merger of Physician's
Resource Network, Inc. ("PRN"), a wholly owned subsidiary of the Company,
that the Company had acquired in July 1997, with American Enterprise
Solutions, Inc. ("AES"). Located in Tampa, Florida, PRN delivered practice
management and billing services to healthcare providers. The transaction
with AES was effected pursuant to an Agreement and Plan of Merger dated June
25, 1998 (but effective as of June 30, 1998) among the Company, AES, PRN
Acquisition Co., and PRN (the "Merger Agreement"). Under the terms of the
Merger Agreement, the Company received AES' promise to deliver within 90
days of the closing date, all of the shares of HALIS common stock owned by
AES of record and beneficially as of the closing date, including without
limitation shares that AES has the right to acquire as of the closing date,
which number of shares shall be not less than 9,984,000 shares of the
Company's common stock. The Merger Agreement provided that if AES delivers
more than 11,000,000 shares of Company common stock, then the Company must
also transfer to AES the right to receive contingent installment payments
(the "Installment Payments") under that certain Asset Purchase Agreement
dated December 31, 1997, between Communications Wiring and Accessories, Inc.
and HALIS Services, Inc., a subsidiary of the Company (See below). To date,
the Company has not recorded a receivable with respect to Installment
Payments because of the uncertain timing and probability of such Installment
Payments. Additionally, pursuant to the Merger Agreement the Company
retained certain liabilities in the aggregate amount of $478,797 related to
the business of PRN.
Because the number of shares to be received by the Company as
consideration for the sale of PRN was uncertain (and as of September 30,
1998 was in dispute), the Company deferred any recognition of the gain on
the sale until such time as this uncertainty was resolved. However, the
results of operations for PRN were not included in the results of operation
for the Company after June 30, 1998. On October 9, 1998, the Merger
Agreement was amended by the parties to acknowledge and agree that the
number of shares of the Company's common stock to be delivered by AES
- 10 -<PAGE>
totaled 12,048,325 shares. AES agreed to deliver, or cause to be delivered,
11,548,325 shares on or before October 13, 1998, with the remaining 500,000
shares to be delivered on or before January 31, 1999. As of December 31,
1999, the Company has received the 11,548,325 shares which were cancelled
and are no longer outstanding. The Company has not received the remaining
500,000 shares, and has informed AES that they are in default under the
Merger Agreement.
The Company's Board of Directors decided that PRN did not fit within its
refocused strategy and viewed the sale to AES as an opportunity to retire
approximately 20% of the Company's outstanding stock while reducing the cash
drain caused by this subsidiary. Charles Broes, who served as a director of
the Company from July 1, 1997 until he resigned on June 10, 1998, served as
the Chief Executive Officer, Secretary, Treasurer and board member of AES.
Mr. Broes did not participate in any meetings of the Company's Board of
Directors with respect to the Merger Agreement, or the amendment thereto.
For federal income tax purposes, the PRN disposition was not intended
to constitute a reorganization within the meaning of Section 368 of the
Code. The parties to the Merger Agreement acknowledged that the Merger was
intended to constitute a redemption by HALIS of all HALIS stock owned
directly or indirectly by AES pursuant to Section 302(b)(3) of the Internal
Revenue Code of 1986, as amended (the "Code").
The amount of consideration to be paid by the parties under the AES
Merger Agreement, as amended, was determined by arms-length negotiations
between informed business persons and represents, in the Company's view,
fair value for PRN. Due to the fact that the uncertainty regarding the
precise timing of receipt and number of shares of the Company's common stock
was not resolved until October 1998, the Company deferred the recognition of
the expected gain on the disposition of PRN, and did not recognize $907,696
of this gain until the fourth quarter ending December 31, 1998.
SALE OF THE HOMA PRACTICE IN FISCAL 1998
On September 30, 1998, the Company's wholly-owned subsidiary,
PhySource, Ltd. ("PhySource"), sold to Physician's Enterprise System, LLC
("PES") all of the medical and non-medical assets of its Dr. Homa medical
practice that the Company had acquired in 1997 (the "Homa Practice"). See
"Item 1. Description of Business Acquisitions." The Homa Practice had
provided medical services to patients in the Arlington Heights, Illinois
vicinity. The sale was effected through an Agreement for Purchase and Sale
of Assets entered into between PES, the Company and PhySource, and was
effective as of October 1, 1998 (the "Asset Agreement"). Under the terms of
the Asset Agreement, PhySource received $400,000 at the closing, and the
right to receive 50% of collections on the receivables assigned to PES in
excess of $400,000, less a collection fee of 20% (the "Contingent Payment"),
and had certain specific liabilities assumed by the purchaser. The
Contingent Payment is not due to be calculated and paid to the Company until
November 1, 1999. This transaction is considered a taxable event and the
$18,323 gain associated with the sale was recognized in the fourth quarter
of 1998. Any gain, if any, associated with any amounts received on the
Contingent Payment will be deferred until such time as a determination has
been made that any amounts will be due and payable to the Company. The
results from operations for the Homa Practice were included in the Company's
results from operations for the nine-month period ended September 30, 1998.
DISPOSITION OF THE ORTHODONTIC BUSINESS IN FISCAL 1997
On December 31, 1997, HALIS Services, Inc., a wholly owned subsidiary
of the Company, sold to InfoCure Corporation ("InfoCure") substantially all
of the assets of the orthodontic practice management software business (the
"Orthodontic Business") that was acquired by the Company from Software
Manufacturing Group, Inc. in January 1997. See -" Item 1. Business -
Acquisitions." The Orthodontic Business included the development,
marketing, selling and servicing of computer hardware and software to
orthodontic healthcare providers. The sale to InfoCure was consummated
pursuant to an Asset Purchase Agreement dated December 31, 1997 (but
effective as of December 1, 1997) by and among the Company, HALIS Services
and InfoCure (the "InfoCure Asset Purchase Agreement"). InfoCure paid HALIS
Services, net of liabilities paid by HALIS Services, approximately $1.2
million in cash. The Company recorded a loss of approximately $3.1 million
on the sale of the Orthodontic Business. In connection with the InfoCure
Asset Purchase Agreement, the Company and HALIS Services agreed to pay
approximately $5,900 per month through January 1999 to a former employee of
HALIS Services and not to compete in the orthodontic practice management
industry for a period of five years.
- 11 -
<PAGE>
SALE OF CERTAIN NON-HEALTH CARE ASSETS IN FISCAL 1997
Due to their disappointing operating performance, HALIS Services, Inc.
sold certain non-healthcare related assets and property of TG Marketing
Systems and Aubis Systems Integration (formerly, Aubis Systems Integration,
Inc. or "ASI") to Communications Wiring and Accessories, Inc.
("Communications Wiring") on December 31, 1997 for a purchase price of $1
million and the assumption of certain liabilities (the "Purchase Price"),
subject to downward adjustment as hereinafter described. The non-healthcare
related assets and property included accounts receivable, computer software,
computer equipment, furniture, fixtures and leasehold improvements. The
Company received no cash consideration at closing and has not recorded any
receivable from this transaction due to an evaluation of the timing and
probability of the payments as hereinafter described.
The Purchase Price is payable in monthly installments, commencing
February 15, 1998, and continuing on the 15th day of each month thereafter
(each, an "Installment Payment") until the earlier of the date upon which
the aggregate amount of Installment Payments paid to HALIS Services shall
equal the Purchase Price or December 31, 2007. Each Installment Payment
shall be equal to 20% of the license fees, lease payments and royalties
actually received by Communications Wiring with respect to the purchased
assets for the calendar month immediately preceding the respective date upon
which such Installment Payment shall be due and payable; provided, however,
that in the event that the aggregate amount of all Installment Payments
actually paid by Communications Wiring to HALIS Services prior to December
31, 2007 (the "Paid Installments") shall be less than $500,000,
Communications Wiring shall pay to Seller an amount equal to the difference
between $500,000 and the Paid Installments on December 31, 2007. In the
event that the aggregate amount of all Installment Payments actually paid by
Communications Wiring to HALIS Services prior to December 31, 2007 shall be
equal to or greater than $500,000, Communications Wiring shall have no
further obligation to make installment payments to HALIS Services and the
entire Purchase Price shall be deemed to be equal to the Paid Installments.
To secure the payment of the Purchase Price by Communications Wiring,
HALIS Services retained a security interest in certain of the purchased
assets constituting or relating to proprietary software developed by HALIS
Services. Such security interest, however, does not guarantee that
Communications Wiring will make the required Installment Payments as and
when they become due. The Company recorded a loss of approximately $2.3
million on the sale of this business.
ACQUISITIONS
THE INITIAL ACQUISITIONS IN NOVEMBER 1996
In November 1996, the Company merged AHS and ASI, each a wholly owned
subsidiary of AUBIS, L.L.C. ("AUBIS"), an entity controlled by Paul W.
Harrison, 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 were suppliers of network integration products and
services to the healthcare and other industries. The Company sold
substantially all of the assets of ASI in December 1997. See "Recent
Dispositions - Sale of Certain Non-Health Care Assets."
In November 1996, the Company also acquired Halis Software, Inc., a
wholly owned subsidiary of Healthcare Technology Investments, L.L.C.
(formerly, HALIS, L.L.C.), a company also controlled by Paul W. Harrison.
In connection therewith, Healthcare Technology Investments, L.L.C. received
5,000,000 shares of Common Stock of the Company. HSI is the developer of
the HES.
ACQUISITION OF THE COMPASS GROUP, INC. IN FISCAL 1997
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
- 12 -<PAGE>
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. On February 25, 1998 the Company's
Board of Directors adopted a resolution to amend the terms of certain
outstanding stock option agreements to reduce the exercise price thereof and
to reduce the number of shares of common stock subject thereto. In
connection with this resolution, the exercise price of Ms. York's options
was reduced to $.25 per share and the number of shares were reduced to
59,500 from 85,000.
ACQUISITION OF SOFTWARE MANUFACTURING GROUP, INC. IN FISCAL 1997
In January 1997, the Company also acquired Software Manufacturing
Group, Inc. ("SMG"), a developer and seller of orthodontic practice
management systems, which the Company sold in December 1997. See -"Item 1.
Business- Recent Dispositions." 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 addition, the
Company granted to certain employees of SMG non-qualified options to
purchase a total of 100,000 shares of the Company's Common Stock at an
option price of $2.00 per share. These options are fully exercisable and
expire on January 24, 2007.
ACQUISITION OF AMERICAN BENEFIT ADMINISTRATIVE SERVICES, INC. IN FISCAL
1997
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 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 January 31, 2007. On
February 25, 1998 the Company's Board of Directors adopted a resolution to
amend the terms of certain outstanding stock option agreements to reduce the
exercise price thereof and to reduce the number of shares of common stock
subject thereto. In connection with this resolution, the exercise price of
one-half of Mr. Spicer's options was reduced to $.25 per share and the
number of shares were reduced to 437,500 from 625,000. In August 1998, the
- 13 -<PAGE>
Company's Board elected to reduce the exercise price of all of the
outstanding options of employees of the Company to $0.13 per share. As a
result, Mr. Spicer now holds options to purchase 625,000 and 437,500 at
$0.13 per share.
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 $596292 as of December 31, 1998, 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 January 31, 2007. 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 connection with the consummation of the mergers, the Company
granted another ABAS/TPA subsidiary employee non-qualified options to
purchase 25,000 shares of the Company's common stock at an option price of
$2.00 per share. These options are fully exercisable and expire on January
31, 2007. In August 1998, the exercise price on each of these options has
been reduced to $0.13 per share.
ACQUISITION OF TG MARKETING SYSTEMS, INC. IN FISCAL 1997
In May 1997 the Company acquired TG Marketing Systems, Inc., a Georgia
corporation ("TGM"), a provider of marketing and customer service software
and related consulting services. 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. Mr. Neely
also entered into an employment agreement with the Company for a term of two
years at an annual base salary of $150,000 to serve as the Chief Operating
Officer of the Company. 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. These options vest over a four year
period in accordance with the Company's 1996 Stock Option Plan, and expire
on May 2, 2007. In December 1997 the Company sold certain assets of the
businesses formerly conducted by TGM. See - Item 1. Business -Recent
Dispositions." In connection with this asset sale the options granted to
purchase 500,000 shares of the Company's Common stock were reduced to an
aggregate number of 129,450 shares. The option price and vesting schedule
were unchanged.
ACQUISITION OF PHYSICIANS RESOURCE NETWORK, INC. IN FISCAL 1997
In July 1997 the Company acquired Physicians Resource Network, Inc., a
Florida corporation ("PRN") which became a subsidiary of the Company (the
"PRN Subsidiary"). PRN provides practice management services to healthcare
providers. 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 June 1998 the Company
sold the PRN Subsidiary to American Enterprises Solutions, Inc. See - Item
1. Business -Recent Dispositions."
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.
- 14 -<PAGE>
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.
Subsequent to year end, the financial institution extended a new one year
promissory note for the remaining outstanding balance of $460,675. The
collateral supporting the loan, including all personal guaranties remains in
place.
ACQUISITION OF PHYSOURCE LTD. IN FISCAL 1997
In July 1997 the Company acquired PhySource Ltd., an Illinois a
physician practice management 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 September 1998 the Company sold the HOMA Practice to
Physicians Enterprise Systems, LLC. See - Item 1. Business -Recent
Dispositions."
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
provided for the employment of Dr. Homa for a term of two years and for the
payment of an annual base salary effective January 1, 1998 of $288,000. In
addition, as incentive compensation Dr. Homa was to be paid an amount equal
to 2% of the software component of technology sales resulting from Dr.
Homa's referral of prospective customers.
SUBSIDIARY CONSOLIDATION
On June 30, 1997, the following subsidiaries of the Company were merged
into HALIS Services, 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.; and AUBIS Systems
Integration, Inc. The purpose of the merger was to simplify the Company's
corporate structure and facilitate the consolidation of accounting and
treasury functions. On January 1, 1999, all of the assets previously
attributable to HALIS Software, Inc., including all of HALIS Services'
rights, title and interest in the HES system were spun-off to a newly
created wholly-owned subsidiary called HES Technology, Inc., a Georgia
corporation.
PURCHASE OF HEALTHWATCH STOCK BY THE COMPANY; RELATIONSHIP WITH HEALTHWATCH
HealthWatch, Inc. (Nasdaq: HEAL) ("HealthWatch") is presently the
single largest shareholder of the Company holding 10,763,655 shares of the
Company's outstanding common stock (approximately 22%). During fiscal years
1997 and 1998 the Company has entered into a number of transactions that
have brought the Companies closer together. Paul W. Harrison is the
Chairman, President and CEO of both Companies. Brian L. Schleicher is the
Chief Financial Officer and Chief Administrative Officer of HealthWatch, and
the Chief Administrative Officer and Secretary of the Company. Mr. Harrison
and Mr. Fisher, the former Executive Vice President of the Company, are
directors of both companies.
The relationship of the two companies began on August 20, 1997, when
the Company and 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.
From August 20, 1997 through September 22, 1997, the Company purchased
an aggregate of 20,833 shares of HealthWatch Preferred Stock for $125,000.
During fiscal 1998 the Company converted the HealthWatch Preferred Stock
into 83,333 shares of HealthWatch Common Stock. The Company is not
obligated and does not have the present intention 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 merger of the Company and HealthWatch; and (ii) to provide
HealthWatch with working capital. The Company and HealthWatch entered into
two different non-binding letters of intent, dated August 8, 1997 and July
14, 1998 (the "Letters of Intent"), providing for the merger of HealthWatch
with the Company. Since the execution of the Letters of Intent, on October
2, 1998, HealthWatch acquired Paul Harrison Enterprises, Inc., a company
controlled by Paul W. Harrison, and which was, at the time of the
acquisition, the largest single shareholder of the Company. Immediately
after the acquisition, HealthWatch held 8,939,010 shares of the Companies
Common Stock. Due to volatility in both companies respective stock price,
and certain accounting issues related to the recording of the possible
merger, the Company and HealthWatch postponed the proposed merger between
the two companies and instead pursued a business collaboration agreement in
which the companies agreed to share sales prospects and HealthWatch became a
reseller of the Company's HES software. Pursuant to the business
collaboration agreement the Company and HealthWatch share office space in
Atlanta, Georgia and certain office and executive personnel. See "Certain
Relationships and Related Transactions".
CUSTOMERS
The Company's customers include numerous healthcare industry
participants located throughout the United States, including healthcare
consumers, provider groups and managed care organizations.
COMPETITION
The Company believes that the principal competitive factors in the
healthcare information systems market are: the breadth and quality of system
and product offerings, the proprietary nature of methodologies and technical
resources, price, customer service, and the effectiveness of marketing and
sales efforts. In addition, the Company believes that the speed with which
information technology companies anticipate and respond to the evolving
healthcare industry structure and address unmet information needs are also
important competitive factors. 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. In addition, 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, physician practice management companies, third party
claims administrators, healthcare information systems and software vendors,
and large data processing and information companies. Many of these
competitors have substantial installed customer bases in the healthcare
industry, as well as 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 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 technological 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, 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 obtain and use information that the Company
- 16 -<PAGE>
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.
EMPLOYEES
As of March 31, 1999, the Company had 47 full-time employees, including
three in senior management. The Company also utilizes contract personnel
supplied by HealthWatch for support services, installations of Company's
systems, and programming. None of the Company's employees are subject to a
collective bargaining agreement, and the Company considers its employee
relations to be good.
YEAR 2000 CONCERNS
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 is in the
process of switching to a new claims processing system that will be Year
2000 compliant. The Company estimates that it will convert all of ABAS' data
by the end of the third quarter of 1999, at a cost of approximately
$400,000. Additionally, the Company will be undertaking a review of its
- 17 -<PAGE>
business systems to make a determination of whether those systems are Year
2000 compliant and will query those vendors whose systems are material to
the Company to determine their Year 2000 readiness. The Company believes
that, with the exception of the software utilized 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.
FORWARD-LOOKING STATEMENTS
This Form 10-KSB 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. See -"Factors Affecting Future Performance".
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's headquarters is located at 9040 Roswell Road, Suite 470,
Atlanta, Georgia. This 11,500-square-foot facility is leased pursuant to a
72-month lease at a monthly rental of $19,800. The Company also leases
approximately 11,000 sq. feet of additional space in Chicago, Illinois, where
its ABAS subsidiary is located, at a monthly rental of $12,500 in 1998, which
will escalate to $23,000 per month by the year 2003.
ITEM 3. LEGAL PROCEEDINGS.
(A) 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 alleges 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 breach 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. The date for
answering the complaint has not yet passed. The Company will be picking up
the defense for Mr. Harrison. The Company denies that any amounts are due
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, and will vigorously defend the action.
In addition, the Company plans to raise a number of counter-claims in its
answer against Ms. York.
(B) Penelope Sellers v. HALIS, Inc., Larry Fisher and Paul W. Harrison,
------------------------------------------------------------------
Fulton State Court Civil Action File No. 97VS1294SD
On July 18, 1997, the Company was sued by Penelope Sellers, in an
action seeking actual damages against the Company in the amount of
$480,534.70, unspecified attorneys fees, and punitive damages of not less
than $1,000,000. Ms. Sellers contends that a finder's Fee Agreement into
which she entered with the Company in August 1995, and under which she was
- 18 -<PAGE>
to receive a commission equal to 10% of the amount of any equity investments
in the Company or software licensing fees paid to the Company, in respect of
transactions introduced to the Company by her, entitles her to an amount in
excess of the approximately $19,350 which she has been paid to date under
that agreement. That amount represents 10% of the investment made by the
principals of AUBIS, LLC ("AUBIS") in a private placement of convertible
notes (in which private placement other investors besides the AUBIS
principals participated) and 10% of the amounts received by the Company from
the sale of Fisher Restaurant Management Systems by AUBIS.
Ms. Sellers claims that the entirety of the convertible notes offering
described above (in which an aggregate of $1,470,000 was raised by the
Company) would not have been successful but for her introduction of the
AUBIS principals to the Company. As a result, Ms. Sellers has made a claim
for 10% of all amounts raised in the notes offering. Ms. Sellers has also
made a claim, based on the same rationale, to 10% of all capital funding
raised by the Company (up to the $500,000 maximum compensation), including
the proceeds of a private placement which raised gross proceeds of
approximately $2.0 million. Finally, Ms. Sellers has made a claim for 10%
of the value of AUBIS and HALIS Systems, Inc.
The Company has answered Ms. Seller's complaint, denying liability
under the Finder's Fee Agreement in an amount exceeding that already paid,
and denying liability to Sellers under any of the factual or legal bases
alleged in her complaint. Litigation, including written discovery, the
exchange of documents, and conduct of a series of depositions is ongoing.
The Company continues to vigorously defend this lawsuit.
(C) Advanced Custom Computer Solutions, Inc., Wayne W. Surman and Charlotte
-----------------------------------------------------------------------
Surman v. Fisher Business Systems, Inc., HALIS, Inc., Larry Fisher,
-------------------------------------------------------------------
Paul W. Harrison and Nathan I. Lipson, Fulton State Court Civil Action
-------------------------------------
File No. 97VS0123082.
In February 1997, Advanced Custom Computer Solutions, Inc. ("ACCS"),
Wayne W. Surman and Charlotte Surman sued the Company alleging, among other
things, breach of contract in connection with the termination by the Company
of a merger agreement with ACCS, which the Company advised ACCS was
terminated in November 1996 due to the impossibility of ACCS's fulfilling
certain conditions to closing therein. In addition, the complaint alleges
that the defendants made false and misleading statements to the plaintiffs
for the purpose of inducing plaintiffs to lend money to the Company, and
that the Company, or individuals related to it, tortiously interfered with
the business relationships of ACCS, and fraudulently induced ACCS management
to permit Company management to take over and "systematically destroy" the
ongoing business of ACCS. The Surmans are the principals of ACCS and claim
personal damages against the Company on certain of the claims, and claim a
right to at least 150,000 shares of the Company's common stock, the exact
amount to be determined at trial, based on a claim of a breach of an alleged
oral contract to pay them shares of HALIS stock as compensation for
soliciting investors (the "Oral Contract Claim"). The Surman's further
claim that the Company fraudulently induced them to solicit investors for
the Company (the "Investor Solicitation Claim"). The complaint sought
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. The Company answered, denying the
allegations of liability in the complaint, and the Company vigorously
defended the lawsuit. On November 19, 1998, the trial court granted summary
judgment in favor of the Company on all but two counts of the plaintiff's
complaint, as amended. The two counts remaining include the Oral Contract
Claim and Investor Solicitation Claim. The plaintiffs have appealed to the
Georgia Court of Appeals from the order granting partial summary judgment to
the Company on all other claims, and the Company has cross-appealed the
portions of the order denying summary judgment on the two surviving counts.
The case has not yet been docketed in the Court of Appeals.
There can be no assurance, however, that the Company will be successful
in its appeal, or defense of the plaintiff's appeal, or that the final
resolution of this matter will not have a material adverse effect on the
financial condition or results of operation of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
- 19 -
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
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 OTC Bulletin Board. The trading symbol for the Common
Stock is "HLIS."
As of March 31, 1999, there were approximately 371 holders of record of
the Company's Common Stock; however, the Company believes that there are
more than 371 beneficial owners of its Common Stock.
The following table sets for the high and the low closing bid price of
the Company's Common Stock on the OTC Bulletin Board, as reported by
Bloomberg Reports for the periods indicated:
<TABLE>
<CAPTION>
1997 1998
High Low High Low
------- -------- -------- -------
<S> <C> <C> <C> <C>
Fourth Quarter $1.97 $0.44 $0.23 $0.21
Third Quarter 2.31 $1.94 $0.58 $0.56
Second Quarter 2.56 $1.38 $0.37 $0.35
First Quarter 2.25 $1.38 $0.72 $0.69
</TABLE>
The quotations given in the above table reflect inter-dealer prices,
without retail mark-up, mark down or commission, and may not represent
actual transactions. 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.
RECENT SALES OF SECURITIES
During January 1998 the Company received additional funds from the sale
of 4% Convertible Debentures and certain warrants pursuant to a claim of
exemption under rules 901 and 903 of Regulation S promulgated by the
Securities Act of 1933, as amended. The debentures and warrants were issued
to non-U.S. Persons with the assistance of GEM Advisors, Inc. acting as a
placement agent. The debentures were convertible into the Company's Common
Stock at a fixed conversion price of $0.61 per share or a variable
conversion price (65% of the bid price average for the 10 trading days
preceding the day prior to the conversion date). The Company also issued
the debenture holders 100,000 warrants with an exercise price of $0.60 per
share. The consideration received by the Company for the debentures was
$100,000 in cash less certain expenses, including 9% of the aggregate
proceeds to GEM Advisors, Inc., and were used for the Company's working
capital needs.
In the first quarter of fiscal 1998, the holders of all of the $300,000
of the 4% Convertible Debentures ($200,000 was received in December 1997,
$100,000 was received in January 1998) elected to convert their investment
into the Company's Common Stock. As a result, the Company issued an
aggregate of 1,267,497 shares of Common Stock in full satisfaction of
principal and accrued interest owed to the holders.
In response to the decline in price of the Company's Common Stock, the
Company offered the holders of $500,000 of the Company's 7% Convertible
Promissory Notes due January 15, 1998 (which was the amount of these notes
remaining outstanding), 125,000 additional shares of Common Stock to
encourage them to execute their conversion option prior to January 15, 1998.
Holders of $210,000 of the Notes accepted the offer as of January 15, 1998,
resulting in the Company issuing 52,500 additional shares of Common Stock.
The additional shares had the effect of increasing the ratio of shares
issued to debt retired from 1:1 to 1.25:1. On January 15, 1998, the
maturity date of the Notes, $190,000 was retired and $100,000 was converted
into newly issued 10% Convertible Notes. As an equitable adjustment
believed by the Board of Directors to be in the Company's best interest and
for fair consideration in light of all the facts and circumstances, the
holders of $1,006,000 of the Notes that had exercised their conversion
- 20 -<PAGE>
option on or before September 30, 1997 were issued 251,500 additional shares
on January 20, 1998.
On January 15, 1998 the Company also issued 358,000 additional shares
of Common Stock to purchasers who had previously purchased Common Stock in a
private placement completed in September 1997. These shares were issued in
exchange for a waiver of rescission rights and as an equitable adjustment to
such private placement based on careful consideration by the Company's Board
of Directors of all the facts and circumstances.
On January 15, 1998, the maturity date of the 7% Convertible Promissory
Notes, $190,000 was retired and $100,000 was converted into newly issued 10%
Convertible Notes. The 10% Convertible Notes are convertible into the
Company's Common Stock at a variable conversion price equal to 80% of the
average closing bid price for the 10 trading days preceding the day prior to
the conversion date. During the three months ended March 31, 1998, the
holders of $50,000 of the 10% Convertible Debentures elected to convert
their investment into the Company's Common Stock. As a result, the Company
issued an aggregate of 163,506 shares of Common Stock in full satisfaction
of principal and accrued interest owed to such holders.
Through a private placement of 6% Convertible Debentures during 1998,
the Company raised $1,530,200. The holders of the 6% Convertible Debentures
elected to convert their investment into the Company's Common Stock
immediately, and the Company issued an aggregate of 10,515,311 shares of
Common Stock in full satisfaction of principal and accrued interest owed to
such holders. The funds raised in this private placement were utilized for
the working capital needs of the Company.
On September 1, 1998 Paul Harrison, the Chairman, President and CEO of
the Company, exercised 500,000 stock options resulting in $65,000 being
received by the Company. On November 19, 1998, Mr. Harrison exercised an
additional 384,615 stock options resulting in an additional $50,000 being
received by the Company. On December 22, 1998, Mr. Harrison exercised an
additional 115,385 stock options resulting in an additional $15,000 being
received by the Company. All of the stock options were exercised at a price
of $0.13 per share.
In January 1997, the Company completed a private placement of 336,000
shares of Common Stock and 112,000 warrants, resulting in net proceeds to
the Company of approximately $400,000. 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, fund expenses related to the acquisition of selected
healthcare software, service and system integration companies, and for
general corporate purposes.
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 $1.6 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, 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
1,779,000 shares of Common Stock and 194,659 warrants, resulting in net
proceeds to the Company of approximately $1.9 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, 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 1,006,000 shares of Common
Stock upon the conversion by holders of $1,006,000 in principal amount of
the Company's 7% Convertible Promissory Notes (the "Notes"). Following the
conversion, $500,000 in principal remained outstanding under the Notes. In
addition to reducing future quarterly cash interest expense by approximately
$20,000, the Note conversion eliminated the obligation of the Company to
repay the principal sum of $1,006,000 at maturity on January 15, 1998. Also
on September 30, 1997, the Company issued approximately 200,051 shares of
Common Stock upon the conversion by certain creditors of approximately
$200,051 of principal and accrued interest.
During December 1997 the Company received funds from the sale of 4%
Convertible Debentures and certain warrants. The debentures and warrants
were issued to non-U.S. Persons with assistance of GEM Advisors, Inc. acting
- 21 -
<PAGE>
as a placement agent pursuant to a claim of exemption under rules 901 and
903 of Regulation S promulgated by the Securities Act of 1933, as amended.
The Debentures are convertible into the Company's common stock at a fixed
conversion price of $0.61 per share or a variable conversion price (65% of
the bill price average for a 10 day period). The Company also issued
250,000 warrants with an exercise price of $0.60 per share. The
consideration received by the Company for the Debentures was $200,000 in
cash less certain expenses, including payments of $2,500 in fees to the
escrow agent and 9% of the aggregate proceeds to GEM Advisors, Inc. as
compensation for its services.
Except as otherwise set forth above, 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. Except as described above, no
underwriter was involved in the transaction and no commissions were paid.
The Company will 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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
The following discussion should be read in conjunction with the
consolidated financial statements of the Company and subsidiaries contained
elsewhere herein.
On June 30, 1998, the Company disposed of its PRN subsidiary in a
merger transaction with AES. Accordingly, results of operations for PRN
were included in fiscal year 1998 through June 30, 1998 only. Due to a
dispute with AES regarding the amount of consideration to be paid by AES to
the Company in the transaction, and any gain or loss recognized on the
transaction was deferred until the fourth quarter of 1998 when the dispute
was resolved. AES is still obligated to deliver 500,000 shares of the
Company's common stock to the Company as the final payment for the
transaction.
On October 1, 1998, the Company disposed of all of the assets and
business known as the Homa Practice. Accordingly, results of operations for
the Homa Practice were included in fiscal year 1998 through September 30,
1998 only.
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.
Software Manufacturing Group, Inc. ("SMG"), and American Administrative
Services, Inc. and Third Party Administrators, Inc. the results of operations
for these three acquired companies are included in the Company's consolidated
financial statements in fiscal year 1997 from their dates of acquisition
(January 10, 24, and 31, respectively) through the period end of December 31,
1997 (SMG is included through the effective date of its disposition,
December 1, 1997. See "Recent Dispositions").
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 December 31,
1997 (TGM was sold effective December 31, 1997 See - "Item 1. Business -
Recent Dispositions"). The Company acquired Physician's Resource Network,
Inc. ("PRN") on July 7, 1997 through the issuance of 3,733,333 shares of its
common stock and PhySource Ltd. ("PhySource") on July 31, 1997 through the
issuance of 2,632,611 shares of its common stock. The results of operations
for PRN and PhySource are included in the Company's consolidated financial
statements for fiscal year 1997 from their acquisition dates through the
period end of December 31, 1997. It is the opinion of management that these
transactions qualify as tax-free reorganizations within the meaning of
Section 368(a) of the Internal Revenue Code of 1986.
- 22 -<PAGE>
FINANCIAL CONDITION
COMPARISON OF 1998 VERSES 1997
------------------------------
Total assets decreased $3,184,094 during the year ended December 31,
1998 due primarily to the dispositions of PRN and the Homa Practice. The
dispositions resulted in the decrease of total assets of $1,505,963 and
$411,801, respectively. Additionally, the Company has written off certain
other assets including $224,312 of goodwill related to the Company's
consulting business, $125,289 of other intangible assets, and recorded
$561,474 of depreciation and amortization, exclusive of PRN. The investment
in HealthWatch was written down to fair market value of $36,158 from
$125,000, a decrease of $88,542, and is recorded as an unrealized loss on
investments in the stockholder' deficit section of the balance sheet. Other
components of the net decrease are increases in accounts receivable of
$160,903, $78,673 of which is related to the sale of the HES system,
deposits of $54,470, customer claims and premium funds at ABAS of $586,629,
and purchases of property and equipment of $93,224. Other decreases consist
of cash of $1,108,326 which was used for general working capital and
operations.
Total liabilities decreased by $290,187 primarily due to decreases
related to the dispositions of PRN and the Homa Practice of $386,984 and
$55,118, respectively. An increase in liabilities consisted of $278,725 in
deferred revenue related to sales of the HES system, $427,047 in customer
deposits at ABAS due to increased volume of new business, and $201,700 and
$294,651 in payroll and sales taxes payable and other current liabilities,
respectively. Other decreases are composed of $490,000 of conversions of
debt to equity, $53,000 in net payments on related party loans, $97,822 in
repayment of notes payable, and $259,924 in accounts payable and accrued
expenses.
COMPARISON OF 1997 VERSES 1996
------------------------------
Total assets increased $5,786,877 or 508% during the year ended
December 31, 1997, due primarily to the six acquisitions described above,
and is reflected in the majority of the Balance Sheet categories
Total liabilities increased $977,829 primarily due to the six
acquisitions. This increase is offset by the conversion into equity of
$1,216,000 of the Company's 7% Convertible Promissory Notes outstanding at
December 31, 1996. At December 31, 1997, the Company had a working capital
deficit of $1,763,792. The Company's current liabilities include accounts
payable and accrued expenses of $1,869,056, including $376,520 payable as a
result of one of the dispositions, and payroll and sales tax payable of
$272,634. Payroll and sales taxes payable at December 31, 1997, consisted
primarily of sales and use taxes for the State of Georgia. The Company has
negotiated an agreement with the Georgia Department of Revenue, which
provides for regular monthly payments of $10,000 for 21 months. The Company
is presently in default under the agreement but has not received any demand
related thereto.
As a result of numerous factors, including but not limited to, the
Company's working capital deficit, and because the Company has sustained
losses from operations since inception, the Company's independent public
accountants have included a paragraph in their audit report accompanying the
Company's financial statements for fiscal years 1998 and 1997 regarding the
significant doubt about 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 large part, from
outside sources. See "- Liquidity and Capital Resources."
RESULTS OF OPERATIONS
COMPARISON OF 1998 VERSES 1997
------------------------------
Revenues which consist of system sales and services, decreased 27% from
$10,134,586 for the year ended December 31, 1997 ("fiscal 1997") to
$7,630,370 for the year ended December 31, 1998. ("fiscal 1998"), primarily
due to the dispositions of PRN and the Homa Practice effective July 1, 1998
and October 1, 1998, respectively. Revenues on a historical basis for the
continuing businesses consisting of the Company's consulting business, ABAS,
HES and corporate increased 51% from $3,616,996 for fiscal 1997 to
$5,474,756 for fiscal 1998. The increase is the result of increased market
acceptance of the HES system and increased service revenues at Halis
consulting and ABAS.
- 23 -<PAGE>
Cost of goods sold increased 24% from $1,889,858 for fiscal 1997 to
$2,335,237 for fiscal 1998 primarily due a 139% increase in revenues from
the Halis consulting business.
Selling, general, and administrative expenses decreased 37% from
$11,855,637 for fiscal 1997 to $7,468,686 to fiscal 1998 primarily due to
the dispositions PRN and the Homa Practice and a reduction of corporate
overhead. The Company's restructuring program has reduced fixed corporate
overhead by 21%, approximately $670,000 from fiscal 1997 to fiscal 1998
Amortization and depreciation decreased $1,689,293 (65%) from
$2,600,664 for fiscal 1997 to $911,371 for fiscal 1998 primarily due to the
write down of unamortized goodwill of PhySource, PRN and Compass during
fiscal 1997, the dispositions of SMG and TGM during fiscal 1997, the
additional write down of unamortized goodwill of Compass during fiscal 1998,
and the dispositions of PRN and the Homa Practice during fiscal 1998.
Due to the anticipated reduction of revenues generated from the Halis
consulting business during fiscal 1999 and in the future, the Company has
written off $224,312 of unamortized goodwill from the Compass acquisition.
The Company reported losses on sale of businesses of $5,395,053 for
fiscal 1997 and gains on the sale of businesses of $926,017 for fiscal 1998.
The losses for fiscal 1997 were the result of goodwill related to the 1997
acquisitions that were acquired primarily with Company stock. Due the write
down of unamortized goodwill on PhySource, PRN and Compass during the fourth
quarter of 1997, the carrying value of the investments were stated at net
realizable value. The dispositions of PRN and the Homa Practice during 1998
resulted in gains due to their carrying value being written down during
fiscal 1997.Of the $926,017 gain on sale of subsidiaries for fiscal 1998,
$907,696 was due to the PRN disposition.
Interest expense decreased by $33,395 (36%) from $93,736 for fiscal
1997 to $60,341 for fiscal 1998 primarily due to the conversion of
promissory notes to equity and the reduction of bank notes payable by
$97,822.
The Company reported other expense of $181,944 for fiscal 1997. Other
income of $44,411 for fiscal 1998 related to rental income due the
subleasing of office space at the ABAS subsidiary.
Primarily due to the dispositions of PRN and the Homa Practice, the
restructuring program that reduced fixed overhead, fiscal 1997 write downs
of unamortized goodwill, and increased profitability and demand in the Halis
consulting business and the HES system, respectively, the Company was able
to reduce its net loss from $20,502,424 or $.57 per share for fiscal 1997 to
$3,148,799 or $0.06 per share for fiscal 1998. The net loss was reduced
from fiscal 1997 to fiscal 1998 by 84%
The Company will continue to focus on the sale of the HES software,
primarily to larger customers with 100 or more users. As a result of the
restructuring during 1998, the Company has improved its financial condition
and is poised to take advantage of the market acceptance of the HES product
that is anticipated to take place during 1999.
COMPARISON OF 1997 VERSES 1996
------------------------------
Revenues, which consist of system sales and services, increased
426% from $1,925,412 for the year ended December 31, 1996 ("fiscal 1996") to
$10,134,586 for the year ended December 31, 1997 ("fiscal 1997"), primarily
due to revenues derived from the six acquired companies (Compass, SMG,
ABAS/TPA, TGM, PRN and PhySource) from their respective acquisition dates
through the period end of December 31, 1997 or the disposition date of
December 1, 1997 for SMG. On a proforma basis including only Compass, ABAS,
PRN, and PhySource as if these acquisitions had occurred on January 1, 1997,
the Company's revenues would have been $9,475,416 compared to $1,925,412 for
the twelve months ended December 31, 1996 or an increase of 392%.
- 24 -<PAGE>
Selling, general and administrative expenses increased 722% from
$1,441,572 in fiscal 1996 to $11,855,637 in fiscal 1997. This increase
reflects the expenses of the acquisitions and increased overhead costs. The
Company has implemented a restructuring program to reduce its fixed costs
and move the Company towards profitability. As a part of this program, the
Company consolidated its three Atlanta offices into a single location March
1, 1998. See -"Item 2. Property."
Other expenses in fiscal 1997 include interest expense of $93,736
related primarily to the Company's convertible promissory notes.
Due to the continued significant operating losses at several
subsidiaries, the Company reviewed the recoverability of goodwill. This
analysis was based upon a review of estimated cash flows from these
businesses. The Company determined that: (i) the unamortized goodwill from
the PhySource acquisition $2,925,044 was not recoverable and should be
written off, (ii) the goodwill from the PRN acquisition should be reduced by
$3,924,741 to $1,396,311, and (iii) the goodwill from Compass acquisition
should be reduced by $942,560 to $383,302.
Primarily as a result of selling, general and administrative and other
expenses during the year (both in absolute terms and as a percentage of
revenue), the write down of goodwill, and a $5.4 million loss on the sale of
assets the Company incurred a net loss of $20,502,424 or $.57 per share for
fiscal 1997. This compares to a net loss of $1,989,696 or $0.12 for fiscal
1996.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
During fiscal 1998, HALIS experienced a severe cash drain as a
result of lower than anticipated revenues from certain acquired companies
and increased overhead costs. This caused management to re-evaluate the
focus of HALIS' business. The Company is focusing its efforts on the sale of
the Healthcare Enterprise System software, which the Company believes will
continue to gain market acceptance. In addition to focusing on near term
profitability, the Company is seeking strategic relationships, including
possible business combinations, which will enhance the Company's capital
structure, as well as its sales and marketing infrastructure.
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 large part, from outside
sources. 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.
The Company raised approximately $1,530,200 during 1998 primarily in
the form of 6% Convertible Debentures. The holders of these debentures
converted their investment into 10,515,311 shares of the Company's common
stock.
No provision has been made in the financial statements for any
settlements or judgments relating to either of the matters discussed in
"Item 3. Legal Proceedings." 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, the majority
of the agreements entered into through December 31, 1997 for the HES 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.
COMPARISON OF 1998 VERSES 1997
------------------------------
During fiscal 1998, the Company recorded a net loss of $3,244,994. The
net loss stemmed primarily from the residual increased overhead associated
with the Company's acquisition strategy during 1997. During the fourth quarter
of 1998, the Company had Earnings Before Interest Depreciation and Amortization
of approximately $240,000. This was primarily due to implementation of the HES
and cost cutting steps put into place during the third quarter. The Company's
operating activities used $2,758,714 in cash during fiscal 1998, a decrease of
$2,050,671 (43%) from $4,809,385 during fiscal 1997. The decrease is primarily
due to the dispositions of PRN and the Homa Practice and the restructuring
program that reduced fixed overhead.
- 25 -<PAGE>
Investing activities provided $329,965 during fiscal 1998, a decrease
of $1,198,251 (78%) from $1,528,216 for fiscal 1997. The decrease is
primarily due to less cash being received for the dispositions of
subsidiaries during fiscal 1998 and the reduction of purchases of property
and equipment.
Financing activities provided $1,320,423 during fiscal 1998, a decrease
of $2,401,566 (65%) from $3,721,989 for fiscal 1997. The decrease in
primarily due to the reduction of capital raising activities during 1998.
The Company began 1998 with $1,160,809 in the bank, and combined with a net
$1,570,199 of capital raised and $400,000 received from the sale of the Homa
Practice was sufficient to fund the net loss of $3,244,994.
The Company estimates that it incurred positive cash flow from
operations of approximately $10,000 during the first quarter of 1999.
During 1998, the Company had approximately $230,000 per month in cash used
by operations. The significant improvement is primarily due to; (1) the
positive effects of the 1998 restructuring that were completed during the
fourth quarter of fiscal 1998 and (2) the business collaboration agreement
with HealthWatch that allowed the Company to cost share fixed expenses
including salaries and rent.
COMPARISON OF 1997 VERSES 1996
------------------------------
During fiscal 1997, the Company recorded a net loss of $20,502,424.
The net loss stemmed primarily from the sales of businesses, the write down
of goodwill, amortization of goodwill from the acquisitions, and increased
overhead costs to support the acquisitions and develop the HES product. The
Company's operating activities used $4,181,346 in cash, primarily due to
increased overhead expenses and disappointing revenues. During fiscal 1997,
investing activities used $584,412 in cash primarily for the purchase of
equipment.
Financing activities during fiscal 1997 provided $5,557,253, primarily
the result of $3,990,348 in proceeds from private placements and $1,845,465
in proceeds from the sale of businesses in the fourth quarter.
ITEM 7. FINANCIAL STATEMENTS.
The following financial statements and report of the Company's
independent auditors are attached at the end of this report:
Report of Independent Public Accountants - Tauber & Balser, P.C.
Consolidated Balance Sheet - December 31, 1998
Consolidated Statements of Operations For The Years Ended December 31,
1998 and December 31, 1997
Consolidated Statements of Cash Flows For The Years Ended December 31,
1998 and December 31, 1997
Consolidated Statements of Stockholders' Equity (Deficit) For The Years
Ended December 31, 1998 and December 31, 1997
Notes to Consolidated Financial Statements
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
On February 1, 1999, the Company dismissed its independent auditors,
Arthur Anderson, LLP and on the same date authorized the engagement of
Tauber & Balser, P.C. as its independent auditors for the fiscal year
ended December 31, 1998. Tauber & Balser, P.C. was formally engaged by the
Company on February 1, 1999 to audit the Company's financial statements for
the fiscal year ended December 31, 1997 and reissue the Company's 1997 report
previously issued by Arthur Andersen. Each of these actions was approved by
the Board of Directors of the Company.
- 26 -<PAGE>
Arthur Andersen LLP audited the financial statements for the Company
for the fiscal year ended December 31, 1997. The report of Arthur Andersen
LLP on the financial statements of the Company for the fiscal year ended
December 31, 1997 contained an additional paragraph which emphasized that
there was substantial doubt about the ability of the Company to continue as
a going concern. Except as set forth in the preceding sentence, the report
of Arthur Andersen LLP did not contain any adverse opinion or a disclaimer
of opinion, nor was it qualified or modified as to uncertainty, audit scope,
or accounting principles.
Except as described herein, in connection with the audit of the fiscal
year ended December 31, 1997 and for the unaudited interim period through
February 1, 1999, there were no disagreements with Arthur Andersen LLP on
any matter of accounting principle or practice, financial statement
disclosure, or audit procedure or scope which disagreement, if not resolved
to the satisfaction of Arthur Andersen LLP would have caused it to make
reference to the subject matter of the disagreement in its report.
Further, during the fiscal year ended December 31, 1997 and the
unaudited interim period through February 1, 1999, neither the Company or
any of its representatives sought the advice of Tauber & Balser, P.C.
regarding the application of accounting principles to a specific completed
or contemplated transaction or the type of audit opinion that might be
rendered on the Company's financial statements, which advice was an
important factor considered by the Company in reaching a decision as to the
accounting, auditing or financial reporting issue.
In connection with the audit of the fiscal year ended December 31, 1997
Arthur Andersen LLP did not advise the Company that (i) the internal controls
necessary for the Company to develop reliable financial statements did not
exist; (ii) that information had come to its attention that led it to no
longer be able to rely on management's representations, or that made it
unwilling to be associated with the financial statements prepared by
management; (iii) that there existed a need to expand significantly the
scope of its audit, or that information had come to the attention of Arthur
Andersen LLP during the fiscal periods, that if further investigated may (a)
materially impact the fairness or reliability of either: a previously issued
audit report or the underlying financial statements, or the financial
statements issued or to be issued covering the fiscal period subsequent to
the date of the most recent financial statements covered by an audit report
(including information that may prevent it from rendering an unqualified
audit report on those financial statements), or (b) cause Arthur Andersen
LLP to be unwilling to rely on management's representations or be associated
with the Company's financial statements, and due to the dismissal of Arthur
Andersen LLP did not so expand the scope of its audit or conduct such
further investigation; or (iv) that information had come to the attention of
Arthur Andersen LLP that it concluded materially impacts the fairness or
reliability of either (a) a previously issued audit report or the underlying
financial statements, or (b) the financial statements issued or to be issued
covering the fiscal period subsequent to the date of the most recent
financial statements covered by an audit report (including information that,
unless resolved to the satisfaction of Arthur Andersen LLP, would prevent it
from rendering an unqualified audit report on those financial statements),
and due to the dismissal of Arthur Andersen LLP, the issue has not been
resolved to the satisfaction of Arthur Andersen LLP prior to its dismissal.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The directors and executive officers of the Company are as follows:
Name Age Position with the Company
---- --- -------------------------
Paul W. Harrison 44 Chairman of the Board, President
and Chief Executive Officer
Brian L. Schleicher 40 Vice President, Secretary and
Chief Administrative Officer
Larry Fisher 55 Director
Dr. Joel R. Greenspan 51 Director
- 27 -<PAGE>
PAUL W. HARRISON, age 44, has served as Chairman of the Board and Chief
Executive Officer of the Company since November 1996. Mr. Harrison was
elected President of the Company in June 1997. Mr. Harrison has extensive
experience in the United States and internationally managing information
technology companies and consulting projects. He is also the Chairman of
HealthWatch, Inc. (Nasdaq: HEAL) ("HealthWatch") since November 1997 and the
President and CEO since June 1998. Mr. Harrison was also the founder and a
significant owner in Paul Harrison Enterprises, Inc., an information
technology management company that was acquired by HealthWatch in October
1998. Previously, Mr. Harrison was the President and Managing Member of
AUBIS, LLC from February 1995 to December 1997, which owned two information
systems companies that were merged into the Company in November 1996. Mr.
Harrison also founded Halis Software, Inc. the initial creator of the early
version of the HES, which was acquired by the Company in November 1996. Mr.
Harrison was an executive with and an advisor to HBO & Company, a leading
healthcare information systems company from June 1993 until December 1994.
Prior to joining HBOC, Mr. Harrison was the President and CEO of BIVEN, Inc.
from April 1991 to June 1993, a company that he founded and sold to HBOC in
June 1993.
BRIAN L. SCHLEICHER, age 40, was elected Vice President, Secretary and
Chief Administrative Officer of the Company on February 1, 1999. Mr.
Schleicher is also a founding partner in the Atlanta law firm Robinson,
Rappaport, Jampol, Aussenberg & Schleicher, LLP, and has acted as General
Counsel to the Company since September 1998. From February 1995 to
September 1998, Mr. Schleicher was a partner with the Atlanta law firm of
Kilpatrick Stockton LLP ("KS"), and was an associate with KS form March 1990
to January 1995. Mr. Schleicher's specialties include corporate law,
mergers and acquisitions, and securities law, with an emphasis on high
technology and software development companies. Mr. Schleicher has also
acted as counsel to Paul W. Harrison and his related companies and
affiliates over the years, and is the Chief Financial Officer and Chief
Administrative Officer, and General Counsel for HealthWatch, Inc.
LARRY FISHER, age 55, has served as Executive Vice President of the
Company since June 1997. Mr. Fisher was the founder of Fisher Business
Systems, Inc. ("Fisher"), the predecessor of HALIS, Inc., and served as a
director since its organization in 1979. Mr. Fisher subsequently served as
President, Chief Executive Officer and Treasurer of Fisher from 1979 to
1992, and as Chairman of the Board, from December 1992 to November 1996.
From November 1996 to June 1997, Mr. Fisher served as the President of
HALIS, Inc. Mr. Fisher also serves as a director of HealthWatch, Inc.
Prior to 1979, Mr. Fisher was employed by IBM for 11 years in several
executive sales and marketing positions. In his last such position, Mr.
Fisher was responsible for creating, implementing and monitoring national
marketing programs for the retail and hospitality industries.
DR. JOEL GREENSPAN, age 51, was elected as a director of the Company
on February 1, 1999 to fill a vacancy on the Board. Dr. Greenspan is
recently retired from the Centers for Disease Control after 23 years with
the organization, where he held the positions of Assistant Director for
Planning, Communications, and External Relations and Chief, Surveillance and
Information Systems, both for the Division of Sexually Transmitted Diseases
Prevention.
The executive officers of the Company are appointed by the Board of
Directors and hold office at the pleasure of the Board. Executive officers
devote their full time to the affairs of the Company. There are no family
relationships between any director or executive officer and any other
director or executive officer of the Company.
RECENT CHANGES IN MANAGEMENT
Effective March 1, 1998, Harold J. Williams, III and James E. Clements
resigned as officers of the Company. Mr. Williams served as Chief Financial
Officer since June 1997 and Mr. Clements served as Controller since
September 1997.
Effective March 1, 1998, Joseph H. Neely and Ken Lopez resigned as
officers of the Company. Mr. Neely served as the Company's Chief Operating
Officer since June 1997 and Mr. Lopez served as the Company's Vice President
of Sales.
In September 1998, the Company retained the services of Robinson,
Rappaport, Jampol, Aussenberg & Schleicher, LLP, to act as its attorneys,
and in particular the services of Brian L. Schleicher who has been elected
- 28 -<PAGE>
the Company's Vice President, Chief Administrative Officer and Secretary.
Mr. Schleicher is also the chief financial officer and chief administrative
officer of HealthWatch. Additionally, in September 1998, the Company
retained the services of Harshman & Phillips, P.C., to provide supervision
of the Company's accounting and finance functions, and in particular the
services of Bruce A. Phillips who has been acting as the Company's principal
financial and accounting officer. Because of the affiliation between the
two companies, Mr. Harrison, Mr. Schleicher and Mr. Phillips each provide
services to both HALIS and HealthWatch.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors, executive officers and persons who own more than 10% of
the outstanding Common Stock of the Company, to file with the Securities and
Exchange Commission reports of changes in ownership of the Common Stock of
the Company held by such persons. Officers, directors and greater than 10%
shareholders are also required to furnish the Company with copies of all
forms they file under this regulation. To the Company's knowledge, based
solely on a review of the copies of such reports furnished to the Company
and representations that no other reports were required, during the fiscal
year ended December 31, 1998, all Section 16(a) filing requirements
applicable to its officers, directors and greater than 10% shareholders were
complied with, except as follows: Paul W. Harrison failed to file on a
timely basis two reports relating to a total of two transactions associated
with the exercise of stock options. The reports were late 30 and 60 days
respectively. PHE failed to file on a timely basis one report relating to a
total of one transaction; Charles Broes failed to file on a timely basis one
report relating to a total of one transaction relating to AES' disposition
of the Company's stock in the PRN transaction. "See Item 1 - Recent
Dispositions."
Although it is not the Company's obligation to make filings pursuant to
Section 16 of the Securities Exchange Act of 1934, the Company has a policy
requiring all Section 16 reporting persons to report monthly to the Company
as to whether any transactions in the Company's Common Stock occurred during
the previous month.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth certain summary information concerning
compensation paid, accrued or deferred by the Company for the fiscal years
ended December 31, 1997, 1996 and 1995 to or on behalf of the Company's
Chief Executive Officer and the other executive officer of the Company whose
total annual salary and bonus exceeded $100,000 during the fiscal year ended
December 31, 1997 (hereinafter referred to as the "Named Executive
Officers").
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
-------------------- -----------------------
NAME AND FISCAL OTHER ANNUAL STOCK
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS
- - -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Paul W. Harrison 1998 $280,000 <F1> $ -0- <F5> 1,650,000
Chairman of the Board and 1997 $200,000 $ -0- <F5> 2,700,000 <F6>
Chief Executive Officer 1996 $ 33,000 <F2> $8,000 4,750,000 <F7>
Brian L. Schleicher 1998 -- -- -- --
Vice President and Chief 1997 -- -- -- --
Administrative Officer and 1996 -- -- -- --
Secretary (F4>
Larry Fisher 1998 $175,000 <F3> $ -0- <F5> 650,000
Former Executive Vice 1997 $175,000 $ -0- <F5> 800,000 <F8>
President 1996 $182,882 $5,000 <F5> 2,650,000 <F9>
</TABLE>
- 29 -<PAGE>
[FN]
<F1> Mr. Harrison's employment contract provides for a base salary of
$280,000 for fiscal year 1998, however, only $25,000 has been paid
to Mr. Harrison as of year-end, with the balance of $255,000 being
deferred. On February 1, 1999, Mr. Harrison agreed to accept
1,500,000 shares of common stock of the Company in lieu of his 1998
base salary that was deferred. The shares of stock had a market
value, based upon the close of trading on January 29, 1999, of
$210,000 (calculated at $0.14 per share). Mr. Harrison agreed to
waive the remaining $45,000 of deferred compensation owed to him
for his fiscal 1998 base salary.
<F2> Mr. Harrison joined the Company on November 19, 1996 upon
consummation of the acquisitions of AHS, ASI and HSI. Accordingly
the salary noted represents cash compensation for 1996 for the period
from November 19, 1996 to December 31, 1996.
<F3> Mr. Fisher's employment was terminated by mutual agreement
effective as of December 31, 1998. As part of the Separation
Agreement, the Company acknowledged that Mr. Fisher received only
$65,338 of his fiscal 1998 base salary as of year-end, and
deferred the balance of $109,662.
<F4> Mr. Schleicher was officially elected an officer of the Company
on February 1, 1999.
<F5> The Company pays for an automobile allowance for Messrs. Harrison
and Fisher, as well as certain other perquisites. The aggregate
amounts of these benefits do not exceed the lesser of $50,000 or
10% of the total annual salary and bonus during the past fiscal
year for the Named Executive Officers.
<F6> These options were revised on January 8, 1998 to 1,809,000
options with a corresponding reduction in exercise price to $0.70
per share from $2.12 per share.
<F7> Of this amount, options to purchase 3,000,000 shares of Common
Stock were subsequently terminated without being exercised. This
amount also includes options to purchase 1,400,000 shares of
Common Stock granted to Mr. Harrison prior to his employment with
the Company. See "- Stock Options."
<F8> These options were revised on January 8, 1998 to 536,000 options
with a corresponding reduction in exercise price to $0.70 per
share from $2.12 per share.
<F9> Of this amount, options to purchase 2,600,000 options were
subsequently terminated without being exercised.
</FN>
DIRECTOR'S FEES
The Company does not presently pay any fees to directors but does
reimburse directors for reasonable out-of-pocket expenses incurred in
connection with attendance of meetings of the Board of Directors.
EMPLOYMENT AGREEMENTS
Effective November 18, 1996, the Company entered into an
Employment Agreement with Paul W. Harrison, pursuant to which Mr.
Harrison serves as Chairman of the Board and Chief Executive Officer
of the Company. The Employment Agreement is for a term of three
years, expiring on December 31, 1999, and provides for an annual base
salary of $200,000 (to be increased upon the attainment of certain
annual revenue targets) plus incentive bonus payments. As a result of
achieving the targets in his employment agreement, Mr. Harrison's base
salary was increased to $280,000 commencing January 1, 1998. In
addition, the Employment Agreement provides for Mr. Harrison to
receive options to purchase shares of Common Stock of the Company in
the discretion of the Board of Directors. The Employment Agreement
provides for certain severance payments to be paid to Mr. Harrison in
the event of a change in control of the Company or a significant
change in Mr. Harrison's operational duties. In the event of a change
in control, Mr. Harrison will be entitled to terminate his employment
with the Company and to receive three times the sum of his annual base
salary and the cost for one year of all additional benefits provided
to Mr. Harrison under the Employment Agreement. In addition, in the
event Mr. Harrison terminates his employment under certain stated
conditions or is terminated by the Company without cause, he will
receive the greater of one year's annual base salary or an amount
equal to the base salary which would otherwise be payable to Mr.
Harrison for the remaining term of his Employment Agreement. Any such
severance payment may, at the option of the Company, be paid to Mr.
Harrison in equal monthly installments or in a lump sum at a
discounted present value. The Employment Agreement contains non-
compete and non-solicitation provisions, effective through the actual
date of termination of the Employment Agreement and for a period of
two years thereafter.
During fiscal year 1998, due to the cash needs of the Company,
the Company and Mr. Harrison agreed to the deferral of the majority of
Mr. Harrison's 1998 base salary. As a result, Mr. Harrison received
only $25,000 of his base salary during fiscal year 1998. On January
31, 1999, Mr. Harrison and the Company agreed to the satisfaction of
- 30-<PAGE>
the $255,000 of base salary owed to him by the issuance to him of
1,500,000 shares of the Company's common stock (the fair market value
of which was $210,000) and the waiver by him of $45,000 of base
salary.
Effective November 18, 1996, the Company also entered into an
Employment Agreement with Larry Fisher, pursuant to which Mr. Fisher
served as President and Chief Operating Officer of the Company. The
Employment Agreement was for a term of three years, expiring on
December 31, 1999, and provided for an annual base 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 Mr. Fisher to receive options to purchase
shares of Common Stock of the Company in the discretion of the Board
of Directors. The Employment Agreement provided for certain severance
payments to be paid to Mr. Fisher in the event of a change in control
of the Company or a significant change in Mr. Fisher's operational
duties. In the event of a change in control, Mr. Fisher will be
entitled to terminate his employment with the Company and to receive
two times his annual base salary plus twice the cost for one year of
all additional benefits provided to Mr. Fisher under the Employment
Agreement. In addition, in the event Mr. Fisher terminates his
employment under certain stated conditions or is terminated by the
Company without cause, he will receive the greater of one year's
annual base salary or an amount equal to the base salary which would
otherwise be payable to Mr. Fisher for the remaining term of his
Employment Agreement. Any such severance payments may, at the option
of the Company, be paid to Mr. Fisher in equal monthly installments or
in a lump sum at a discounted present value. The Employment Agreement
contains non-compete and non-solicitation provisions, effective
through the actual date of termination of the Employment Agreement and
for a period of two years thereafter.
During fiscal year 1998, due to the cash needs of the Company,
the Company and Mr. Fisher agreed to the deferral of $109,662 of Mr.
Fisher's 1998 base salary. On January 31, 1999, the Company and Mr.
Fisher agreed to the mutual termination of his employment agreement
effective as of December 31, 1998. Pursuant to a Separation and
Settlement Agreement entered with Mr. Fisher, the Company agreed to
pay Mr. Fisher $25,000, issue him 300,000 fully vested non-statutory
stock options, exercisable at a price of $0.13125 per share, to pay
the amount of the FY 1998 deferred base salary at $5,000 per month
commencing February 1999, and to continue to pay Mr. Fisher's medical
premiums and other employee benefits through the end of the original
term of the employment agreement.
STOCK OPTIONS
On November 18, 1996, the Company's shareholders adopted the 1996
Stock Option Plan (the "Plan") for employees who are contributing
significantly to the business of the Company or its subsidiaries as
determined by the Company's Board of Directors or the committee
administering the Plan. The Plan currently provides for the grant of
incentive and non-qualified stock options to purchase up to 8,000,000
shares of Common Stock at the discretion of the Board of Directors of
The Company or a committee designated by the Board of Directors to
administer the Plan. The option exercise price of incentive stock
options must be at least 100% (110% in the case of a holder of 10% or
more of the Common Stock) of the fair market value of the stock on the
date the option is granted and the options are exercisable by the
holder thereof in full at any time prior to their expiration in
accordance with the terms of the Plan. Incentive stock options
granted pursuant to the Plan will expire on or before (1) the date
which is the tenth anniversary of the date the option is granted, or
(2) the date which is the fifth anniversary of the date the option is
granted in the event that the option is granted to a key employee who
owns more than 10% of the total combined voting power of all classes
of stock of the Company or any subsidiary of the Company. Options
granted under the Plan typically vest over a period of four years.
In consideration of services rendered by Paul Harrison to the
Company in anticipation of the consummation of the mergers with AHS,
ASI and HSI, the Company on June 7, 1996 granted to Mr. Harrison an
option to purchase 1,400,000 shares of Common Stock, which options
became exercisable upon consummation of the HSI merger. The option
terminates on June 7, 2006 and is exercisable at a price of $1.125 per
share (which represents the fair market value of the Common Stock on
the date of grant). During 1998, the exercise price was reduced to
$0.13 per share (the market price at the date of reduction).
On December 6, 1996, the Company granted options to purchase up
to 3,350,000 shares of Common Stock to Mr. Harrison, and options to
purchase up to 1,850,000 shares of Common Stock to Mr. Fisher,
- 31 -<PAGE>
exercisable at a price of $2.00 per share. Of this amount, options to
purchase 3,000,000 shares of Common Stock granted to Mr. Harrison, and
options to purchase 1,800,000 shares of Common Stock granted to Mr.
Fisher, were subsequently terminated during 1997 without being
exercised. The remaining stock options granted to Messrs. Harrison
and Fisher are exercisable immediately. In February 1998 options were
granted to Mr. Harrison (1,000,000 at $0.25 per share) and Mr. Fisher
(600,000 at $0.25 per share) in consideration of deferral of salary,
and additional 650,000 and 350,000 as compensation, respectively. In
August 1998, all of these options were repriced to $0.13 per share.
As of March 31, 1999, options to purchase 10,468,280 shares of
Common Stock of the Company were outstanding.
The following table provides certain information concerning
individual grants of stock options made during the fiscal year ended
December 31, 1998 to the Named Executive Officers:
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
------------------
Percent of Total
Name Number of Options Granted to Exercise or Base Price Expiration
Options Granted <F1> Employees in Fiscal Year ($Per Share) Date
- - ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Paul W. Harrison 1,650,000 32.1% $0.25 02/25/08
1,650,000 <F2> 32.1% $0.13 02/25/08
1,400,000 <F2> 27.2% $0.13 06/07/06
245,000 <F2><F3> 4.7% $0.13 12/06/06
1,809,000 35.2% $0.13 06/05/07
Larry Fisher 950,000 18.5% $0.25 02/25/08
650,000 <F2> 12.6% $0.13 02/25/08
58,000 <F2> 1.1% $0.13 12/12/02
42,000 <F2> 0.8% $0.13 04/01/03
650,000 12.6% $0.13 05/04/05
35,000 0.7% $0.13 12/06/06
536,000 <F2><F7> 10.4% $0.13 06/05/07
________________
<FN>
<F1> All options noted are immediately exercisable.
<F2> Represents repricing of options issued in previous years per
approval of the Board on August 24, 1998.
<F3> A total of 350,000 options were originally issued at an exercise
price of $2.00 each. Mr. Harrison accepted a reduction of these
options on January 8, 1998 to 245,000 and an exercise price of
$0.70 per share.
<F4> A total of 2,700,000 options were originally issued at an
exercise price of $2.12 each. Mr. Harrison accepted a reduction
of these options on January 8, 1998 to 1,809,000 and an exercise
price of $0.70 per share.
<F5> A total of 950,000 options were originally issued at an exercise
price of $2.12 each. Mr. Fisher voluntarily accepted a reduction
of these options during fiscal year 1998 by 300,000 options.
<F6> A total of 50,000 options were originally issued at an exercise
price of $2.00 each. Mr. Fisher accepted a reduction of these
options on January 8, 1998 to 35,000 shares and an exercise price
of $0.70 per share.
<F7> A total of 800,000 options were originally issued at an exercise
price of $2.12 each. Mr. Fisher accepted a reduction of these
options on January 8, 1998 to 536,000 shares and an exercise
price of $0.70 per share.
</FN>
</TABLE>
The following table provides certain information concerning the
value of unexercised options held by the Named Executive Officers as
of December 31, 1998.
- 32 -<PAGE>
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
Value of
Number of Unexercised In-the
Unexercised Money Options at
Shares Acquired Options at Year- Year-End
on Exercise Value End Exercisable / Exercisable /
Name Realized Unexercisable Unexercisable <F2>
- - ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Paul W. Harrison 1,000,000 shs. <F1> $130,000 4,104,000/ 0 $107,524 / $0
Larry Fisher -- -- 1,971,000/ 0 $51,640 / $0
________________________
<FN>
<F1> Mr. Harrison exercised 115,385 shares on December 29, 1998 but the
shares were not issued until January 5, 1999.
<F2> Dollar values calculated by determining the difference between
the fair market value of the Company's Common Stock at December
31, 1998 ($0.1562) and the exercise price of such options.
</FN>
</TABLE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information regarding the
beneficial ownership of the Company Common Stock of the Company, as o
March 31, 19998, by (i) those persons or entities known by management
of the Company to own beneficially more than 5% of the Company Common
Stock, (ii) each of the directors of the Company, and (iii) all
directors and executive officers of the Company as a group. Unless
otherwise indicated in the footnotes to the table, the persons or
entities listed below have sole voting and investment power with
respect to the shares of the Company Common Stock shown as
beneficially owned by them.
SHARES OF
COMMON STOCK
NAME BENEFICIALLY PERCENT
OF BENEFICIAL OWNER OWNED<F1> OF CLASS
- - ------------------- ----------- --------
Paul W. Harrison 16,358,504<F2> 29.6%
Larry Fisher 2,366,500<F3> 4.3%
Dr. Joel Greenspan - 0 - n/a
Brian L. Schleicher 300,000<F4> *
Directors and executive officers
as a group (4 persons) 19,025,004 34.4%
[FN]
* - Less than one percent
<F1> "Beneficial Ownership" includes shares for which an individual
directly or indirectly, has or shares voting or investment power or
- 33 -<PAGE>
both and also includes options that are exercisable within sixty days
of the date of this report. 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. Beneficial
ownership as reported in the above table has been determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934.
The percentages are based upon 55,229,989 shares, representing
48,854,989 shares outstanding as of March 31, 1999, plus 6,375,000
which is the number of shares subject to presently exercisable options
or convertible securities held by the noted parties, as indicated in
the following notes.
<F2> The amount reflected above includes (i) 4,104,000 shares subject
to presently exercisable stock options, (ii) 10,763,655 shares owned
by HealthWatch, 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, and (iii) 1,490,849
shares owned by Mr. Harrison directly. Mr. Harrison's business
address is 9040 Roswell Road, Suite 470, Atlanta, Georgia 30350.
<F3> Includes 1,971,000 shares subject to presently exercisable stock
options. Mr. Fisher's business address is 9040 Roswell Road, Suite
470, Atlanta, Georgia 30350.
<F4> Includes 300,000 shares subject to presently exercisable stock
options that were issued in fiscal year 1999. Mr. Schleicher's
business address is 9040 Roswell Road, Suite 470, Atlanta, Georgia
30350.
</FN>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company has a note receivable due from Philip Spicer,
President of the ABAS Subsidiary and a shareholder of the Company, of
$574,831 as of December 31, 1998. The note accrues interest at 5% per annum
and is due October 31, 2001. The note may be repaid using HALIS common
stock if certain conditions are met, including but not limited to, the
Company's common stock achieving a traded market price of at least $3 per
share for a specified period of time.
At December 31, 1998 the Company is indebted to Paul Harrison on
an unsecured non-interest bearing basis in the amount of $13,241.
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").
Paul W. Harrison, the Chairman, President and Chief Executive Officer
of the Company, is also the Chairman, President and Chief Executive Officer
of HealthWatch. Larry Fisher, is a director of the Company, and until
December 31, 1998 the Executive Vice President of the Company, is also a
director of HealthWatch. Brian L. Schleicher, the current Vice President,
Chief Administrative Officer and Secretary of the Company, is also the Chief
Financial Officer and Chief Administrative Officer for HealthWatch. Each of
Messrs. Harrison, Fisher and Schleicher are also shareholders of both
companies.
- 34 -<PAGE>
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 was converted into
83,333 shares of HealthWatch Common Stock, representing approximately 2.7%
of the total shares of HealthWatch common stock outstanding at December 31,
1998. The Company is not obligated and does not have the present intent to
purchase additional shares of the capital stock of HealthWatch.
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. A
second letter of intent was entered on July 14, 1998 (the "New LOI") whish
superceded the Letter of Intent. Under the New LOI, the Company and
HealthWatch again agreed to merge the two companies.
Pursuant to the New LOI, HealthWatch agreed to loan the Company up to a
total of $250,000 pursuant to a 6% debenture maturing in February 2000 (see
Exhibit 4.4). As of December 31, 1998, HealthWatch had advanced $100,000 to
the Company under the debenture. Subsequently, the Company advanced an
additional $57,740 to HALIS. On January 29, 1999 HealthWatch exercised its
conversion rights in the debenture, and converted the outstanding amounts
due to HealthWatch into 1,824,645 shares of the Company's common stock.
HealthWatch now holds 10,763,655 shares of the Company's common stock
(approximately 22%) and is the Company's single largest shareholder.
Due to the market volatility of the two companies stock, and accounting
issues that would be raised as a result of the merger that may have an
adverse effect on HealthWatch, the companies agreed to delay the
consummation of the merger. For the time being, the companies continue to
operate under a business collaboration agreement between the parties, which
allows HealthWatch to act as a reseller of the HES, and the parties agree to
a cost sharing arrangement.
No amounts were paid or accrued under the business collaboration
agreement during 1998 or 1997. In January and February 1999, HealthWatch
owed the Company $30,000 each month. Effective March 1, 1999 a number of
employees of the Company were transferred to HealthWatch which will result
in a redetermination of the cost allocation between the two companies which
has not yet been completed for the month of March.
On September 30, 1997 the then directors of the Company elected to
convert their 7% convertible Promissory Notes to shares of the Company's
common stock in accordance with the provisions of the notes. Shares were
issued to the directors as follows:
Paul Harrison & affiliate 90,000 shares
Larry Fisher 50,000 shares
Nathan Lipson 90,000 shares
In response to the decline in price of the Company's common stock
during 1997, the Company offered the remaining holders of the 7% convertible
Promissory Notes additional shares of common stock to encourage them to
execute their conversion option. The additional shares had the effect of
increasing the ratio of shares issued to debt retired from 1:1 to 1.25:1.
This same offer was extended to the holders of $1,006,000 of the 7%
- 35 -<PAGE>
Convertible Notes that had exercised their conversion option on September
30, 1997, including the directors of the Company. Consequently, on January
20, 1998 the directors received additional shares as follows:
Paul Harrison & affiliate 22,500 shares
Larry Fisher 12,500 shares
Nathan Lipson 22,500 shares
In addition, as of December 31, 1996, the Company owed $135,000 to
Nathan Lipson, then a director of the Company. Those notes accured interest
at rates ranging from 8.75% to 12.0% per year and were due on demand. On
September 30, 1997 the Company converted the $129,188 of outstanding
principal and accrued interest owed to Mr. Lipson into 129,188 shares of the
Company's Common Stock.
On November 18, 1996, the Company entered into a license to a
proprietary technology asset ("MERAD") from Paul Harrison Enterprises, Inc.
("PHE"), which was controlled by Paul Harrison, the Chairman and Chief
Executive Officer of the Company. Mr. Harrison serves as the President of
PHE and at the time beneficially owned approximately 40% of this company.
PHE was acquired by HealthWatch, Inc. on October 2, 1998. The Company is
obligated to pay a license fee equal to 10% of the gross revenues generated
from MERAD and any derivations thereof by the Company or any of its
affiliates to PHE (after the merger now known as MERAD Software, Inc.). In
addition, the Company is obligated to pay MERAD Corporation, a 79%
subsidiary of PHE (Paul Harrison owns the remaining 21% interest) a
development fee of $15,000 per month pursuant to a license and software
development agreement between MERAD Corporation and HALIS Software, Inc.
The development agreement with MERAD Corporation ended June 30, 1998.
During 1998 and 1997, $60,000 and $180,000, respectively, was paid to MERAD
Corporation for specific enhancements and maintenance required by the
Company to its software products. The Company owes MERAD Corporation
$30,000 at December 31, 1998.
As part of the license, HALIS Software agreed to continue developing
MERAD and to be a beta site to test MERAD's capabilities and functionality.
HSI agreed that any enhancements and modifications to MERAD became the sole
and exclusive proprietary property of PHE, subject to HALIS Software's
rights to use the same under its license. With the exception of certain
licenses to use MERAD running in favor of the Company and its affiliates,
PHE has exclusive ownership rights to MERAD.
As a result of its acquisition of HALIS Software in November 1996, the
Company assumed a software development and license agreement with OneTree
Corporation, which was also controlled by Paul W. Harrison. Mr. Harrison
served as a director and was an 80% shareholder of OneTree Corporation,
which is now defunct. During 1998 and 1997, $0 and $75,223, respectively,
was paid to OneTree Corporation pursuant to its development and license
agreement. This agreement was terminated in April 1997 in a settlement
agreement that required the Company to pay OneTree $59,473. This obligation
was satisfied in September 1997 and is included in the aggregate number
cited above.
- 36 -
<PAGE>
PART IV
ITEM 13. 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 (No. 333-45783) filed February 6, 1998 of the
Company's Registration Statement on Form S-2 (No. 333-
34215) filed August 29, 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, Reg. No. 33-14114-A, filed May 7,
1987, as amended ("Form S-18"))
4.2 Form of 4% Convertible Debenture (incorporated by
reference to Exhibit 4.1 of the Company's Current Report
on Form 8-K dated January 13, 1998)
4.3 Form of Common Stock Purchase Warrant Certificate
(incorporated by reference to Exhibit 4.2 of the Company's
Current Report on Form 8-K dated January 13, 1998)
4.4 Form of 6% Convertible Debenture Subscription Agreement
and Debenture (incorporated by reference to Exhibit 4.2 of
the Company's Form 10QSB filed August 13, 1998)
10.1 Employment Agreement dated November 18, 1996, as amended
on January 3, 1997, by and between the Registrant HALIS
and Paul W. Harrison (incorporated by reference to Exhibit
10.1 of the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1996)
10.2.1 Employment Agreement dated November 18, 1996, as
amended on January 3, 1997, by and between the Registrant
and Larry Fisher (incorporated by reference to Exhibit
10.2 of the Company Annual Report on Form 10-KSB for the
year ended December 31, 1996)
10.2.2 Separation and Settlement Agreement entered as of
January 31, 1999 by and between Registrant and Larry
Fisher (filed herewith)
10.3 Sublease dated January 10, 1997 by and between VeriFone,
Inc. and the Registrant for lease of office space in
Atlanta, Georgia (incorporated by reference to Exhibit
10.3 of the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1996)
10.4 Warrant Agreement, dated November 19, 1996, by and between
the Registrant and SunTrust Bank, Atlanta (incorporated by
reference to the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1996)
10.5 Form of Employee Trade Secret Agreement (incorporated by
reference to Exhibit 10.19 of the Company's Form S-18)
- 37 -<PAGE>
10.6 License Agreement, dated November 18, 1996, by and between
Paul Harrison Enterprises, Inc. and the Registrant
(incorporated by reference to Exhibit 10.6 of the Company's
Annual Report on Form 10-KSB for the year ended December 31,
1996)
10.7 Form of Note Purchase Agreement (incorporated by reference
to Exhibit 10.7 to the Company's Registration Statement on
Form S-2 effective August 29, 1997)
10.8 Amended and Restated Agreement and Plan of Merger and
Reorganization, dated as of December 13, 1995 and amended
and restated as of March 29, 1996 and as further amended
on September 27, 1996, among Fisher Business Systems,
Inc., AUBIS, L.L.C., AUBIS Hospitality Systems, Inc.,
AUBIS Systems Integration, Inc., and certain persons and
affiliates of AUBIS, L.L.C. (incorporated by reference
from the Company's Current Report on Form 8-K dated
November 19, 1996)
10.9 Agreement and Plan of Merger and Reorganization, dated as
of January 10, 1997, among HALIS, Inc. and The Compass
Group, Inc., Compass Acquisition Co. and Debra B. York
(incorporated by reference from the Company's Current
Report on Form 8-K dated January 10, 1997)
10.10 Agreement and Plan of Merger and Reorganization, dated as
of January 24, 1997, among HALIS, Inc., SMG Acquisition
Co., Software Manufacturing Group, Inc., and the
shareholders of Software Manufacturing Group, Inc.
(incorporated by reference from the Company's Current
Report on Form 8-K dated January 24, 1997)
10.11 Agreement and Plan of Merger and Reorganization, dated as
of May 2, 1997, among HALIS, Inc., TG Marketing Systems,
Inc., TG Marketing Systems Acquisition Co., and Joseph H.
Neely (incorporated by reference from the Company's
Current Report on Form 8-K dated May 2, 1997)
10.12 Agreement and Plan of Merger and Reorganization, dated as
of July 7, 1997, among HALIS, Inc., PRN Acquisition Co.,
Physicians Resource Network, Inc., and the sole
shareholder of Physicians Resource Network, Inc.
(incorporated by reference from the Company's Current
Report on Form 8-K dated July 7, 1997)
10.13 Agreement and Plan of Merger and Reorganization, dated as
of July 31, 1997, among HALIS, Inc., PhySource Acquisition
Co., PhySource Ltd., and the shareholders of PhySource
Ltd. (incorporated by reference from the Company's Current
Report on Form 8-K dated July 31, 1997)
10.14 Agreement and Plan of Merger and Reorganization, dated as
of January 31, 1997, among HALIS, Inc., ABAS/TPA
Acquisition Co., American Benefit Administrative Services,
Inc., Third Party Administrators, Inc., and the
shareholders of American Benefit Administrative Services,
Inc. and Third Party Administrators, Inc. (incorporated by
reference from the Company's Current Report on Form 8-K
dated January 31, 1997)
10.15 401(k) Plan of Registrant adopted January 1, 1991
(incorporated by reference to Exhibit 10.16 to the
Company's Annual Report on Form 10-K)
10.16 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 (incorporated by reference to Exhibit 2.2 to the
Company's Current Report on Form 8-K dated November 19,
1996)
10.17.1 1996 Stock Option Plan of the Company (incorporated by
reference to Exhibit 10.20 of the Company's Annual Report
on Form 10-KSB for the year ended January 31, 1996)
10.17.2 Amendment No. 1 to 1996 Stock Option Plan (incorporated by
reference to Exhibit 10.19.1 of the Company's Registration
Statement on Form S-2 (Registration No. 333-45783), filed
February 6, 1998)
10.17.3 Amendment No. 2 to 1996 Stock Option Plan (incorporated by
reference to Exhibit 10.19.2 of the Company's Registration
Statement on Form S-2 (Registration No. 333-45783), filed
February 6, 1998)
10.20.1 Agreement and Plan of Merger dated June 25, 1998 among HALIS,
Inc., American Enterprise Solutions, Inc., PRN Acquisition Co.,
and Physicians Resource Network, Inc. (incorporated by reference
from the Company's Current Report on Form 8-K dated July 15,
1998)
10.20.2 First Amendment to Agreement and Plan of Merger dated as of
October 9, 1998 among HALIS, Inc., American Enterprise Solutions,
Inc., PRN Acquisition Co., and Physicians Resource Network, Inc.
(filed herewith)
- 38 -<PAGE>
10.21 Asset Purchase Agreement dated December 31, 1997 among HALIS
Services, Inc., Orthodontic Practice Management System, Inc.,
Infocure Corporation, and the Company (incorporated by reference
to Exhibit 10.1 to the Company's Current Report on Form 8-K filed
January 15, 1998)
10.22 Asset Purchase Agreement dated December 31 1997 between
Communications Wiring and Accessories, Inc. and HALIS
Services, Inc.(incorporated by reference to Exhibit 10.2 to the
Company's Current Report on Form 8-K filed January 15,1998)
10.23 Agreement for Purchase and Sale of Assets by and between
Physicians Enterprise Systems, LLC and Registrant and Physource,
Ltd., dated as of September 30, 1998, effective as of October 1,
1998 (incorporated by reference to the Company's Form 10QSB filed
November 23, 1998)
21.1 List of Subsidiaries
23.1 Consent of Tauber & Balser, P.C.
27.1 Financial Data Schedule (for SEC use only)
99.1 Letter of Intent to Merge dated as of July 14, 1998 by and
between Registrant and HealthWatch, Inc. (incorporated by
reference to Exhibit 99.1 of the Companies Form 10-QSB
filed August 13, 1998)
(b) Reports on Form 8-K.
-------------------
The following reports on Form 8-K were filed during the fourth
quarter of the fiscal year ended December 31, 1998:
None.
- 39 -<PAGE>
HALIS, INC.
AND SUBSIDIARIES
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
TABLE OF CONTENTS
------------------
Page
----
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . F-1
Consolidated Balance Sheet . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Statements of Operations . . . . . . . . . . . . . . . F-3
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . F-4
Consolidated Statements of Stockholders' Equity (Deficit) . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . F-7
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
HALIS, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheet of HALIS,
Inc. and Subsidiaries as of December 31, 1998, and the related
consolidated statements of operations, stockholders' equity (deficit),
and cash flows for the years ended December 31, 1998 and 1997. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of HALIS,
Inc. and Subsidiaries as of December 31, 1998, and the results of
their operations and their cash flows for the years ended December 31,
1998 and 1997 in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As
discussed in Note B to the financial statements, the Company's
recurring losses from operations and limited capital resources raise
substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in
Note B. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
Tauber & Balser, P.C.
Atlanta, Georgia
April 1, 1999
F-1
<PAGE>
HALIS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS
Cash $ 52,483
Restricted cash, customer claims and premium funds 937,304
Receivables, less allowance for possible losses of $195,654 362,931
Other current assets 70,871
-----------
TOTAL CURRENT ASSETS 1,423,589
-----------
PROPERTY AND EQUIPMENT
Computer equipment 141,936
Office furniture and fixtures 80,033
Leasehold improvements 11,721
-----------
233,690
Less: accumulated depreciation 87,773
-----------
TOTAL PROPERTY AND EQUIPMENT, NET 145,917
-----------
OTHER ASSETS
Deposits 169,387
Goodwill, net of accumulated amortization of $741,339 1,273,074
Capitalized software development costs, net of accumulated
amortization of $64,800 96,195
Note receivable - related party 596,292
Investment 36,458
-----------
TOTAL OTHER ASSETS 2,171,406
-----------
TOTAL ASSETS $ 3,740,912
===========
<PAGE>
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,167,030
Deferred revenue and customer deposits 1,094,350
Accrued payroll and payroll taxes 474,334
Note payable 375,526
Notes payable related parties 113,241
Obligation under capital lease current portion 7,665
Other current liabilities 649,070
-----------
TOTAL CURRENT LIABILITIES 3,881,216
-----------
LONG-TERM DEBT
Obligation under capital lease, net of current portion 36,378
STOCKHOLDERS' DEFICIT
Preferred stock, $.10 par value; 5,000,000 shares authorized;
none issued -
Common stock, $.01 par value; 100,000,000 shares authorized;
46,259,763 issued and outstanding 462,597
Additional paid-in capital 36,066,439
Accumulated other comprehensive income, unrealized loss on
investment (88,542)
Accumulated deficit (36,617,176)
-----------
TOTAL STOCKHOLDERS' DEFICIT (176,682)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 3,740,912
===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-2
<PAGE>
HALIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---------------- -----------------
<S> <C> <C>
REVENUES $ 7,630,370 $ 10,134,586
----------- -----------
COST AND EXPENSES
Cost of goods sold 2,335,237 1,889,858
Selling, general, and administrative 7,343,382 11,855,637
Depreciation and amortization 911,371 2,600,664
Research and development 725,994 844,404
Write down of intangibles 224,312 7,792,345
----------- -----------
TOTAL COST AND EXPENSES 11,540,296 24,982,908
----------- -----------
OPERATING LOSS (3,909,926) (14,848,322)
----------- -----------
OTHER INCOME (EXPENSE)
Gain (loss) on sale of subsidiaries 926,017 (5,395,053)
Gain (loss) on asset disposal (174,603) 8,678
Interest expense (60,341) (93,736)
Interest income 25,643 7,953
Other income (expense) 44,411 (181,944)
----------- -----------
TOTAL OTHER INCOME (EXPENSE) 761,127 (5,654,102)
----------- -----------
NET LOSS $ (3,148,799) $ (20,502,424)
=========== ===========
BASIC AND DILUTED LOSS PER COMMON SHARE $ (.06) $ (0.57)
=========== ==========
BASIC AND DILUTED WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 50,804,461 36,094,189
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-3<PAGE>
HALIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
--------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,148,799) $ (20,502,424)
----------- ------------
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization: 911,371 2,600,664
Property and equipment
Goodwill
Other
Loss on disposal of property and equipment 174,603 -
(Gain) loss on sale of subsidiaries (926,019) 5,395,053
Write down of intangibles 224,312 7,792,345
Provision for losses on accounts receivable 186,951 316,257
Changes in operating assets and liabilities, net of
assets and liabilities acquired and sold
Increase in customer claims and premium funds (586,629) (350,675)
Increase in accounts receivable (369,981) (510,038)
Increase in receivables-related parties - (13,754)
Decrease in inventory - 11,479
Increase in other current assets (9,469) (117,224)
Increase in deposits (63,908) (85,380)
Increase (decrease) in accounts payable and
accrued expenses (510,091) 708,170
Decrease in accrued expenses - related parties - (36,543)
Increase (decrease) in accrued payroll and
payroll taxes 201,700 (485,887)
Increase in deferred revenues and customer deposits 862,594 192,326
Increase in other current liabilities 294,651 276,246
----------- ------------
Total adjustments 390,085 15,693,039
----------- ------------
Net cash used by operating activities (2,758,714) (4,809,385)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (48,574) (491,631)
Increase in note receivable - related party (21,461) (13,754)
Net purchase of investment - (120,000)
Cash acquired in acquisitions - 299,458
Proceeds from sale of subsidiaries 400,000 1,845,465
Net proceeds from sale of property and equipment - 8,678
----------- ------------
Net cash provided by investing activities 329,965 1,528,216
----------- ------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
<PAGE>
HALIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------- ------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net of
transaction costs 1,685,199 3,848,197
Proceeds from 6% convertible promissory note 100,000 -
Proceeds from 4% convertible promissory notes - 200,000
Net payments on convertible promissory note (215,000) -
Net payments on lines of credit - (66,666)
Net payments on obligations under capital leases (98,954) (69,039)
Net payments on note payable (97,822) (92,102)
Net payments on notes payable related parties (53,000) (98,401)
----------- ------------
Net cash provided by financing activities 1,320,423 3,721,989
----------- ------------
NET INCREASE (DECREASE) IN CASH (1,108,326) 440,820
CASH, BEGINNING OF YEAR 1,160,809 719,989
----------- ------------
CASH, END OF YEAR $ 52,483 $ 1,160,809
=========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-5<PAGE>
HALIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other Total
------------------------- Paid-In Comprehensive Stock Accumulated Stockholders'
Shares Amount Capital Income (Loss) Subscription Receivable Deficit
------------ ---------- ------------ -------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1996 23,972,621 $ 239,726 $10,874,401 $ - $(240,000) $(12,965,953) $ (2,091,826)
Net loss - - - - - (20,502,424) (20,502,424)
Shares issued in business
acquisitions 15,699,004 156,990 19,606,419 - - - 19,763,409
Issuance of common stock 3,040,332 30,403 3,749,945 - 240,000 - 4,020,348
Common stock issued for
conversion of convertible
debt to equity 1,527,718 15,278 1,512,440 - - - 1,527,718
---------- -------- ---------- -------- -------- ----------- ----------
Balances, December 31, 1997 44,239,675 442,397 35,743,205 - - (33,468,377) 2,717,225
Net loss - - - - - (3,148,799) (3,148,799)
Shares received and cancelled
as proceeds of sale of
subsidiary (11,548,325) (115,483) (1,501,282) - - - (1,616,765)
Issuance of common stock 11,952,225 119,521 1,465,678 - - - 1,585,199
Common stock issued for
conversion of convertible
debt to equity 1,616,188 16,162 358,838 - - - 375,000
Change in unrealized loss on
investments - - - (88,542) - - (88,542)
----------- -------- ---------- ------- -------- ----------- ----------
Balances, December 31, 1998 $46,259,763 $ 462,597 $36,066,439 $(88,542) $ - $(36,617,176) $ (176,682)
=========== ======== ========== ======= ======== =========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-6
<PAGE>
HALIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE COMPANY AND BASIS OF PRESENTATION
HALIS, Inc. ("HALIS") and Subsidiaries (collectively, the "Company")
develops and supplies healthcare software systems and provides
practice management and claims processing services to managed
healthcare markets, medical practices, and related point of service
markets. The Company also provides value added computer services,
network solutions, and connectivity solutions and systems integration
principally to Atlanta area businesses. Additionally, the Company
provides services support, including onsite hardware maintenance, as
well as network support programs. It grants credit to its customers
without requiring collateral.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of HALIS,
Inc. and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
REVENUE RECOGNITION
Revenue consists primarily of 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 processing, When the services are provided.
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.
F-7
<PAGE>
HALIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
RESTRICTED CASH
The Company, through its third party claims administration subsidiary,
received prepayments for premiums to be paid on behalf of its
customers. As of December 31, 1998, the Company had $806,159 of such
prepayments, and related deferred revenue and customer deposits of
$806,058. The balance in the restricted accounts at December 31, 1998
was $937,304.
PROPERTY AND EQUIPMENT
Property and equipment is carried at cost. Depreciation is computed
using the straight-line method based on the estimated useful lives of
the assets, generally five to seven years.
GOODWILL
Goodwill represents the excess of cost over the fair value of assets
acquired and is amortized using the straight-line method over a period
of five years. The Company assesses the recoverability of its
goodwill whenever adverse events or changes in circumstances or
business climate indicate that expected future cash flows
(undiscounted and without interest charges) in individual business
units may not be sufficient to support the recorded asset. An
impairment is recognized by reducing the carrying value of the
goodwill based on the expected discounted cash flows of the business
unit.
In December 1998, due to the anticipated expiration of major customer
contracts of the Company's HALIS Consulting subsidiary ("HALIS
Consulting"), the Company reviewed the recoverability of goodwill.
The Company determined that the unamortized goodwill from the HALIS
Consulting acquisition of $224,312 was not recoverable and should be
written off.
In December 1997, due to the continued significant operating losses
at several subsidiaries, the Company reviewed the recoverability of
goodwill. The Company determined that: (i) the unamortized goodwill
from the PhySource Ltd. ("PhySource") acquisition totalling $2,925,044
was not recoverable and should be written off, (ii) the goodwill from the
Physician Resource Network, Inc. ("PRN") acquisition should be reduced
by $3,924,741 to $1,396,311, and (iii) the goodwill from The Compass
Group, Inc. ("Compass") acquisition should be reduced by $942,560 to
$383,302.
SOFTWARE DEVELOPMENT COSTS
In accordance with Statement of Financial Accounting Standards
("SFAS") No. 86, "Accounting for the Costs of Computer Software to be
Sold, Leased, or Otherwise Marketed," research and development costs
incurred prior to the attainment of technological and marketing
feasibility of products are charged to operations. Thereafter, the
Company capitalizes the direct costs and allocated overhead incurred
in the development of products until the point of market release of
such products, wherein costs incurred are again charged to operations.
F-8
<PAGE>
HALIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (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.
INVESTMENT
The investment is in a marketable equity security, which is classified
as available for sale, and is carried at market value. The purchase
cost and fair value of the investment at December 31, 1998 was
$125,000 and $36,458, respectively. The related unrealized holding
loss of $88,542 is reported as a separate component of stockholders'
equity (deficit) at December 31, 1998.
INCOME TAXES
Deferred tax liabilities and assets are recognized for the estimated
tax effects of temporary differences between financial reporting and
taxable income (loss) and 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 utilized.
EARNINGS PER SHARE
The Company had adopted SFAS No. 128, "Earnings Per Share," in 1997
which requires a basic earnings per share and diluted earnings per share
presentation. The two calculations differ as a result of potential
common shares included in diluted earnings per share, but excluded in
basic earnings per share. As the Company experienced net losses for the
income statement periods presented, potential common shares have an
antidilutive effect and are excluded for purposes of calculating diluted
earnings per share. The number of shares which have an antidilutive
effect on diluted earnings per share was 1,652,650 and 1,942,345 in 1998
and 1997, respectively. There is no difference between earnings per
share amounts recorded previously and amounts recorded pursuant to SFAS
No. 128.
COMPREHENSIVE INCOME (LOSS)
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income." This Statement establishes rules for the reporting of
comprehensive income and its components. Comprehensive income
consists of net loss and the net unrealized gain on available for sale
securities and is presented in the Consolidated Statement of Stockholders'
Equity (Deficit). The adoption of SFAS No. 130 has no impact on total
stockholders' equity. As of December 31, 1998, the Company's Accumulated
Other Comprehensive Income reduced stockholders' equity by $88,542.
F-9
<PAGE>
HALIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 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 the reported amounts of certain assets,
liabilities, revenues, expenses and contingent assets and liabilities.
Significant estimates included in these financial statements relate to
the allowance for possible losses, useful lives, legal contingencies,
and recoverability of long-term assets such as capitalized software
development costs and goodwill. Actual amounts could differ from those
estimates. Any adjustments applied to estimated amounts are recognized
in the year in which such adjustments are determined.
NOTE B - 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 which contemplates the
realization of assets and the settlement of liabilities in the normal
course of business. The Company incurred a net loss of $3,148,799 and
$20,502,424 for the years ended December 31, 1998 and 1997, respectively,
and had a working capital deficiency of $2,457,627 and an equity
deficiency of $176,682 at December 31, 1998. The Company has sustained
losses from operations since the merger in November 1996. The Company
has used, rather than provided, cash in its operating activities during
the years ended December 31, 1998 and 1997 and has deferred payment of
certain accounts payable and accrued expenses and notes payable. The
Company had a working capital deficiency as of March 31, 1999.
In view of the matters described in the preceding paragraph, there is
a 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
that might result from the outcome of this uncertainty.
F-10
<PAGE>
HALIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - REALIZATION OF ASSETS (Continued)
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.
As discussed in Note M to these financial statements, the Company
completed two dispositions in 1998 that it believes substantially
strengthened the Company's operations. These dispositions raised
cash, improved cash flow, and increased the Company's focus on sales
of its software technology.
Thus far in 1999, the Company has had limited success entering into
contracts for the sale of the HES product. The Company continues to
focus on the sale of HES software, which the Company believes will
continue to gain market acceptance. In addition to focusing on near
term profitability, the Company is seeking strategic relationships,
including possible business combinations, which will enhance the
Company's capital structure, as well as its sales and marketing
infrastructure.
The Company is presently raising capital in a private placement to
provide up to $1,000,000 of working capital. Additionally, the
Company is attempting to locate a strategic partner that could assist
the Company in deploying its HES system during fiscal 1999.
NOTE C - SOFTWARE DEVELOPMENT COSTS
December 31,
--------------------------------
1998 1997
----------- -----------
Balances, beginning of year $ 128,394 $ 160,995
Amounts capitalized - -
Amortization (32,199) (32,601)
-------- -------
Balances, end of year $ 96,195 $ 128,394
======== =======
Research and development costs incurred $ 725,994 $ 844,404
Less amounts capitalized - -
-------- --------
$ 725,994 $ 844,404
======== ========
F-11
<PAGE>
HALIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE D - NOTE PAYABLE
The Company has a 10.5% note payable to a bank in the amount of
$375,526 as of December 31, 1998. The note is payable in monthly
installments of $12,935, including interest, with a balloon payment at
maturity on March 17, 1999. The note was assumed in connection with
the disposal of a subsidiary of the Company. None of the Company's
assets are pledged under the note, however certain assets not
belonging to the Company do act as collateral for the loan.
At April 14, 1999, although the note has matured and is now delinquent,
the Company is in negotiations with the bank to extend the note under
similar terms and conditions. The Company has in good faith been making
the required monthly payments to the bank in anticipation of an extension.
NOTE E - RELATED PARTY NOTES
The Company has an unsecured note receivable due from a stockholder of
$596,292 as of December 31, 1998. The note accrues interest at 5% per
annum and is due October 31, 2001. The stockholder may repay the note
using HALIS common stock if certain conditions are met, including but not
limited to, the Company's common stock achieving a traded market price
of at least $3 per share for a specified period of time.
The Company has the following unsecured notes payable to stockholders
and directors as of December 31, 1998:
Notes Payable:
Stockholder/Director - unsecured non-interest bearing note
payable; due on demand. $13,241
Stockholder 6% convertible debenture to HealthWatch, Inc, a
related company, issued during 1998 with interest payable at
maturity or upon conversion. The debenture is convertible into
the Company's common stock at 65% of the average closing bid
price for the ten (10) trading days preceding the conversion
date. Subsequent to year end, the entire debenture was converted
into common shares of the Company at a price per share of $.09. $100,000
F-12
<PAGE>
HALIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE F - COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases office space under several operating lease
agreements expiring between 1999 and 2003. Rent expense for the
office space and equipment classified as operating leases totaled
$586,121 and $586,827 for the years ended December 31, 1998 and 1997,
respectively. At December 31, 1998, future minimum lease payments
under non-cancelable operating leases having remaining terms in excess
of one year are as follows:
1999 $ 454,836
2000 503,292
2001 507,002
2002 459,843
2003 350,937
----------
$ 2,275,910
==========
During 1998, the Company acquired equipment totaling $44,650 under a
five year capital lease. Amortization of this capital lease included
in depreciation expense and accumulated amortization amounted to
$2,236 as of December 31, 1998.
Future payments under this lease are as follows:
1999 $ 11,685
2000 10,786
2001 10,786
2002 10,786
2003 8,988
-------
Total minimum lease payments 53,031
Amount representing interest (8,988)
-------
Present value of minimum lease payments $ 44,043
=======
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. For the years ended December 31, 1998
and 1997, the Company contributed approximately $0 and $14,000,
respectively, to the plan on behalf of its employees.
F-13<PAGE>
HALIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE F - COMMITMENTS AND CONTINGENCIES (Continued)
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with Paul W.
Harrison, which expires December 31, 1999. The agreement provides for
an annual base salary of $200,000 (to be increased upon the attainment
of certain annual revenue targets) plus certain incentive bonus
payments and the issuance of certain qualified and non-qualified stock
options to purchase shares of common stock of the Company at the
discretion of the Board of Directors. Effective February 15, 1998,
Mr. Harrison elected to defer his salary until such time as the
Company is generating positive cash flow. As a result, Mr. Harrison
received only $25,000 of his base salary during fiscal year 1998. On
January 31, 1999, Mr. Harrison and the Company agreed to the
satisfaction of the $255,000 of deferred base salary owed to him by
the issuance to him of 1,500,000 shares of the Company's common stock
(the fair market value of which was $210,000) and the waiver by him of
$45,000 of base salary.
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 the issuance of
certain qualified and non-qualified options to purchase shares of
common stock of the Company at the discretion of the Board of
Directors. Effective February 15, 1998, Mr. Fisher elected to defer
his salary until such time as the Company is generating positive cash
flow. During fiscal year 1998, due to the cash needs of the Company,
the Company and Mr. Fisher agreed to the deferral of $109,662 of Mr.
Fisher's 1998 base salary
On January 31, 1999, the Company and Mr. Fisher agreed to the mutual
termination of his employment agreement effective as of December 31,
1998. Pursuant to a Separation and Settlement Agreement entered with
Mr. Fisher, the Company agreed to pay Mr. Fisher $25,000, issue him
300,000 fully vested non-statutory stock options, exercisable at a
price of $0.13125 per share, to pay the amount of the FY 1998 deferred
base salary at $5,000 per month commencing February 1999, and to
continue to pay Mr. Fisher's medical premiums and other employee
benefits through the end of the original term of the employment
agreement.
LITIGATION
In February 1997, a complaint styled Advanced Custom Computer
Solutions, Inc. ("ACCS"), Wayne W. Surman and Charlotte Surman v.
Fisher Business Systems, Inc., HALIS, Inc., Larry Fisher, Paul W.
Harrison, and Nathan I. Lipson was filed in the State Court of Fulton
County, Georgia. The complain alleges, among other things, breach of
contract in connection with the termination by the Company of its
merger agreement with ACCS, which the Company advised ACCS was
terminated in November 1996 due to the impossibility of ACCS's
fulfilling certain conditions to closing therein. In addition, the
complaint alleges that the defendants made false and misleading
statements to the plaintiffs for the purpose of inducing plaintiffs to
lend money to the Company. The Surmans are the principals of ACCS and
F-14<PAGE>
HALIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE F - COMMITMENTS AND CONTINGENCIES (Continued)
claim personal damages against the Company on certain of the claims,
and claim a right to at least 150,000 shares of the Company's common
stock, the exact amount to be determined at trial, based on a claim of
a breach of an alleged oral contract to pay them shares of the Company's
common stock as compensation for soliciting investors (the "Oral Contract
Claim"). The Surman's further claim that the Company fraudulently induced
them to solicit investors for the Company (the "Investor Solicitation
Claim"). The complaint seeks damages in the amount of at least $2.0 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. The Company
answered, denying the allegations of liability in the complaint, and
the Company vigorously defended the lawsuit. On November 19, 1998,
the trial court granted summary judgment in favor of the Company on
all but two counts of the plaintiff's complaint, as amended. The two
counts remaining include the Oral Contract Claim and Investor
Solicitation Claim. The plaintiffs have appealed to the Georgia Court
of Appeals from the order granting partial summary judgment to the
Company on all other claims, and the Company has cross-appealed the
portions of the order denying summary judgment on the two surviving
counts. The case has not yet been docketed in the Court of Appeals.
There can be no assurance, however, that the Company will be
successful in its defense or that the resolution of this matter will
not have a material adverse effect on the financial condition or
results of operation of the Company.
On July 18, 1997, the Company was sued by Penelope Sellers, in an
action seeking actual damages against the Company in the amount of
$480,534.70, unspecified attorneys fees, and punitive damages of not
less than $1,000,000. Ms. Sellers contends that a finder's Fee
Agreement into which she entered with the Company in August 1995, and
under which she was to receive a commission equal to 10% of the amount
of any equity investments in the Company or software licensing fees
paid to the Company, in respect of transactions introduced to the
Company by her, entitles her to an amount in excess of the
approximately $19,350 which she has been paid to date under that
agreement. That amount represents 10% of the investment made by the
principals of AUBIS, LLC ("AUBIS") in a private placement of
convertible notes (in which private placement other investors besides
the AUBIS principals participated) and 10% of the amounts received by
the Company from the sale of Fisher Restaurant Management Systems by
AUBIS.
Ms. Sellers claims that the entirety of the convertible notes offering
described above (in which an aggregate of $1,470,000 was raised by the
Company) would not have been successful but for her introduction of
the AUBIS principals to the Company. As a result, Ms. Sellers has
made a claim for 10% of all amounts raised in the notes offering. Ms.
Sellers has also made a claim, based on the same rationale, to 10% of
all capital funding raised by the Company (up to the $500,000 maximum
compensation), including the proceeds of a private placement which
raised gross proceeds of approximately $2.0 million. Finally, Ms.
Sellers has made a claim for 10% of the value of AUBIS and HALIS
Systems, Inc.
The Company has answered Ms. Seller's complaint, denying liability
under the Finder's Fee Agreement in an amount exceeding that already
paid, and denying liability to Ms. Sellers under any of the factual or
F-15<PAGE>
HALIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE F - COMMITMENTS AND CONTINGENCIES (Continued)
legal bases alleged in her complaint. Litigation, including written
discovery, the exchange of documents, and conduct of a series of
depositions is ongoing. The Company believes that the claims made by
Ms. Sellers are outside the scope of the Finder's Fee Agreement and
continues to vigorously defend this lawsuit. There can be no assurance,
however, that the Company will be successful in its defense or that the
resolution of this matter will not have a material adverse effect on the
financial condition or results of operation of the Company.
On March 22, 1999, the Company and Paul Harrison were sued by Debra
York, the former President of the Company's wholly owned subsidiary,
The Compass Group, Inc. Ms. York's complaint alleges that the Company
breached an Employment Agreement that was entered on January 10, 1997
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 its
products 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.
The date for answering the complaint has not yet passed. The Company
will be paying for the costs of defense for Mr. Harrison. The Company
denies that any amounts are due 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, and will vigorously defend the action. In addition, the
Company plans to raise a number of counter-claims in its answer
against Ms. York when it is filed. There can be no assurance,
however, that the Company will be successful in its defense or that
the resolution of this matter will not have a material adverse effect
on the financial condition or results of operation of the Company
HALIS is also party to litigation that it believes to be immaterial
with respect to amount and is not disclosed herein. No provision has
been made in these financial statements regarding these items due to
the uncertainty of their ultimate resolution.
On March 31, 1999, the Company's ABAS subsidiary entered into a lease
commitment for computer equipment and software. The lease is for a
sixty-month term at monthly payments of $5,215, for a total commitment
of approximately $313,000.
F-16
<PAGE>
HALIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE G - INCOME TAXES
Significant components of the Company's deferred income tax assets as of
December 31, 1998 are as follows:
Deferred tax assets:
Net operating loss carryforwards $ 5,914,963
Other, net 490,349
----------
Net deferred tax asset 6,405,312
Valuation allowance (6,405,312)
----------
Net deferred tax asset reported $ -
==========
The valuation allowance at December 31, 1997 amounted to $10,953,433.
The reconciliation of the effective income tax rate to the federal statutory
rate is as follows:
<TABLE>
<CAPTION>
1998 1997
--------- --------
<S> <C> <C>
Federal income tax rate (34.0)% (34.0)%
Effect of valuation allowance on deferred
tax assets 34.0 34.0
State income tax, net of federal benefit 0.0 0.0
Effective income tax rate 0.0% 0.0%
</TABLE>
At December 31, 1998, the Company had available for carryforward a net
operating loss of approximately $15.5 million. Approximately $12.4
million of the net operating loss relates to losses prior to 1998, and
as a result of an ownership change on November 19, 1996 , and in
accordance with Section 382 of the Internal Revenue Code, the loss
carryforward is limited to approximately $841,000 for each year
thereafter. Losses are limited to a fifteen-year carryforward, with
losses from 1985 beginning to expire in 2000.
F-17
<PAGE>
HALIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE H - STOCK OPTION PLAN
During 1996, the Company adopted the 1996 Stock Option Plan which
provided for the issuance of both qualified and non-qualified stock
options to employees and non-employee directors pursuant to Section
422 of the Internal Revenue Code. The number of shares reserved for
the plan was 3,000,000. On December 5, 1997 the shareholders of the
Company approved an amendment to increase the number of shares
available for grant from 3,000,000 shares to 8,000,000 shares.
Additional non-qualified options may be granted outside of the plan
upon approval of the Board of Directors.
Options issued to participants are granted with an exercise price of
the mean between the high "bid" and low "ask" price (average market
price) as of the close of business on the date of grant, and are
exercisable up to ten years from date of grant. Incentive stock
option 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 & Weighted Weighted Outside Weighted
1988 Plans: Average 1996 Plan: Average of Plans: Average
Number of Exercise Number of Exercise Number of Exercise
Options Price Options Price Options Price
----------- ------- ----------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at December 31,1996 71,940 $0.72 1,760,000 $1.59 6,992,000 $1.04
Granted - - 1,217,742 $1.87 5,680,000 $2.09
Expired - - (10,000) $2.00 - -
Terminated - - - - (4,800,000) $1.13
------- ---------- ----------
Outstanding at December 31, 1997 71,940 $0.72 2,967,742 $1.67 7,872,000 $1.75
Granted - - 990,350 $0.13 3,995,290 $0.13
Expired - - - - -
Terminated - - (2,206,842) $1.23 (2,222,200) $0.38
Exercised - - - - (1,000,000) $0.13
------- ---------- ----------
Outstanding at December 31, 1998 71,940 $0.34 1,751,250 $0.25 8,645,090 $0.20
======= ========== ==========
</TABLE>
On February 25, 1998, the Company's Board of Directors adopted a
resolution to amend the terms of certain outstanding stock option
agreements to reduce the exercise price thereof and the number of
shares of common stock subject thereto. In connection with this
resolution, the aggregate number of
F-18<PAGE>
HALIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE H - STOCK OPTION PLAN (Continued)
options outstanding at December 31, 1997 was reduced by 2.1 million
shares to approximately 8.8 million shares (prior to any other
transactions in 1998). The weighted average exercise price declined
from $1.72 per share to $0.54 per share.
Exercise prices for options outstanding as of December 31, 1998 under
the 1986 and 1988 Plans range from $0.125 and $11.875 per share. The
weighted average remaining life of these options was approximately
four years.
Exercise prices for options outstanding as of December 31, 1998
granted under the 1996 Plan ranged from $0.13 to $2.00 per share. The
weighted average remaining life of these options was approximately
nine years.
Exercise prices from options outstanding as of December 31, 1998
granted outside of the Plans ranged from $0.13 to $2.12 per share.
The weighted average remaining life of these options was approximately
nine years.
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," (APB 25) and
related interpretations in accounting for its employee stock options
rather than Statement of Financial Accounting Standards Board
Statement No. 123, "Accounting for Stock-Based Compensation," (SFAS
123). Under APB 25, since the exercise price of the underlying stock
equals fair market value on the date of grant, no compensation expense
was recognized.
Pro forma information regarding net income (loss) and earnings per
share is required by SFAS 123, and has been determined as if the
Company had accounted for its employee stock options under the fair
value method of that statement. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions for 1998 and
1997:
1998 1997
------------ -----------
Risk-free interest rate 4.31-4.72% 5.88-6.53%
Dividend yield 0.0% 0.0%
Volatility factor 0.2 0.3
Weighted average expected life 4 years 5 years
Forfeiture rate 5.0% 5.0%
F-19
<PAGE>
HALIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE H - STOCK OPTION PLAN (Continued)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma net loss and loss per share if compensation
expense had been recognized for the options issued would have been as
follows:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Net loss - as reported 3,148,799 $20,502,424
Net loss - pro forma 3,935,589 26,688,334
Reported loss per share - basic & diluted (0.06) 0.57
Pro forma loss per share - basic & diluted (0.08) 0.71
Weighted average fair value of options granted
during the year 0.13 0.74
</TABLE>
NOTE I - STOCK WARRANTS
The Company has issued stock warrants in conjunction with the issuance
of common stock. During 1998 and 1997 the Company issued warrants of 0
and 619,404, respectively. There were no warrants exercised in 1998 and
1997. During 1998 and 1997, the Company terminated warrants of 25,000
and 0, respectively. As of December 31, 1998, there were 1,276,760
warrants outstanding at exercise prices varying from $1.35 to $1.75.
These warrants expire at various dates from November 19, 2001 to
December 31, 2002
NOTE J - RELATED PARTY TRANSACTIONS
The Company has issued stock warrants in conjunction with the issuance
of common stock. During 1998 and 1997 the Company issued warrants of 0
and 619,404, respectively. There were no warrants exercised in 1998 and
1997. During 1998 and 1997, the Company terminated warrants of 25,000
and 0, respectively. As of December 31, 1998, there were 1,276,760
warrants outstanding at exercise prices varying from $1.35 to $1.75.
These warrants expire at various dates from November 19, 2001 to
December 31, 2002
On November 18, 1996, the Company entered into a license to a
proprietary technology asset ("MERAD") from Paul Harrison Enterprises,
Inc. ("PHE"), which is controlled by the Chairman and Chief Executive
Officer of the Company. Mr. Harrison serves as the President of PHE
and beneficially owns approximately 40% of this company. The Company
is obligated to pay a license fee equal to 10% of the gross revenues
generated from MERAD and any derivations thereof by the Company or any
of its affiliates. In addition, the Company is obligated to pay MERAD
Corporation a development fee of $15,000 per month pursuant to a
license and software development agreement between MERAD Corporation
and HALIS Software, Inc., a company purchased by the Company in
November 1996. Mr. Harrison serves as President and is a 21%
shareholder of MERAD Corporation. During 1998 and 1997, $0 and $180,000,
respectively, was paid to MERAD Corporation for specific enhancements and
maintenance required by the Company.
As part of the license, HALIS Software agreed to continue developing
MERAD and to be a beta site to test MERAD's capabilities and
functionality. HSI agreed that any enhancements and modifications to
MERAD become the sole and exclusive proprietary property of PHE,
subject to HALIS Software's rights to use the same under its license.
With the exception of certain licenses to use MERAD, PHE has exclusive
ownership rights to MERAD.
As a result of its acquisition of HALIS Software in November 1996, the
Company assumed a software development and license agreement with
OneTree Corporation, which is controlled by Paul W. Harrison. Mr.
Harrison serves as a director and is an 80% shareholder of OneTree
Corporation. During 1998 and 1997, $0 and $75,223, respectively, was
paid to OneTree Corporation pursuant to its development and license
agreement. This agreement was terminated in April 1997 in a settlement
agreement that required the Company to pay OneTree $59,473. This
obligation was satisfied in September 1997 and is included in the
aggregate number cited above.
F-20<PAGE>
HALIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I - RELATED PARTY TRANSACTIONS (Continued)
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 upon 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. Paul W. Harrison and Larry Fisher, who are directors and
the Chairman and Chief Executive Officer and the Executive Vice
President of the Company, respectively, serve as directors of
HealthWatch and as of February 5, 1998 beneficially own approximately
44% of its common stock.
From August 20, 1997 through September 22, 1997, the Company purchased
an aggregate of 4,166 shares of HealthWatch Preferred Stock for
$125,000. The HealthWatch Preferred Stock purchased by the Company
was converted into 83,333 shares of HealthWatch Common Stock, or 3.9%
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.
The purpose of the acquisition by the Company of 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, 1998 (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 pursued a joint venture and co-marketing arrangement.
The Company's HealthWatch investment is viewed by both companies as a
demonstration of HALIS' commitment to the joint venture. The arrangement
contemplate shared sales prospects by the Company and HealthWatch with
a commission or revenue sharing 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.
Supplemental information required by SFAS No. 95 relative to the statement
of cash flows is as follows:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Capital lease obligation incurred for the acquisition
of equipment $ 44,650 $ -
========= =======
Debt consolidated into a single note payable to a bank:
Line of credit $ 92,334 $ -
Note payable 368,341 -
-------- -------
$ 460,675 $ -
======== =======
</TABLE>
F-21
<PAGE>
HALIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE J - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (Continued)
<TABLE>
<CAPTION>
1998 1997
------------- -----------------
<S> <C> <C>
Debt converted to equity:
Exchange of 4% convertible promissory notes for
common stock $ 300,000 $ -
Exchange of 10% convertible promissory notes for
common stock 75,000 -
Exchange of notes payable related party for
common stock - 203,051
Exchange of 7% convertible promissory notes for
common stock - 1,216,000
Exchange of services rendered for common stock - 108,667
---------- -----------
$ 375,000 $ 1,527,718
========== ===========
12,048,305 shares of the Company's common stock
recorded as consideration for sale of subsidiary $ 1,686,763 $ -
========== ===========
Acquisitions:
Fair value of assets acquired $ - $ 6,465,634
Liabilities assumed - 2,341,960
Stock issued - 19,763,409
Goodwill $ - $ 15,639,735
---------- -----------
Cash paid during the year for:
Interest $ 63,191 $ 90,343
Taxes $ - $ -
</TABLE>
F-22
<PAGE>
HALIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K - ACQUISITIONS AND DISPOSITIONS
SALE OF PHYSICIAN'S RESOURCE NETWORK IN FISCAL 1998
On June 30, 1998, the Company sold to American Enterprise Solutions,
Inc. ("AES") all of the stock of Physician's Resource Network, Inc.
("PRN"), a wholly-owned subsidiary of the Company, that the Company
had acquired in July 1997. Located in Tampa, Florida, PRN delivers
practice management services to healthcare providers. The sale of AES
was effected pursuant to an Agreement and Plan of Merger dated June
25, 1998 (but effective as of June 30, 1998) among the Company, AES,
PRN Acquisition Co., and PRN (the "Merger Agreement"). Under the
terms of the Merger Agreement, the Company received AES' promise to
deliver within 90 days of the closing date, all of the shares of HALIS
common stock owned by AES of record and beneficially as of the closing
date, including without limitation shares that AES has the right to
acquire as of the closing date, which number of shares shall not be
less than 9,984,000 shares of the Company's common stock. The Merger
Agreement provided that if AES delivers more than 11,000,000 shares of
Company common stock, then the Company must also transfer to AES the
right to receive contingent installment payments (the "Installment
Payments") under that certain Asset Purchase Agreement dated December
31, 1997, between Communications Wiring and Accessories, Inc. and
HALIS Services, Inc., a subsidiary of the Company. Additionally,
pursuant to the Merger Agreement the Company retained certain
liabilities in the aggregate amount of $478,797 related to the
business of PRN.
On October 9, 1998, the Merger Agreement was amended by the parties to
acknowledge and agree that the number of shares of the Company's
common stock to be delivered by AES totaled 12,048,325 shares. AES
delivered, 11,548,325 shares during 1998. The remaining 500,000 shares
have not been received by the Company
Charles Broes, who served as a director of the Company from July 1,
1997 until he resigned on June 10, 1998, served as the Chief Executive
Officer, Secretary, Treasurer and board member of AES. Mr. Broes did
not participate in any meetings of the Company's board of directors
with respect to the Merger Agreement, or the amendment thereto.
For federal income tax purposes, the Merger is not intended to
constitute a reorganization within the meaning of Section 368 of the
Code. The parties to the Merger Agreement acknowledge that the Merger
is intended to constitute a redemption by HALIS of all HALIS stock
owned directly or indirectly by AES pursuant to Section 302(b)(3) of
the Internal Revenue Code of 1986, as amended (the "Code").
F-23
<PAGE>
HALIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K - ACQUISITIONS AND DISPOSITIONS (Continued)
SALE OF THE HOMA PRACTICE IN FISCAL 1998
On September 30, 1998, the Company's wholly-owned subsidiary,
PhySource, Ltd. ("PhySource"), sold to Physician's Enterprise System,
LLC ("PES") all of the medical and non-medical assets of its Dr. Homa
medical practice that the Company had acquired in 1997 (the "Homa
Practice"). The Homa Practice had provided medical services to
patients in the Arlington Heights, Illinois vicinity. The sale was
effected through an Agreement for Purchase and Sale of Assets entered
into between PES, the Company and PhySource, and was effective as of
October 1, 1998 (the "Asset Agreement"). Under the terms of the Asset
Agreement, PhySource received $400,000 at the closing, and the right
to receive 50% of collections on the receivables assigned to PES in
excess of $400,000, less a collection fee of 20% (the "Contingent
Payment"), and had certain specific liabilities assumed by the
purchaser. The Contingent Payment is not due to be calculated and
paid to the Company until November 1, 1999. The results from
operations for the Homa Practice were included in the Company's
results from operations for the nine-month period ended September 30,
1998.
DISPOSITION OF THE ORTHODONTIC BUSINESS IN FISCAL 1997
On December 31, 1997, HALIS Services, Inc., a wholly owned subsidiary
of the Company, sold to InfoCure Corporation ("InfoCure")
substantially all of the assets of the orthodontic practice management
software business (the "Orthodontic Business") that was acquired by
the Company from Software Manufacturing Group, Inc. in January 1997.
The Orthodontic Business included the development, marketing, selling
and servicing of computer hardware and software to orthodontic healthcare
providers. The sale to InfoCure was consummated pursuant to an Asset
Purchase Agreement dated December 31, 1997 (but effective as of December 1,
1997) by and among the Company, HALIS Services and InfoCure (the "InfoCure
Asset Purchase Agreement"). InfoCure paid HALIS Services, net of
liabilities paid by HALIS Services, approximately $1.2 million in cash.
The Company recorded a loss of approximately $3.1 million on the sale of
the Orthodontic Business. In connection with the InfoCure Asset Purchase
Agreement, the Company and HALIS Services agreed to pay approximately
$5,900 per month through January 1999 to a former employee of HALIS
Services and not to compete in the orthodontic practice management
industry for a period of five years.
SALE OF CERTAIN NON-HEALTH CARE ASSETS IN FISCAL 1997
Due to their disappointing operating performance, HALIS Services, Inc.
sold certain non-healthcare related assets and property of TG
Marketing Systems and Aubis Systems Integration (formerly, Aubis
Systems Integration, Inc. or "ASI") to Communications Wiring and
Accessories, Inc. ("Communications Wiring") on December 31, 1997 for a
purchase price of $1 million and the assumption of certain liabilities
(the "Purchase Price"), subject to downward adjustment as hereinafter
described. The non-healthcare related assets and property included
accounts receivable, computer software, computer equipment, furniture,
fixtures and leasehold improvements. The Company received no cash
F-24
<PAGE>
HALIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K - ACQUISITIONS AND DISPOSITIONS (Continued)
consideration at closing and has not recorded any receivable from this
transaction due to an evaluation of the timing and probability of the
payments as hereinafter described.
The Purchase Price is payable in monthly installments, commencing
February 15, 1998, and continuing on the 15th day of each month
thereafter (each, an "Installment Payment") until the earlier of the
date upon which the aggregate amount of Installment Payments paid to
HALIS Services shall equal the Purchase Price or December 31, 2007.
The Company did not receive any payment under the purchase agreement
in 1998. Each Installment Payment shall be equal to 20% of the license
fees, lease payments and royalties actually received by Communications
Wiring with respect to the purchased assets for the calendar month
immediately preceding the respective date upon which such Installment
Payment shall be due and payable; provided, however, that in the event
that the aggregate amount of all Installment Payments actually paid by
Communications Wiring to HALIS Services prior to December 31, 2007
(the "Paid Installments") shall be less than $500,000, Communications
Wiring shall pay to Seller an amount equal to the difference between
$500,000 and the Paid Installments on December 31, 2007. In the event
that the aggregate amount of all Installment Payments actually paid by
Communications Wiring to HALIS Services prior to December 31, 2007
shall be equal to or greater than $500,000, Communications Wiring
shall have no further obligation to make installment payments to HALIS
Services and the entire Purchase Price shall be deemed to be equal to
the Paid Installments.
To secure the payment of the Purchase Price by Communications Wiring,
HALIS Services retained a security interest in certain of the
purchased assets constituting or relating to proprietary software
developed by HALIS Services. Such security interest, however, does
not guarantee that Communications Wiring will make the required
Installment Payments as and when they become due. The Company recorded
a loss of approximately $2.3 million on the sale of this business.
Pursuant to the sale of PRN to AES, the Company assigned its rights to
any installment payments to AES in June 1998.
ACQUISITION OF THE COMPASS GROUP, INC. IN FISCAL 1997
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
F-25<PAGE>
HALIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K - ACQUISITIONS AND DISPOSITIONS (Continued)
certain financial targets were achieved for the year ending December 31,
1997, the Company issued 688,000 shares of the Company's Common Stock to
Ms. York.
ACQUISITION OF SOFTWARE MANUFACTURING GROUP, INC. IN FISCAL 1997
In January 1997, the Company also acquired Software Manufacturing
Group, Inc. ("SMG"), a developer and seller of orthodontic practice
management systems, which the Company sold in December 1997 (see
discussion above). 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. In 1997, the Company agreed to issue 960,000 shares of the
Company's Common Stock to the SMG shareholders.
ACQUISITION OF AMERICAN BENEFIT ADMINISTRATIVE SERVICES, INC. IN
FISCAL 1997
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").
ACQUISITION OF TG MARKETING SYSTEMS, INC. IN FISCAL 1997
In May 1997 the Company acquired TG Marketing Systems, Inc., a Georgia
corporation ("TGM"), a provider of marketing and customer service
software and related consulting services. 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. Mr. Neely also entered into an employment agreement
with the Company for a term of two years at an annual base salary of
$150,000 to serve as the Chief Operating Officer of the Company. 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. These options vest over a four year period
in accordance with the Company's 1996 Stock Option Plan, and expire on
May 2, 2007. In December 1997 the Company sold certain assets of the
businesses formerly conducted by TGM (see discussion above). In
connection with this asset sale the options granted to purchase
500,000 shares of the Company's Common stock were reduced to an
aggregate number of 129,450 shares. The option price and vesting
schedule were unchanged.
F-26
<PAGE>
HALIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K - ACQUISITIONS AND DISPOSITIONS (Continued)
ACQUISITION OF PHYSICIANS RESOURCE NETWORK, INC. IN FISCAL 1997
In July 1997 the Company acquired Physicians Resource Network, Inc., a
Florida corporation ("PRN") which became a subsidiary of the Company
(the "PRN Subsidiary"). PRN provides practice management services to
healthcare providers. 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 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. Subsequent to year end, the financial institution
extended a new one year promissory note for the remaining outstanding
balance of $460,675. The collateral supporting the loan, including
all personal guaranties remains in place. The PRN Subsidiary was
disposed of in fiscal 1998 (see discussion above).
ACQUISITION OF PHYSOURCE LTD. IN FISCAL 1997
In July 1997 the Company acquired PhySource Ltd., an Illinois a
physician practice management 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. The PhySource assets were
disposed of in fiscal 1998 (see discussion above concerning Physicians
Resource Network).
F-27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has caused this report
to be signed on its behalf by the undersigned, thereunto duly
authorized.
HALIS, INC.
Date: April 15, 1999 By: /s/ Paul W. Harrison
----------------------------------
Paul W. Harrison
Chief Executive Officer
By: /s/ Bruce A. Phillips
----------------------------------
Bruce A. Phillips
Principal Accounting and
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
---------- ----- ----
<S> <S> <C>
/s/ Paul W. Harrison Chairman of the Board, President April 15, 1999
Paul W. Harrison and Chief Executive Officer
/s/ Larry Fisher Director April 15, 1999
Larry Fisher
/s/ Dr. Joel Greenspan Director April 15, 1999
Dr. Joel Greenspan
- 37 -<PAGE>
EXHIBIT INDEX
-------------
Exhibit
Number Description
------- -----------
10.2.2 Separation and Settlement Agreement entered as of
January 31, 1999 by and between Registrant and Larry
Fisher
10.20.2 First Amendment to Agreement and Plan of Merger dated as of
October 9, 1998 among HALIS, Inc., American Enterprise Solutions,
Inc., PRN Acquisition Co., and Physicians Resource Network, Inc.
21.1 List of Subsidiaries
23.1 Consent of Tauber & Balser, P.C.
27.1 Financial Data Schedule (for SEC use only)
</TABLE>
SEPARATION AND SETTLEMENT AGREEMENT
THIS SEPARATION AND SETTLEMENT AGREEMENT (the "Agreement"),
made and entered into as of the 31st day of January, 1999, by and
between HALIS, INC., a Georgia corporation ("HALIS"), and LARRY FISHER
("Fisher").
WHEREAS, on November 18, 1996, HALIS and Fisher entered a certain
Employment Agreement whereby HALIS employed Fisher for a term of three
years ending December 31, 1999, as amended January 3, 1997 (as
amended, the "Employment Agreement"); and
WHEREAS, HALIS and Fisher desire to mutually terminate the
employment arrangement between them effective December 31, 1998 on the
terms and conditions hereof.
NOW THEREFORE, for and in consideration of the mutual premises
herein, and other good and valuable consideration, the parties hereto
agree as follows:
1. Separation from the Company. HALIS and Fisher hereby agree
that Fisher's employment under the Employment Agreement shall hereby
terminate effective as of December 31, 1998 (the "Effective Date"),
and that such termination shall be deemed a mutual termination, and
not be construed as a termination by HALIS with or without cause, or a
termination by Fisher, as those terms are defined in the Employment
Agreement. In that regard, this agreement supercedes any rights or
obligations of Fisher or HALIS as provided for in section 6 of the
Employment Agreement, except section 6.6 which shall continue in full
force and effect.
2. Consideration. In satisfaction of any and all monetary
obligations of HALIS to Fisher under the Employment Agreement, HALIS
agrees, and Fisher accepts, the following:
a) Except as provided in subsections (b) and (c) below, in lieu
of any compensation, as provided for in section 4 of the Employment
Agreement, including base salary, incentive compensation and any
accrued but unpaid vacation, that may otherwise be due and owing as
of, or would have become due and owing after, the Effective Date, the
Company agrees to pay Fisher $25,000 and issue to Fisher 300,000 fully
vested non-statutory stock options with an exercise price of $0.1315
per share, exercisable by Fisher on or before January 31, 2006.
b) Fisher and HALIS acknowledge and agree that as of the
Effective Date, HALIS owes Fisher $109,662.00 under the Employment
Agreement with regard to HALIS' fiscal year ended on the Effective
Date, and that HALIS shall satisfy this obligation by making monthly
payments of $5,000 each, until the amount is fully paid, commencing
with the first payment being due to Fisher by February 28, 1999 (the
"Deferred Payments"). Notwithstanding the foregoing, HALIS shall only
pay the Deferred Payments to the extent HALIS, in its reasonable
determination, has available cash. Any Deferred Payments not made
during a required month will nonetheless continue to be due and owing
with no interest or penalty of any kind or nature accruing thereon.
c) HALIS shall continue to pay through the original term of the
Employment Agreement, on behalf of Fisher, any medical or dental
premiums or other obligations related to the medical or dental plans
of HALIS to extent that Fisher is participating in such plans as of
the Effective Date. HALIS shall further reimburse Fisher for any<PAGE>
reasonable business expenses incurred by Fisher on behalf of HALIS
that may not have previously been reimbursed, and for an automobile
allowance, including cost of insurance, through the original term of
the Employment Agreement, to the extent HALIS has been obligated to
pay or reimburse Fisher those amounts as of the Effective Date. In
order to receive any reimbursement hereunder, Fisher shall supply a
completed expense reimbursement request, along with any supporting
documentation thereof, in such form as may be reasonably required by
HALIS.
3. Entire Agreement. This Agreement and the Employment
Agreement constitutes the entire agreement between the parties hereto
regarding the Fisher's employment by HALIS and the termination
thereof, and supersedes any other agreement, written or oral, relating
to the subject matter hereof. Except as modified herein, the
Employment Agreement shall remain in full force and effect.
4. Governing Law. This Agreement shall in all respects be
interpreted, construed and governed by and in accordance with the laws
of the State of Georgia.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed and delivered as of the day and year first above
written.
HALIS, INC.
By: /s/ Paul W. Harrison /s/ Larry Fisher
Paul W, Harrison Larry Fisher
Chairman, President and
Chief Executive Officer
- 2 -
FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER
THIS FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER (the "Amendment")
is made as of October 9, 1998, by and among American Enterprise Solutions,
Inc., a Florida corporation ("AES"); PRN Acquisition Co., a Florida
corporation and a wholly-owned subsidiary of AES (the "Subsidiary"); and
HALIS, Inc., a Georgia corporation ("HALIS").
R E C I T A L S
WHEREAS, the parties hereto and Physicians Resource Network, Inc., a
Georgia corporation and formerly a wholly-owned subsidiary of HALIS ("PRN"),
have heretofore entered into that certain Agreement and Plan of Merger,
dated June 25, 1998 (the "Original Agreement"), pursuant to which PRN was
merged into the Subsidiary and the Subsidiary continues to exist as the
surviving corporation of the merger; and
WHEREAS, the parties desire to amend the Original Agreement as
hereinafter provided;
NOW, THEREFORE, for and in consideration of the mutual covenants set
forth herein, and for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto agree as
follows:
SECTION 1. Definitions. Capitalized terms used in this Amendment
-----------
shall have the meanings ascribed to them in the Original Agreement.
SECTION 2. Amendments to Original Agreement. The Original
--------------------------------
Agreement is hereby amended as follows:
2.1 Amendment to Recital D. Recital D of the Original Agreement is
----------------------
hereby amended by deleting the second sentence thereof in its entirety and
adding in its place and stead the following:
AES is the direct or indirect holder of, and except as
set forth herein has the right to convey and transfer to
HALIS, 12,048,325 shares of common stock, $.01 par
value, of HALIS (the "AES HALIS Stock"). The parties
acknowledge that it is their intention that all the AES
HALIS Stock be transferred to HALIS by AES as
consideration for the Merger, all as more fully
hereinafter set forth.
<PAGE>
2.2 Amendment to Section 1.8. Section 1.8 of the Original Agreement
------------------------
is hereby amended by deleting the existing Section 1.8 in its entirety and
adding in its place and stead the following:
1.8 Merger Consideration. The merger consideration to
be paid by AES to HALIS in consideration of the Merger
(the "Merger Consideration") shall consist of the AES
HALIS Stock. (i) On or before October 13, 1998, AES
shall deliver to HALIS, or cause its stockbroker, Paine
Weber Incorporated. to provide to HALIS written
confirmation that it has received irrevocable
instructions from AES to immediately transfer to HALIS,
a certificate or certificates representing 11,548,325
shares of the AES HALIS Stock (the "Initial Shares"),
and (ii) on or before January 31, 1999, AES shall
deliver to HALIS a certificate or certificates
representing the remaining 500,000 shares of AES HALIS
Stock (the "Pledged Shares")due pursuant to the Merger.
Each such certificate shall be duly endorsed in blank or
accompanied by stock powers duly executed in blank by
AES, or as appropriate to consummate the transfer. The
Initial Shares shall be delivered to HALIS as soon as
practicable and in the ordinary course after October 13,
1998, subject only to the normal and ordinary delays in
clearing stock transfer instructions.
2.3 Amendment to Section 3.4. Section 3.4 of the Original Agreement
------------------------
is hereby amended by deleting the existing first sentence of Section 3.4 in
its entirety and adding in its place and stead the following:
(i) AES beneficially and of record owns, and has full
power and authority to convey free and clear of all
liens, encumbrances or restrictions (except the Pledged
Shares that are currently pledged to Central Bank of
Tampa) all of the AES HALIS Stock constituting the
Merger Consideration, (ii) the AES HALIS Stock
constituting the Merger Consideration consists of
12,048,325 shares of HALIS common stock, (iii) the AES
HALIS Stock represents all of the common stock of HALIS
that AES or any affiliate of AES, or any officer or
director or their affiliates, owns either directly or
indirectly, or otherwise has a beneficial interest of
any kind or nature, and (iv) upon delivery of the
certificate or certificates representing the Merger
Consideration as provided in Section 1.8, HALIS will
acquire title thereto, free and clear of all liens,
encumbrances or restrictions of any kind or nature.
<PAGE>
2.4 Amendment to Section 7.3. Section 7.3 of the Original Agreement
------------------------
is hereby amended by deleting the existing first sentence of Section 7.3 in
its entirety and adding in its place and stead the following:
HALIS agrees that upon receipt from AES of 11,548,325
shares of HALIS Stock constituting a portion of the
Merger Consideration, HALIS will promptly cause HALIS
Services, Inc. a wholly-owned subsidiary of HALIS
("HALIS Services"), to execute and deliver to AES a
written assignment to AES of all right, title and
interest of HALIS Services in, to and under Section 3 of
that certain Asset Purchase Agreement dated December 31,
1997, by and between Communications Wiring and
Accessories, Inc. and HALIS Services.
Section 3. Releases and Additional Agreements. AES and Subsidiary
----------------------------------
hereby waives any claim of any kind whatsoever that either of them may have
with respect to the consummation of the Merger or the consideration paid
therefore, provided, however, that the release herein shall not release any
claim based on a breach of the representations, warranties or covenants made
by HALIS in the Original Agreement, in which case the provisions of the
Original Agreement shall apply, or a breach of the agreements delivered by
HALIS pursuant to section 4(e) of the Original Agreement, in which case the
provisions of such respective agreements shall apply, or any other
agreements between or among any of the parties, in which case such
respective other agreements shall apply, nor shall this release apply to any
other claim or action or remedy AES and/or Subsidiary may have against
HALIS. AES and the Subsidiary agree that it shall not further restrict,
encumber or commit the Pledged Shares for any purpose other than the
existing pledge to the Central Bank of Tampa, and that in the event the
Pledged Shares are foreclosed or otherwise not available to be delivered by
January 31, 1999, AES shall be obligated to pay HALIS the fair market value
of such stock on and as of such date and, upon its receipt of such payments,
HALIS will be deemed to have released and relinquished any further right to
acquire or receive a transfer of the Pledged Shares. Upon execution hereof,
HALIS withdraws its Notice of Claim made on October 1, 1998 and deems any
breach or default under the Original Agreement claimed therein to have been
timely cured as a result of the execution hereof.
Section 4. Original Agreement to Remain in Effect. Except as
--------------------------------------
hereinabove expressly provided, the Original Agreement shall remain
unaltered and in full force and effect.
Section 5. No Admission; Non-waiver. The parties agree that their
------------------------
execution of this Amendment is not an admission of any liability and that
they have not waived any rights they may have under any agreement or
applicable law except as specifically and expressly set forth herein.
<PAGE>
The foregoing Amendment is hereby executed as of the date first above
written.
"AES"
AMERICAN ENTERPRISE
SOLUTIONS, INC.
By: __________________________________
Name: _________________________________
Title: ________________________________
"SUBSIDIARY"
PRN ACQUISITION CO.
By: __________________________________
Name: _________________________________
Title: ________________________________
"HALIS"
HALIS, INC.
By: __________________________________
Paul W. Harrison,
President and CEO
Exhibit 21.1
List of Subsidiaries
HALIS Services, Inc., a Georgia corporation
The Compass Group, Inc., a Georgia corporation, d/b/a HALIS Consulting
HES Technology, Inc., a Georgia corporation
American Benefit Administrative Services, Inc., an Illinois
corporation, d/b/a ABAS and TPA
PhySource Ltd., a Georgia corporation
TAUBER & BALSER, P.C.
Certified Public Accountants
3340 Peachtree Road, N.E.
Suite 250
Atlanta, GA 30326
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference of our report dated April 1, 1999
included in the December 31, 1998 Form 10-KSB for HALIS, Inc. into its
previously filed Registration Statements No. 33-22588 on Form S-8 dated June 16,
1988, No. 33-22591 on Form S-8 dated June 16, 1988, No. 33-38257 on Form S-8
dated December 19, 1990, No. 33-38258 on Form S-8 dated December 19, 1990, No.
33-53702 on Form S-8 dated October 20, 1992, and No. 33-53704 on Form S-8
dated October 20, 1992.
/s/ Tauber & Balser, P.C.
TAUBER & BALSER, P.C.
Atlanta, Georgia
April 14, 1999
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF HALIS, INC. FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000725627
<NAME> HEALTHWATCH, INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 989,787
<SECURITIES> 0
<RECEIVABLES> 558,585
<ALLOWANCES> 195,654
<INVENTORY> 0
<CURRENT-ASSETS> 1,423,589
<PP&E> 233,690
<DEPRECIATION> 87,773
<TOTAL-ASSETS> 3,740,912
<CURRENT-LIABILITIES> 3,881,216
<BONDS> 0
0
0
<COMMON> 462,597
<OTHER-SE> (639,279)
<TOTAL-LIABILITY-AND-EQUITY> 3,740,912
<SALES> 7,630,370
<TOTAL-REVENUES> 7,630,370
<CGS> 2,335,237
<TOTAL-COSTS> 11,540,296
<OTHER-EXPENSES> (44,411)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 60,341
<INCOME-PRETAX> (3,148,799)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 751,414
<CHANGES> 0
<NET-INCOME> (3,148,799)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
</TABLE>
