As filed with the Securities and Exchange Commission on April 9, 2001
Registration No. 333-48546
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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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Amendment No. 4
to
Form S-4
REGISTRATION STATEMENT
Under
The Securities Act of 1933
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HEALTHWATCH, INC.
(Name of Registrant as specified in its charter)
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Minnesota 7373 84-0916792
(State or jurisdiction of (Primary Standard (I.R.S. Employer
incorporation or Industrial Classification Identification No.)
organization) Code Number)
1100 Johnson Ferry Road
Suite 670
Atlanta, Georgia 30342
(404) 256-0083
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
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MICHAEL M. SMITH, ESQ.
J. CRAIG LEE, ESQ.
Gambrell & Stolz, L.L.P.
Suite 4300, SunTrust Plaza
303 Peachtree Street, N.E.
Atlanta, Georgia 30308
(404) 577-6000
Facsimile: (404) 221-6501
(Name, address, including zip code, and telephone and facsimile numbers,
including area code, of agent for service)
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Copy to:
GREGORY M. FRASSRAND, ESQ.
Gomel & Davis, LLP
700 Marquis Two Tower
285 Peachtree Center Avenue, N.E.
Atlanta, Georgia 30303
(404) 223-5900
Facsimile: (404) 524-4755
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after this registration statement becomes effective and all other
conditions to the merger of Halis, Inc. ("Halis") with and into the HealthWatch
Merger Sub, Inc. ("Merger Sub") pursuant to an Agreement and Plan of Merger,
dated as of June 29, 2000, and as amended by amendments dated September 29,
2000, January 31, 2001 and March 28, 2001, described in the enclosed joint
proxy statement/prospectus have been satisfied or waived.
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If any of the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
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CALCULATION OF REGISTRATION FEE
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Amount Proposed maximum Proposed maximum Amount of
Title of each class of to be offering price aggregate registration
securities to be registered registered (1) per share (2) offering price (2) fee
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2,910,219
Common Stock, $.05 par value ... shares $.624 $1,815,977 $454.00
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(1) The registration statement relates to shares of common stock of the
Registrant that may be issued to the stockholders of Halis, Inc., a Georgia
corporation (excluding all shares owned directly by the Registrant),
pursuant to the proposed merger, assuming the exercise of all outstanding
options to purchase Halis common stock.
(2) Estimated solely for the purpose of calculating the registration fee
required by the Securities Act of 1933, as amended, and computed pursuant
to Rules 457(f)(1) and (c) under the Securities Act based on the average of
the high and low per share prices of common stock of Halis, Inc. (HLIS.OB)
as reported on the Nasdaq Securities Market on March 26, 2001 divided by
the exchange ratio of 0.050.
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The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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HEALTHWATCH, INC
1100 Johnson Ferry Road
Suite 670
Atlanta, Georgia 30342
To Our Stockholders:
You are cordially invited to attend a special meeting of stockholders of
HealthWatch, Inc., to be held on April , 2001 at The W At Perimeter Center
Hotel, 111 Perimeter Center West NE, Atlanta, Georgia 30346 at 10:00 a.m.,
local time.
The proposals expected to be acted upon at the meeting relate to the
issuance of HealthWatch common stock in connection with a merger among
HealthWatch, Inc., Halis, Inc. and HealthWatch Merger Sub, Inc. (a newly
formed, wholly-owned subsidiary of HealthWatch) and the transactions associated
with the merger that will cause Halis, Inc. to merge with and into HealthWatch
Merger Sub, Inc. In addition, HealthWatch stockholders will be asked to approve
an amendment to HealthWatch's Articles of Incorporation to increase the number
of authorized shares of capital stock and to approve other proposals relating
to the terms of outstanding HealthWatch preferred stock and other securities.
These proposals are described in detail in the attached notice of special
meeting of stockholders and proxy statement/prospectus.
In the merger, Halis stockholders would receive for each share of common
stock of Halis, Inc. outstanding immediately prior to the effective time of the
merger, one twentieth (.05) of a share of HealthWatch common stock (the "Merger
Consideration"), thus for every twenty outstanding shares of Halis common stock
(excluding those shares held by HealthWatch) we will issue one share of
HealthWatch common stock. In addition, outstanding Halis, Inc. employee and
director stock options would be converted into options to purchase HealthWatch
common stock using the same exchange ratio. Based on the number of shares of
Halis common stock outstanding on December 31, 2000, HealthWatch will issue
approximately 2,300,000 shares of HealthWatch common stock to Halis
stockholders in the merger, excluding Halis common stock owned by HealthWatch.
HealthWatch intends to continue listing its common stock on the Nasdaq SmallCap
Market under the symbol "HEAL."
After careful consideration, your board of directors has determined that the
merger agreement and the transactions associated with it, including the stock
issuance, are fair to and in the best interests of HealthWatch and its
stockholders and has approved the merger agreement and other proposals.
Your board of directors recommends that you vote FOR the merger agreement
and the transactions associated with it, including the stock issuance, and FOR
each of the other proposals on which you may vote.
The merger, the merger agreement, the stock issuance and the other proposals
are described in the accompanying joint proxy statement/prospectus, which you
should read carefully, including the section describing risk factors that
begins on page 15. If you have any questions or require additional information
about the special meeting or the merger, please call Ms. Marilyn May, Vice
President--Investor Relations, at (404) 256-0083.
Sincerely,
Paul W. Harrison
Chairman, President & Chief
Executive Officer
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the HealthWatch common stock to be
issued under this joint proxy statement/prospectus or determined if this joint
proxy statement/prospectus is accurate or adequate. Any representation to the
contrary is a criminal offense.
This joint proxy statement/prospectus is dated April , 2001 and was first
mailed to stockholders on or about April , 2001.
HealthWatch, Inc.
1100 Johnson Ferry Road
Suite 670
Atlanta, Georgia 30342
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL , 2001 AT 10:00 A.M.
To Our Stockholders:
A special meeting of the stockholders of HealthWatch, Inc. ("HealthWatch")
will be held at located at The W At Perimeter Center Hotel, 111
Perimeter Center West NE, Atlanta, Georgia 30346 on April , 2001 at 10:00
a.m. for the following purposes:
1. To approve the issuance of shares of HealthWatch common stock in the
merger of Halis, Inc. ("Halis") with and into HealthWatch Merger Sub,
Inc., a wholly-owned subsidiary of HealthWatch ("Merger Sub"), as
contemplated by the Agreement and Plan of Merger dated as of June 29,
2000, by and among Halis, Merger Sub and HealthWatch. In the merger,
HealthWatch will issue one twentieth (.05) of a share of fully paid and
non-assessable HealthWatch common stock for each share of Halis common
stock outstanding;
2. To consider and vote upon proposed amendments to HealthWatch's Articles
of Incorporation to:
A: increase the number of authorized shares of HealthWatch common stock
from 10,000,000 shares to 50,000,000 shares; and
B: increase the number of authorized shares of HealthWatch preferred
stock from 1,000,000 shares to 15,000,000 shares;
3. To ratify and approve anti-dilution provisions related to HealthWatch's
outstanding preferred stock and related warrants contained in:
A: the Certificate of Designation, Preferences and Rights of Series C
8% Convertible Preferred Stock (the "Series C Preferred");
B: the Certificate of Designation, Preferences and Rights of Series D
8% Convertible Preferred Stock (the "Series D Preferred");
C: warrants to purchase HealthWatch common stock issued to purchasers
of the Series C Preferred in a bridge financing completed in
February 2000 (the "Bridge Warrants");
D: warrants to purchase HealthWatch common stock issued to purchasers
of the Series D Preferred in a private placement completed in May
2000 (the "Offering Warrants"); and
E: warrants to purchase HealthWatch common stock issued to an affiliate
of Commonwealth Associates, L.P. in connection with a $2 million
line of credit (the "Line of Credit Warrants");
4. To ratify and approve the conversion feature and the issuance of shares
of HealthWatch common stock upon conversion of HealthWatch's outstanding
Series P Preferred Stock (the "Series P Preferred"); and
5. To transact any other business that properly comes before the special
meeting or any adjournment and postponements thereof.
The accompanying proxy statement/prospectus describes the proposed merger
and other proposals in more detail. We encourage you to read the entire
document carefully.
We have fixed the close of business on March 16, 2001 as the record date for
the determination of our stockholders entitled to vote at this meeting.
By Order of the Board of Directors
Paul W. Harrison, Chairman,
President and Chief Executive
Officer
Atlanta, Georgia
Date: April , 2001
Halis, Inc.
1100 Johnson Ferry Road
Suite 670
Atlanta, Georgia 30342
To Our Stockholders:
Halis, Inc.'s board of directors has approved a merger which will result in
the acquisition of Halis by HealthWatch, Inc., a publicly-traded company
headquartered in Atlanta, Georgia. In the merger, each share of Halis, Inc.
common stock will be converted into one twentieth (.05) of a share of
HealthWatch common stock. Therefore, the exchange ratio will be one share of
HealthWatch common stock for each twenty shares of Halis Common Stock. In
addition, holders of Halis stock options will have their options converted into
options to purchase HealthWatch common stock based on the same exchange ratio.
HealthWatch common stock is traded on the Nasdaq SmallCap Market under the
symbol "HEAL."
This joint proxy statement/prospectus is also the prospectus of HealthWatch
regarding the HealthWatch common stock to be issued to Halis stockholders in
exchange for their shares of Halis common stock in connection with the merger.
Based on the number of shares of Halis common stock outstanding on December 31,
2000, HealthWatch will issue approximately 2,300,000 shares of HealthWatch
common stock to Halis stockholders in the merger, excluding Halis common stock
owned by HealthWatch.
The merger cannot be completed unless the holders of a majority of Halis'
common stock approve the merger agreement and the merger. Only stockholders who
hold common shares of Halis at the close of business on March 16, 2001 will be
entitled to vote at the special meeting. After careful consideration, your
board of directors has determined the merger is in your best interest and
recommends that you vote in favor of the merger.
This joint proxy statement/prospectus provides you with detailed information
concerning HealthWatch, Halis and the merger. Please give all of the
information contained in the proxy statement/prospectus your careful attention.
In particular, you should carefully consider the discussions in the section
entitled "Risk Factors" on page 15 of the joint proxy statement/prospectus.
Each Company has scheduled a special meeting for its stockholders to vote on
the merger agreement and the transactions associated with it. The special
meeting of Halis stockholders will be held on April , 2001 at 12:30 p.m.
local time at The W At Perimeter Center Hotel, 111 Perimeter Center West NE,
Atlanta, Georgia 30346.
Please use this opportunity to take part in the affairs of Halis by voting
on the adoption of the merger agreement. Whether or not you plan to attend the
meeting, please complete, sign, date and return the accompanying proxy in the
enclosed self-addressed stamped envelope. Returning the proxy does NOT deprive
you of your right to attend the meeting and to vote your shares in person. YOUR
VOTE IS VERY IMPORTANT.
We appreciate your interest in Halis and your consideration of this matter.
Dr. Joel Greenspan,
Member of Halis' Board of Directors
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved the HealthWatch common stock to be
issued under this joint proxy statement/prospectus or determined if this joint
proxy statement/prospectus is accurate or adequate. Any representation to the
contrary is a criminal offense.
This joint proxy statement/prospectus is dated April , 2001 and was first
mailed to stockholders on or about April , 2001.
Halis, Inc.
1100 Johnson Ferry Road
Suite 670
Atlanta, Georgia 30342
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL , 2001 AT 12.30 P.M.
To Our Stockholders:
NOTICE IS HEREBY GIVEN that the special meeting of stockholders of Halis,
Inc. ("Halis") will be held on April , 2001 at 12:30 p.m. at The W At
Perimeter Center Hotel, 111 Perimeter Center West NE, Atlanta, Georgia 30346
to:
1. Consider and vote on the proposed merger of Halis, Inc. with and into
HealthWatch Merger Sub, Inc., a wholly-owned subsidiary of HealthWatch,
Inc., as contemplated by the Agreement and Plan of Merger dated as of
June 29, 2000, by and among Halis, Inc., HealthWatch Merger Sub, Inc.
and HealthWatch, Inc. In the merger, HealthWatch, Inc. will issue one
twentieth (.05) of a share of fully paid and non-assessable HealthWatch,
Inc. common stock in exchange for each outstanding share of Halis common
stock; and
2. Transact such other business as may properly come before the Halis
special meeting or any adjournment thereof.
Your board of directors has determined that the merger agreement and the
merger are in your best interests and recommends that you vote to approve the
merger agreement at the special meeting.
The board of directors has fixed the close of business on March 16, 2001 as
the record date for the determination of stockholders entitled to notice of,
and to vote at, the Halis special meeting. The merger cannot be completed
unless holders of a majority of the outstanding shares of Halis common stock on
the record date affirmatively vote to approve the merger agreement.
Accompanying this notice is a joint proxy statement/prospectus discussing
the proposed merger and the related merger agreement. We encourage you to read
this document carefully. Regardless of whether you expect to be present at the
meeting, please mark, date and sign the enclosed proxy and return it in the
envelope which has been provided. No postage is required for mailing in the
United States. In the event you are able to attend the Halis special meeting,
you may revoke your proxy and vote your shares in person.
By Order of the Board of Directors,
Dr. Joel Greenspan,
Member of the Board of Directors
Atlanta, Georgia
Date: April , 2001
TABLE OF CONTENTS
Page
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FORWARD LOOKING STATEMENTS MAY PROVE INACCURATE........................... 1
QUESTIONS AND ANSWERS FOR HEALTHWATCH STOCKHOLDERS AND HALIS STOCKHOLDERS. 2
SUMMARY OF THE JOINT PROXY STATEMENT/PROSPECTUS........................... 4
The Companies........................................................... 4
Our Reasons for the Merger.............................................. 5
Risks of the Merger..................................................... 5
Conflicts of Interest................................................... 6
Recommendations to Stockholders......................................... 6
Stockholder Vote Required to Approve the Merger......................... 6
HealthWatch Stockholder Vote Required to Approve Other Proposals........ 7
The Merger.............................................................. 7
What Stockholders Will Receive in the Merger............................ 7
Ownership of HealthWatch Following the Merger........................... 8
Conditions to Completion of the Merger.................................. 8
Termination............................................................. 9
Officers and Directors Following the Merger............................. 9
Important United States Federal Income Tax Consequences................. 9
Dissenters' Rights...................................................... 9
Opinion of Financial Advisor............................................ 10
Comparative Per Share Market Price Information.......................... 10
Exchange Value Received by Halis Stockholders........................... 10
Comparative Rights of Stockholders...................................... 11
Selected Historical and Pro Forma Consolidated Financial Data........... 11
Selected Unaudited Pro Forma Consolidated Financial Data and Comparative
per Share Information for the HealthWatch/Halis Merger................. 13
HealthWatch, Halis and Pro Forma Comparative Per Share Data............. 14
RISK FACTORS.............................................................. 15
THE SPECIAL MEETINGS...................................................... 26
General................................................................. 26
Voting Securities and Record Dates Securities and Record Dates.......... 26
Purpose of Special Meetings............................................. 27
Solicitation of Proxies; Expenses....................................... 27
THE COMPANIES............................................................. 30
HealthWatch, Inc. ...................................................... 30
Halis, Inc.............................................................. 36
HealthWatch Merger Sub, Inc. ........................................... 38
HEALTHWATCH MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................................ 39
Forward Looking Statements.............................................. 39
General................................................................. 39
Financial Condition..................................................... 39
Results of Operations................................................... 40
Liquidity and Capital Resources......................................... 42
OTHER HEALTHWATCH INFORMATION ............................................ 44
Description of Property................................................. 44
Legal Proceedings....................................................... 44
i
Page
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Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................... 44
HEALTHWATCH MANAGEMENT.................................................... 46
Executive Officers and Directors........................................ 46
Recent Changes in Management............................................ 48
Employment Agreements................................................... 48
Stock Option Plans...................................................... 48
Board Composition....................................................... 48
Board Committees........................................................ 49
Director Compensation................................................... 49
Executive Compensation.................................................. 49
Options Grants in Last Fiscal Year...................................... 50
Option Exercises and Holdings........................................... 50
Limitation of Liability and Indemnification Matters..................... 50
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF
HEALTHWATCH.............................................................. 52
HEALTHWATCH RELATED PARTY TRANSACTIONS.................................... 53
HALIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.................................................... 59
Forward Looking Statements.............................................. 59
General................................................................. 59
Financial Condition..................................................... 59
Liquidity and Capital Resources......................................... 61
OTHER HALIS INFORMATION................................................... 62
Description of Property................................................. 62
Legal Proceedings....................................................... 62
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................... 64
HALIS MANAGEMENT.......................................................... 66
Executive Officers and Directors........................................ 66
Employment Agreements................................................... 66
Stock Option Plans...................................................... 66
Board Composition....................................................... 67
Director Compensation................................................... 67
Executive Compensation.................................................. 67
Options Grants in Last Fiscal Year...................................... 67
Option Exercises and Holdings........................................... 68
Limitation of Liability and Indemnification Matters..................... 68
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF HALIS... 69
HALIS RELATED PARTY TRANSACTIONS ......................................... 69
THE MERGER................................................................ 70
General................................................................. 70
Background of the Merger................................................ 70
Reasons for HealthWatch Engaging in the Merger; Recommendation of the
HealthWatch Board...................................................... 73
Opinion of HealthWatch's Financial Advisor.............................. 74
Reasons for Halis Engaging in the Merger; Recommendation of the Halis
Board.................................................................. 80
Opinion of Halis' Financial Advisor..................................... 80
ii
Page
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Board and Management of the Surviving Corporation Following the Merger.. 84
Board and Management of HealthWatch Following the Merger................ 84
Conflicts of Interest................................................... 84
Indemnification Agreements.............................................. 85
Dissenters' Rights...................................................... 85
Stock Exchange Listings................................................. 86
Delisting and Deregistration of Halis Common Stock...................... 86
Treatment of Stock Certificates......................................... 86
Accounting Treatment of the Merger...................................... 86
Regulatory Filings and Approvals Required to Complete the Merger........ 86
Tax-Free Reorganization................................................. 86
THE MERGER AGREEMENT...................................................... 87
The Merger.............................................................. 87
Exchange Procedures..................................................... 87
Corporate Organization and Governance................................... 88
Stockholders' Meetings.................................................. 89
Representations and Warranties.......................................... 89
Covenants............................................................... 90
No Solicitation of Transactions......................................... 91
Indemnification and Insurance........................................... 92
Conditions.............................................................. 93
Resale Restrictions..................................................... 93
Termination............................................................. 94
Termination Fee......................................................... 95
Expenses................................................................ 96
Amendment; Extension and Waiver......................................... 96
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER...... 97
COMPARISON OF RIGHTS OF HOLDERS OF HALIS COMMON STOCK AND HEALTHWATCH
COMMON STOCK............................................................. 99
Authorized Capital Stock................................................ 99
Stockholder Meetings.................................................... 101
Record Date for Stockholder Action...................................... 102
Notice of Stockholder Meeting........................................... 102
Board of Directors...................................................... 103
Officer and Director Indemnification.................................... 105
Limitation on Liability................................................. 105
Required Stockholder Approval........................................... 106
Dissenters' Rights...................................................... 106
Derivative Actions...................................................... 107
HEALTHWATCH UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS......... 108
MARKET PRICE AND DIVIDEND INFORMATION..................................... 116
EXPERTS................................................................... 117
ADDITIONAL MATTERS BEING SUBMITTED TO A VOTE OF ONLY HEALTHWATCH
STOCKHOLDERS............................................................. 118
Amendment to Articles of Incorporation to Increase Authorized Capital
Stock (Proposals No. 2.A and 2.B)..................................... 118
Matters Relating to Series C Preferred, Series D Preferred and Related
Warrants (Proposals No. 3.A through 3.E)............................... 121
Matters Relating to the Series P Preferred (Proposal No. 4)............. 126
iii
Page
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LEGAL MATTERS............................................................. 128
STOCKHOLDER PROPOSALS..................................................... 128
DISCLOSURE OF COMMISSION'S POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES.............................................................. 129
WHERE YOU CAN FIND MORE INFORMATION....................................... 129
INDEX TO FINANCIAL STATEMENTS............................................. 130
ANNEXES:
A-- Agreement and Plan of Merger, dated as of June 29, 2000
B-- Amendment to Agreement and Plan of Merger, dated as of September 29,
2000
C-- Form of HealthWatch's Stock Option Agreement
D-- Fairness Opinion of New York Capital
E-- Certificate of Designation, Preferences and Rights of the Series C 8%
Convertible Preferred Stock of HealthWatch, Inc.
F-- Certificate of Designation, Preferences and Rights of the Series D 8%
Convertible Preferred Stock of HealthWatch, Inc.
G-- Warrant Agreement and Form of warrant representative of the Bridge
Warrants, Offering Warrants and Line of Credit Warrants
H-- Certificate of Designation, Preferences and Rights of the Series P
Preferred Stock of HealthWatch, Inc.
I-- Article 13 of the Georgia Business Corporations Code.
J-- Second Amendment to Agreement and Plan of Merger, dated as of January
31, 2001.
K-- Third Amendment to Agreement and Plan of Merger, dated as of February
16, 2001.
L-- Fairness Opinion of Houlihan Lokey Howard & Zukin Financial Advisors,
Inc.
M-- Fourth Amendment to Agreement and Plan of Merger, dated as of March 28,
2001.
iv
FORWARD LOOKING STATEMENTS MAY PROVE INACCURATE
This document and other communications to stockholders of HealthWatch and
Halis may contain "forward looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements relate to
expectations concerning matters that are not historical facts. Also, when we
use words such as "believes," "expects," "anticipates" or similar expressions,
we are making forward looking statements. Although each of HealthWatch and
Halis believes that the expectations reflected in such forward looking
statements are reasonable, neither of us can give any assurance that our
expectations will prove to be correct. Important factors that could cause our
actual results to differ materially from our expectations are disclosed herein,
including, without limitation, the factors we discuss under the section
entitled "RISK FACTORS" beginning on page 15. All forward looking statements
attributable to HealthWatch and Halis are expressly qualified in their entirety
by the factors which may cause actual results to differ materially from
expectations described herein.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS TO VOTE ON THE MERGER AGREEMENT AND THE TRANSACTIONS
ASSOCIATED WITH IT. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT FROM WHAT IS CONTAINED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS. THIS JOINT PROXY STATEMENT/PROSPECTUS IS DATED APRIL ,
2001. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN SUCH DATE, AND
NEITHER THE MAILING OF THIS JOINT PROXY STATEMENT/PROSPECTUS TO STOCKHOLDERS
NOR THE ISSUANCE OF HEALTHWATCH COMMON STOCK IN THE MERGER SHALL CREATE ANY
IMPLICATION TO THE CONTRARY.
1
QUESTIONS AND ANSWERS FOR HEALTHWATCH STOCKHOLDERS
AND HALIS STOCKHOLDERS
Q: Why are the two companies proposing to merge and how will I benefit?
A: The combined company's breadth of technology, products, management and
operational experience and financial resources should enable it to respond more
quickly and effectively to technological change, intensifying competition,
increasing consolidation and evolving market demands. Moreover, management of
HealthWatch and Halis believe that the combined company could achieve operating
synergies through cross marketing of each company's products, as well as
possible cost savings related to more efficient administrative and support
functions of the combined company. To review the reasons for the merger in
greater detail, and related uncertainties, see pages 73 and 80.
Q: What will Halis stockholders receive in the merger?
A: Halis stockholders will receive for each share of Halis common stock one
twentieth (.05) of a share of HealthWatch common stock (i.e., one share of
HealthWatch common stock for twenty shares of Halis common stock). HealthWatch
will not issue fractional shares. Halis stockholders who would otherwise be
entitled to receive a fractional share instead will receive a cash payment
based on the average market value of the fractional share of HealthWatch stock
during a specified period prior to the merger.
Holders of options or warrants to purchase shares of Halis common stock will
receive options or warrants, as appropriate, to purchase shares of HealthWatch
common stock after completion of the merger. The number and exercise price of
the options or warrants received will be based on the same Exchange Ratio.
For Example:
If you currently own 250 shares of Halis common stock and assuming an
average closing price of $3.00 for HealthWatch common stock, then after the
merger you will be entitled to receive twelve (12) shares of HealthWatch common
stock and a check for the market value of the .50 fractional share or $1.50
(.50 X $3.00).
If you currently own 200 shares of HealthWatch common stock, then you will
continue to own those 200 shares after the merger.
Q: When do you expect the merger to be completed?
A: We are working towards completing the merger as quickly as possible. In
addition to stockholder approvals, we must also satisfy other conditions
described in the merger agreement. We hope to complete the merger during the
first calendar quarter of 2001.
Q: What will HealthWatch's dividend policy be?
A: HealthWatch has never declared or paid dividends on its common stock, and
does not expect to declare common dividends in the near future. Furthermore,
the terms of HealthWatch's outstanding preferred stock restrict the payment of
dividends on common stock until all preferred stock dividends were paid.
HealthWatch's board of directors will use its discretion to decide whether to
declare dividends and the amount of any dividends. In making its decision, the
board will consider various factors, including tax efficiency, continuing
investment opportunities and the earnings and financial condition of
HealthWatch and its subsidiaries.
Q: What do I need to do now?
A: Just mail your signed proxy card in the enclosed return envelope as soon as
possible, so that your shares will be represented at your special stockholders'
meeting. If you do not include instructions on how to vote your properly signed
proxy, your shares will be voted "FOR" approval of the merger.
2
Q: What do I do if I want to change my vote?
A: If you want to change your vote, send the secretary of HealthWatch or Halis,
as the case may be, a later-dated, signed proxy card before your meeting or
attend the meeting in person. You may also revoke your proxy by sending written
notice to your company's secretary before the meeting.
Q: Should I send in my stock certificates now?
A: No. After the merger is completed, Halis stockholders will receive written
instructions for exchanging their stock certificates. HealthWatch stockholders
will keep their certificates, as the merger will not require surrender of
outstanding HealthWatch stock certificates.
Q: Who can help answer further questions?
A: If you have any questions about the merger or how to submit your proxy, or
if you need additional copies of this joint proxy statement/prospectus or the
enclosed proxy card or voting instructions, you should contact:
. if you are a HealthWatch stockholder:
HealthWatch, Inc.
Investor Relations
1100 Johnson Ferry Road, Suite 670
Atlanta, Georgia 30342
(404) 256-0083
. if you are a Halis stockholder:
Halis, Inc.
Investor Relations
1100 Johnson Ferry Road, Suite 670
Atlanta, Georgia 30342
(404) 364-1871
3
SUMMARY OF THE JOINT PROXY STATEMENT/PROSPECTUS
This proxy statement/prospectus pertains to the merger of Halis with and
into a newly formed wholly-owned subsidiary of HealthWatch, and is being sent
to the stockholders of both companies. This summary may not contain all of the
information that is important to you. You should read carefully this entire
document and the other documents referenced in it for a more complete
understanding of the merger. In particular, you should read the documents
attached to this proxy statement/prospectus, including the merger agreement,
which is attached as Annex A, and the opinion of New York Capital Corporation,
which is attached as Annex D, and the opinion Houlihan Lokey Howard & Zukin
Financial Advisors, Inc., which is attached as Annex L.
The Companies
HealthWatch, Inc.
1100 Johnson Ferry Road
Suite 670
Atlanta, Georgia 30342
(404) 256-0083
HealthWatch, Inc. is a healthcare information technology company operating
as an Enterprise Applications Provider and an Application Service Provider for
a variety of healthcare businesses. The primary difference between an
Enterprise Service Provider and an Application Service Provider is where the
software program and data is physically processed and stored. As an Enterprise
Application Provider, HealthWatch offers its customers one comprehensive
software program that will meet the customer's total information technology
needs, which is installed and managed on the customer's system. As an
Application Service Provider, HealthWatch offers its customers access to its
software product through the Internet and charges a fee on a per user basis.
HealthWatch offers an enterprise software program, known as the Healthcare
Enterprise System (the "HES System"), which uses proprietary technology to
distribute, in compressed digital format, one integrated system that includes
over 50 information applications for the management of a healthcare
enterprise's resources, patient data, clinical data and finances. The HES
System is capable of processing and tracking information for the entire
healthcare cycle from the doctor visit, specialty clinic or hospital stay, to
the laboratory tests, pharmacy prescriptions, home care, insurance payments and
more. The HES System can efficiently download applications over the Internet to
a customer managed and operated environment or run applications efficiently on
the Internet as an outsourced application, where HealthWatch will manage and
maintain the HES System. HealthWatch is currently in the marketing and
deployment stage for the HES System. HealthWatch first began offering the HES
System as an Application Service Provider and Enterprise Service Provider in
October 2000. However, as of the date hereof, HealthWatch has generated
virtually no revenue from the sale of the HES System. Almost all revenue for
the six months ended December 31, 2000, was from supplies, service and repair
work associated with HealthWatch's medical device business, which has been
discontinued.
In both the Enterprise Application Provider and Application Service Provider
models, HealthWatch expects to market, deliver and maintain the HES System
primarily over the Internet. The HES System can be used by physician practices,
outpatient clinics, hospitals, long-term care facilities, home health
providers, health insurance payors and other healthcare facilities.
Halis, Inc.
1100 Johnson Ferry Road
Suite 670
Atlanta, Georgia 30342
(404) 364-1871
Halis, Inc., based in Atlanta, Georgia, owns the HES System, which
incorporates a software utility known as MERAD that provides an advanced
database architecture and intelligent information processing algorithms
that was developed by HealthWatch and has been licensed to Halis pursuant to a
perpetual software license
4
agreement. Under a business collaboration agreement between HealthWatch and
Halis, HealthWatch has a non-exclusive right to market the HES System and
receive commissions from any sale made by HealthWatch. The business
collaboration agreement expires on September 20, 2005 with automatic renewals
for successive one-year terms.
Halis targets its healthcare software program business to healthcare
industry participants, such as physician practices, outpatient clinics and
hospitals that generally have 100 users or more. Halis expects to capitalize on
the healthcare industry's demand for software that is flexible, easy to
maintain and cost efficient. In addition, Halis' subsidiary, American Benefit
Administrative Services, Inc., provides claims processing and other
administrative services to major companies throughout the United States.
During the first quarter of fiscal year 1999, Halis' board of directors
decided that in order to conserve its resources and to operate more
efficiently, Halis would focus its attention on support and services to Halis'
current HES System customers and on its claims processing capabilities, and
would rely upon HealthWatch to market the HES System to new customers.
HealthWatch is in the process of expanding this capability with the goal of
identifying third party resellers for the HES System. Halis' corporate
headquarters are located in Atlanta, Georgia. HealthWatch and Halis share
office space and administrative support under a cost sharing arrangement.
Halis' Chicago facility is the location for its American Benefit Administrative
Services subsidiary, which performs healthcare claims processing and other
healthcare related services for employers.
Our Reasons for the Merger
The HealthWatch and Halis boards of directors have determined that the
merger is in the best interests of their respective stockholders. In reaching
their respective decisions, the boards of directors of the two companies
considered the following factors, among other things:
. The two companies share common management and have similar philosophies
with regard to future growth. In addition, the two companies have worked
closely in the development and deployment of the HES System.
. The two companies can achieve potential synergies and operating
efficiencies through combining the companies and cross-marketing each
company's products and services. To review the reasons for the merger in
greater detail, as well as related uncertainties, see pages 73 and 80.
. The merger would allow the combined company to lessen duplicate
administrative and regulatory burdens, thus allowing it to focus more of
its financial and personnel resources on the marketing, selling and
support of its software products and services.
Risks of the Merger
In considering whether to approve the merger agreement, you should consider
the risks of the merger, including the following:
. HealthWatch has operating losses totaling over $30 million and Halis has
operating losses totaling over $38 million; together, the combined
companies have lost over $69 million since inception and we expect losses
to continue in the foreseeable future;
. HealthWatch first began marketing a pilot version of the HES System in
1998; however, to date there have been no sales from that effort;
. The exchange ratio for the merger is fixed, as such the value received by
Halis stockholders and paid by HealthWatch could change if the market
price of HealthWatch's common stock changes;
. HealthWatch's executive officers and directors and their affiliates have
control over 29% of the voting power of HealthWatch, as such they will be
able to control matters submitted to a vote of the stockholders of
HealthWatch, including the election of directors;
. HealthWatch and Halis rely on the HES System as its sole product and our
success is dependent on the healthcare industry's acceptance of that
product.
5
We urge you to read carefully the factors described in "RISK FACTORS" on
pages 15 through 25 in making your decision.
Conflicts of Interests (Page 84)
In considering the boards' recommendations that you vote to approve the
merger, you should note that the directors and officers of HealthWatch and
Halis participate in arrangements and have continuing indemnification against
certain liabilities that provide them with interests in the merger that are
different from, or in addition to, yours. These rights and interests include
positions as directors and/or executive officers of HealthWatch following the
merger and the right to continued indemnification and insurance coverage by
HealthWatch for acts or omissions occurring prior to the merger. As a result,
these directors and officers could be more likely to vote to approve the merger
agreement than stockholders of HealthWatch and Halis generally.
In addition, Paul W. Harrison is the Chairman, President and CEO of both
Halis and HealthWatch. Furthermore, John Gruber, Robert Tucker and John R.
Prufeta, members of HealthWatch's board of directors, have current or past
employment or contractual relationships with Commonwealth Associates, L.P., and
pursuant to an agency agreement between Commonwealth Associates and
HealthWatch, Commonwealth Associates will receive a fee equal to five percent
of the consideration paid or received in the merger. While there are no
agreements in place between the above named directors and Commonwealth
Associates that would convey benefits directly to such directors, as a result
of their current or past employment relationships, these directors could be
more likely to vote to approve the merger agreement than stockholders of
HealthWatch and Halis generally.
Recommendations to Stockholders
To HealthWatch Stockholders:
The HealthWatch board of directors believes that the merger is in your best
interests and recommends that you vote FOR the proposal to approve the merger
agreement and the transactions associated with it, including the issuance of
shares of HealthWatch common stock to Halis stockholders and the conversion of
Halis stock options into options to purchase HealthWatch common stock. In
addition, the HealthWatch board of directors recommends that you vote FOR the
proposals to amend the HealthWatch Articles of Incorporation to increase
HealthWatch's authorized capital stock and ratify and approve anti-dilution
provisions contained in its outstanding preferred stock and other securities.
These recommendations were made by a vote of directors present at a meeting of
the board of directors of HealthWatch to approve the merger agreement.
To Halis Stockholders:
The Halis Board believes that the merger is in your best interests and
recommends that you vote FOR the proposal to approve the merger agreement and
the transactions associated with it.
Stockholder Vote Required to Approve the Merger
HealthWatch:
The merger agreement and the transactions associated with it must be
approved by the affirmative vote of a majority of shares present in person or
by proxy at the special meeting of the HealthWatch stockholders and entitled to
vote thereon, which may include persons who are directors and executive
officers of HealthWatch, Halis, or in some cases both companies. As of December
31, 2000, directors and executive officers of HealthWatch held 153,021 shares
or approximately 3.4% of the outstanding shares entitled to vote at the
HealthWatch special meeting. This number includes 121,531 shares held by Paul
W. Harrison, Chairman, President and CEO of HealthWatch and Halis. In addition,
Halis holds 16,667 shares or .3% of the outstanding shares entitled to vote at
the HealthWatch special meeting. The Halis board of directors and Mr. Harrison
have both indicated their intent to vote FOR the merger in their capacity as
stockholders of HealthWatch.
6
Halis:
The merger agreement and the transactions associated with it must be
approved by the affirmative vote of the holders of a majority of the issued and
outstanding stock entitled to vote at the special meeting of the Halis
stockholders. This includes persons who are directors and executive officers of
HealthWatch, Halis, or in some cases both companies. As of December 31, 2000,
the directors and executive officers of Halis held approximately 5.3% of the
outstanding shares of Halis entitled to vote at the Halis special meeting, of
which 2,990,849 shares or 4.8% were held by Mr. Harrison. In addition,
HealthWatch directly holds 15,763,655 shares or 25.7% of the outstanding shares
of Halis entitled to vote on the merger. The HealthWatch board of directors and
Mr. Harrison have both indicated their intent to vote FOR the merger in their
capacity as stockholders of Halis. Assuming the Halis directors and officers,
including Mr. Harrison, and HealthWatch vote FOR the merger proposal, only
12,093,107 shares or 28% of the remaining shares entitled to vote will be
necessary to approve the merger.
Because the merger agreement and transactions associated with it must be
approved by a majority of the outstanding capital stock entitled to vote, your
abstention, failure to vote or your failure to instruct your broker as to how
to vote your shares will have the effect of a vote "Against" the merger
agreement and the transactions associated with it.
To review information relating to stockholder votes in greater detail, see
"THE SPECIAL MEETINGS--Voting Securities and Record Dates Securities and Record
Date" beginning on page 26.
HealthWatch Stockholder Vote Required to Approve Other Proposals
A majority of all issued and outstanding capital stock entitled to vote,
including common stock, the Series C Preferred and the Series D Preferred
voting as a single class, must approve HealthWatch's proposal to increase the
authorized capital stock from 10 million shares of common stock and 1 million
shares of preferred stock to 50 million shares of common stock and 15 million
shares of preferred stock (Proposals 2.A and 2.B). Abstentions and broker non-
votes will have the effect of a vote "Against" these proposals.
All other HealthWatch proposals (Proposals 3.A through 3.E and Proposal 4)
must be approved by the affirmative vote of a majority of the voting power
present in person or by proxy at the special meeting of the HealthWatch
stockholders and entitled to vote thereon. For these proposals, abstentions are
counted for the purposes of calculating shares entitled to vote, but are not
counted as shares voting and therefore have the effect of a vote "Against" each
such proposal. Also, for these proposals, broker non-votes are not counted as
shares present at the meeting and entitled to vote and therefore have no
effect.
The Merger
In the merger, Halis will merge with and into a wholly-owned subsidiary of
HealthWatch named HealthWatch Merger Sub, Inc., a Georgia corporation.
HealthWatch Merger Sub, Inc. will survive the merger and Halis will cease to
exist as a separate corporate entity. The merger agreement is attached as Annex
A at the back of this joint proxy statement/prospectus. We encourage you to
read the merger agreement as it is the legal document that governs the merger.
What Stockholders Will Receive in the Merger
As a result of the merger, Halis stockholders will receive for each share of
Halis common stock that they own one twentieth (.05) of a share of fully paid
and non-assessable HealthWatch common stock; the exchange ratio shall be one
share of HealthWatch common stock for twenty shares of Halis common stock, or
.05. Halis stockholders will not receive fractional shares. Instead, they will
receive a check in payment for any fractional share based on the average market
value of HealthWatch common stock during a specified period prior to the
merger.
7
In addition, at the time the merger is completed, holders of Halis stock
options will have their options converted into options to purchase HealthWatch
common stock. The exercise price of such converted options will be adjusted to
reflect the exchange ratio.
Do not send in your stock certificates now. When the merger is completed you
will receive written instructions for exchanging your Halis stock certificates.
HealthWatch stockholders will continue to hold their HealthWatch stock
certificates.
Ownership of HealthWatch Following the Merger
The shares of HealthWatch common stock issued to Halis stockholders in the
merger will constitute approximately 52% of the outstanding HealthWatch common
stock after the merger. The current stockholders of HealthWatch will hold the
remaining approximately 48% of the outstanding HealthWatch common stock after
the merger. However, if the holders of the Series C and D Preferred convert all
of their Shares into HealthWatch common stock, the current stockholders of
HealthWatch will own 66% of the outstanding HealthWatch common stock, and the
former stockholders of Halis (excluding HealthWatch) will own 34% of the
outstanding HealthWatch common stock.
Conditions to Completion of the Merger (see Page 93)
HealthWatch's and Halis' respective obligations to complete the merger are
subject to the satisfaction or waiver of various closing conditions. Should
either party fail to satisfy its respective obligations, the non-breaching
party may be permitted to withdraw from the merger, and the breaching party may
be subject to a $500,000 termination fee under certain circumstances. The
material conditions that must be satisfied or waived before the completion of
the merger include the following:
. The Halis stockholders must approve the merger agreement and merger and
the HealthWatch stockholders must approve the issuance of HealthWatch
common stock in the merger.
. HealthWatch, Halis and any of their subsidiaries must receive all
consents, approvals and actions of, filings with and notices to, any
governmental entity required to consummate the merger, and the other
transactions contemplated thereby, must be obtained.
. No injunction or order preventing the completion of the merger may be in
effect.
. HealthWatch and Halis each must receive an opinion of tax counsel to the
effect that the merger will qualify as a transaction in which no gain or
loss for United States federal income tax purposes will be recognized
upon receiving HealthWatch shares.
. The shares of HealthWatch common stock to be issued in the merger must
have been approved for listing on the Nasdaq SmallCap Market.
. A Form S-4 covering the shares of HealthWatch common stock to be issued
in the merger must become effective under the Securities Act of 1933
prior to the mailing of this joint proxy statement/prospectus and no stop
order or proceeding seeking a stop order may be threatened or initiated
by the United States Securities and Exchange Commission.
. HealthWatch's and Halis' respective representations and warranties in the
merger agreement must be true and correct in all material respects.
. No material adverse effect shall have occurred with respect to
HealthWatch or Halis.
. HealthWatch and Halis must have complied in all material respects with
their respective agreements and covenants in the merger agreement.
8
If either HealthWatch or Halis waives any conditions, each company will
consider the facts and circumstances at that time and determine whether it is
appropriate to resolicit proxies from its respective stockholders.
Termination (Page 94)
Together HealthWatch and Halis may agree to terminate the merger agreement
without completing the merger, whether or not their respective stockholders
have approved the merger agreement. The merger agreement may also be terminated
by the board of directors of either company in certain other circumstances,
including:
. If the merger is not completed on or before April 30, 2001, except that
neither HealthWatch nor Halis may terminate the merger agreement if its
breach of the merger agreement is the reason the merger has not been
completed by that date;
. If the Halis or HealthWatch stockholders do not approve the merger;
. If the other company's board of directors has failed to recommend the
merger to its stockholders or has withdrawn or adversely modified or
qualified its recommendation of the merger; or
. If the other company has failed to perform certain of its obligations
under the merger agreement.
Officers and Directors Following the Merger
Following the merger, the board of directors of HealthWatch will consist of
six members, including Paul W. Harrison, who is a current member of both the
Halis and HealthWatch boards. In addition, David M. Engert, Robert Tucker, John
R. Prufeta, John Gruber and Harold Blue will continue to serve on the
HealthWatch board of directors.
Following the merger, Paul W. Harrison, the current Chairman, President and
Chief Executive Officer of Halis and HealthWatch, will continue to serve as
Chairman, President and Chief Executive Officer of HealthWatch. In addition,
the other officers of HealthWatch will continue to serve in their respective
positions until their resignation or removal.
Important United States Federal Income Tax Consequences
We have structured the merger so that, in general, the exchange of Halis
common stock for HealthWatch common stock will be tax-free to Halis
stockholders for federal income tax purposes, except for cash paid for
fractional shares. HealthWatch and Halis must receive legal opinions to this
effect as a condition of the merger. To review the tax consequences to
stockholders in greater detail, see page 97.
Tax matters are very complicated and the tax consequences of the merger to you
will depend on your individual circumstances. You should consult your tax
advisors for a full understanding of all of the tax consequences of the merger
to you.
Dissenters' Rights (see Page 85)
Under Georgia law, Halis stockholders who submit a written demand for
appraisal of their shares and who comply with the other applicable statutory
procedures under Georgia law, including not voting in favor of adopting the
merger agreement, will be entitled to appraisal rights and to receive payment
in cash for the fair value of their shares.
9
Opinion of Financial Advisors
HealthWatch:
In deciding to approve the merger, the HealthWatch board of directors
considered the opinion of its financial advisor, Houlihan Lokey Howard & Zukin
Financial Advisors, Inc., as to the fairness, as of the date of the opinion, of
the merger from a financial point of view to the HealthWatch public
stockholders. In reaching its opinion, Houlihan Lokey relied solely on the
discounted cash flow approach and rejected the other valuation methodologies as
untrustworthy, as discussed in the section of this joint proxy/prospectus
entitled "Opinion of HealthWatch's Financial Advisor" beginning on page 74. The
full text of this opinion, which contains the assumptions made, matters
considered and the qualifications and limitations on the review undertaken, is
attached as Annex L to this joint proxy statement/prospectus. We encourage you
to carefully read this opinion in its entirety. This opinion does not address
the price at which HealthWatch common stock will trade after the merger and
does not constitute a recommendation as to how to vote with respect to any
matter relating to the merger. For more information about the Houlihan Lokey
opinion, see pages 74 through 79.
Halis:
In deciding to approve the merger, the Halis board of directors considered
the opinion of its financial advisor, New York Capital Corporation, as to the
fairness, as of the date of the opinion, of the exchange ratio from a financial
point of view to the Halis stockholders. The full text of this opinion, which
contains the assumptions made, matters considered and the qualifications and
limitations on the review undertaken, is attached as Annex D to this joint
proxy statement/prospectus. We encourage you to carefully read this opinion in
its entirety. This opinion does not address the price at which HealthWatch
common stock will trade after the merger and does not constitute a
recommendation as to how to vote with respect to any matter relating to the
merger. For more information about the New York Capital Corporation opinion,
see pages 80 through 84.
Comparative Per Share Market Price Information
Shares of HealthWatch common stock are listed on the Nasdaq SmallCap Market
and shares of Halis are quoted on the OTC Bulletin Board. On March 7, 2000, the
last trading day before the announcement of the proposed merger, the
HealthWatch common stock closed at $6.875 per share and the Halis common stock
closed at $0.39 per share. On April , 2001, the last trading day prior to the
date of this joint proxy statement/prospectus, HealthWatch common stock closed
at $ per share and Halis common stock closed at $ per share. For more
information about the comparative market price information, see page 116.
Exchange Value Received by Halis Stockholders
The following table shows (1) the closing price for HealthWatch common stock
and Halis common stock on (a) the day management first announced the merger and
(b) the date of this joint proxy statement/prospectus and (2) the exchange
value that Halis stockholders will receive on a per share basis and an
aggregate basis.
Value Received
by Halis Stockholders
HealthWatch Halis -------------------------
Common Stock Common Stock Per Share(1) Aggregate(2)
------------ ------------ ------------ ------------
March 7, 2000(3)............ $6.875 $.39 $.34 $790,625
March 8, 2000(4)............ $6.75 $.41 $.34 $776,250
April , 2001(5)............
10
--------
(1) Calculated by multiplying the HealthWatch closing price by the exchange
ratio (.050).
(2) Calculated by multiplying the per share value received by Halis
stockholders by the approximate number of shares to be issued (2,300,000).
(3) The last day of trading prior to the announcement of the merger.
(4) The day the companies jointly announced the signing of a letter of intent
for the merger.
(5) The date of this joint proxy statement/prospectus.
Comparative Rights of Stockholders (see Page 99)
The rights of stockholders of HealthWatch are governed by Minnesota law and
its articles of incorporation and by-laws. The rights of Halis stockholders are
governed by Georgia law and its articles of incorporation and by-laws. If the
merger is completed, the rights of former Halis stockholders who become
HealthWatch stockholders will be determined by Minnesota law and HealthWatch's
articles of incorporation and by-laws, which differ in certain respects from
Halis' articles of incorporation and by-laws.
Selected Historical and Pro Forma Consolidated Financial Data
The following tables show (1) selected historical consolidated financial
data of HealthWatch, (2) selected historical consolidated financial data of
Halis and (3) unaudited selected historical consolidated financial data
reflecting the merger of HealthWatch and Halis (which is referred to as "pro
forma" information). In presenting the pro forma statement of operations data
for the fiscal year ended June 30, 2000, HealthWatch and Halis assume the
companies had been merged throughout such respective periods. The pro forma
balance sheet data as of December 31, 2000 assumes that HealthWatch and Halis
merged on December 31, 2000. The following tables also show information about
HealthWatch's and Halis' historical earnings per share and book value per share
and similar pro forma information.
The information in the following tables is based on the historical
consolidated financial information contained elsewhere in this document. The
financial information presented in this section is only a summary, and you
should read it in connection with the detailed financial information provided
elsewhere in this document, which you can find beginning on page F-1.
We expect to incur transaction costs consisting primarily of financial
advisor, legal, accounting and investment banking fees, along with printing,
mailing and registration expenses that are expected to be incurred to complete
the merger. These costs have not been reflected in the selected unaudited pro
forma condensed consolidated financial data due to their non-recurring nature.
The selected unaudited pro forma condensed consolidated financial data is based
on an exchange ratio of 0.05 shares of HealthWatch common stock for each
outstanding Halis share and for each outstanding option or warrant for Halis
stock, excluding Halis shares owned by HealthWatch.
The selected unaudited pro forma condensed consolidated financial data is
not necessarily indicative of operating results that we would have achieved had
the merger been completed as of the beginning of the period. You should not
construe the pro forma data as representative of future operations. This
selected unaudited pro forma condensed consolidated financial data should be
read in connection with the unaudited pro forma financial statements included
elsewhere in this document.
HealthWatch has allocated the total estimated purchase price of the
transaction on a preliminary basis to assets and liabilities based on
management's estimate of their fair market values. HealthWatch has allocated
the excess of the purchase price over the fair market value of the net assets
acquired to goodwill and other intangible assets. HealthWatch will update these
preliminary allocations based on the results of final valuations of the assets
acquired and liabilities assumed. The impact of such changes could be material.
11
HealthWatch Selected Historical Financial Data
(In Thousands, Except Shares and per Share Data)
(Unaudited)
Six Months Ended
Years Ended June 30, December 31,
---------------------------------------- -------------------
1997 1998 1999 2000 2000 1999
-------- -------- -------- ---------- --------- ---------
Selected Financial Data:
Revenue............... $ 2,089 $ 1,383 $ 1,221 $ 552 $ 184 $ 322
Loss from continuing
operations........... 2,189 4,084 1,820 3,741 1,999 1,127
Net Loss.............. 2,189 4,084 1,820 3,575 1,999 962
Basic and diluted net
loss per share(1).... 4.5 12.25 4.32 3.82 2.54 1.21
Basic and diluted
weighted average
shares............... 488,114 333,865 537,972 1,538,924 2,142,751 1,036,263
Cash and cash
equivalents.......... $ 45 $ 854 $ 22 $ 16 52 223
Working capital....... (404) (340) (1,430) 3,748 1,621 (932)
Total Assets.......... 2,089 2,469 3,477 7,440 5,700 3,057
Long-Term obligations,
net of current
portion.............. -- -- -- -- -- --
Total Liabilities..... 1,461 1,775 1,644 541 693 1,317
Convertible preferred
stock................ -- 11 15 8 8 4
Total stockholders'
equity (deficit)..... $ 627 $ 694 $ 1,833 $ 6,899 5,007 1,740
--------
(1) Calculated by dividing the loss attributable to common shares (net loss
less preferred stock dividends--undeclared less amortization of beneficial
conversion options on preferred stock) by the weighted average number of
shares outstanding. Does not include convertible preferred stock, common
stock options or warrants, or convertible debt in the loss per common share
calculation, as their effect is anti-dilutive.
Halis Selected Historical Financial Data
(In Thousands, Except Shares and per Share Data)
Year Ended December 31,
-------------------------------------------------
1997 1998 1999 2000
----------- ----------- ----------- ----------
Selected Financial Data:
Revenue................... $ 10,135 $ 7,630 $ 5,082 $ 4,051
Operating Loss............ 14,848 3,910 794 704
Net Loss.................. 20,502 3,149 1,445 777
Basic and diluted net loss
per share(1)............. 0.57 0.06 0.03 0.01
Basic and diluted weighted
average shares........... 36,094,189 50,804,461 51,266,751 59,147,006
Cash and cash equivalents. $ 1,161 $ 52 $ 14 328
Working capital........... (1,791) (2,458) (2,116) (1,045)
Total Assets.............. 6,925 3,741 1,786 1,638
Long-Term obligations, net
of current portion....... 145 36 209 143
Total Liabilities......... 4,208 3,918 2,669 1,896
Convertible preferred
stock.................... -- -- -- --
Total stockholders' equity
(deficit)................ $ 2,727 $ (177) $ (883) (258)
12
--------
(1) Calculated by dividing the loss attributable to common shares by the
weighted average number of shares outstanding. Does not include common
stock options or warrants in the loss per common share calculation, as
their effect is anti-dilutive.
Selected Unaudited Pro Forma Consolidated
Financial Data and Comparative per Share Information
for the HealthWatch/Halis Merger
The following selected unaudited pro forma condensed consolidated financial
data gives effect to the merger using the purchase accounting method. The
unaudited pro forma consolidated balance sheet data assumes the merger took
place on December 31, 2000. The statement of operations and the pro forma
adjustments described in the Notes to the Unaudited Pro Forma Condensed
Combining Financial Information assumes the merger took place on July 1, 1999.
The unaudited pro forma consolidated and equivalent financial data does not
reflect any cost savings or other synergies anticipated by management as a
result of the merger. Also, in connection with the merger, the companies expect
to incur charges for merger-related costs. Neither HealthWatch nor Halis have
included the amount of these merger-related costs in their historical financial
data. The pro forma earnings per share data does not reflect any of these
costs. The companies may have performed differently if they had always been
combined. You should not rely on the pro forma information as being indicative
of the historical results the combined company would have had or the results
they will experience in the future.
Selected Unaudited Pro Forma Condensed Consolidated Financial Data (1)
(In Thousands, Except Shares and Per Share Data)
Year Ended Six Months Ended
June 30, 2000 December 31, 2000
----------------- -----------------
Unaudited Pro Forma Condensed Consolidated
Statements of Operations Data:
Revenue................................. $ 4,856 $ 2,260
Loss from Continuing Operations......... 5,088 2,836
Basic and diluted net loss per share.... 1.95 1.43
Basic and diluted weighted average
shares................................. 3,788,019 4,391,846
As of
December 31, 2000
-----------------
Unaudited Pro Forma Condensed Consolidated
Balance Sheet Data:
Cash and cash equivalents............... $ 380
Working capital......................... 1,118
Total Assets............................ 10,090
Long-Term obligations, net of current
portion ............................... 143
Total Liabilities....................... 2,047
Convertible preferred stock............. 8
Total stockholders' equity (deficit).... $ 8,043
--------
(1) For detailed information, see "Unaudited pro forma consolidated financial
information" on pages 108 through 115.
13
HealthWatch, Halis and Pro Forma Comparative Per Share Data
The following table contains:
. Historical net loss per share and historical net tangible book value per
share data of HealthWatch;
. Historical net loss per share and historical net tangible book value per
share data of Halis;
. Unaudited pro forma condensed consolidated net loss per share and
unaudited pro forma condensed consolidated net tangible book value per
share data of the combined company giving effect to the merger; and
. Unaudited pro forma condensed consolidated net loss on a per share
equivalent basis.
You should read the information in this table in conjunction with the
historical financial statements of HealthWatch and Halis and the related notes
contained in this joint proxy statement/prospectus and the unaudited pro forma
condensed consolidated financial information and related notes also included
elsewhere in this joint proxy statement/prospectus. The unaudited pro forma
condensed consolidated financial information is not necessarily indicative of
the net loss per share or book value per share that would have been achieved
had the merger been completed as of the beginning of any period presented and
should not be construed as representative of these amounts on any future dates
or periods.
Historical Data Pro Forma
----------------- Condensed
HealthWatch Halis Consolidated
----------- ----- ------------
Net loss per share--basic and diluted for the
year ended June 30, 2000...................... $3.82 $ .03 $1.95
Net loss per share--basic and diluted for the
six months ended December 31, 2000............ $2.54 $ .01 $1.43
Net tangible book value per share at December
31, 2000...................................... $1.86 $(.01) $ .37
. Historical net tangible book value per share is computed by dividing
stockholders' equity less goodwill and other intangible assets by the
number of shares of common stock outstanding at the end of the period.
. Pro forma condensed consolidated book value per share is computed by
dividing pro forma stockholders' equity less goodwill and other
intangible assets, including the effect of pro forma adjustments, by the
pro forma number of shares of HealthWatch common stock that would have
been outstanding had the merger been consummated as of June 30, 2000.
For the
For the Year Six Months
Ended 6/30/00 Ended 12/31/00
------------- --------------
Halis equivalent pro forma per share data:
Net loss per share--basic and diluted............. $.10 $.07
Net tangible book value per share................. $.05 $.02
. The Halis per share equivalent data are calculated by multiplying the
HealthWatch pro forma amounts by .05, the exchange ratio to HealthWatch
common stock.
14
RISK FACTORS
In addition to the other information contained in this joint proxy
statement/prospectus, you should carefully consider the following risk factors
in deciding whether to vote for the merger and other stockholder proposals.
Unless the context clearly provides otherwise, these risks apply to the
combined company and words such as "we" and "our" should be read to refer to
the combined company after consummation of the proposed merger.
RISK FACTORS RELATING TO THE MERGER
Both companies have only a limited operating history that you may use to assess
our future prospects.
While both HealthWatch and Halis have been in business for many years, their
entrance into the healthcare software business was not until 1998. As such,
HealthWatch and Halis have generated virtually no revenues from their
information technology businesses. Our revenue and income potential are
unproven and our business model is constantly evolving.
As a result of our limited operating history, our plan for growth, in
particular through the formation of strategic business relationships and
acquisitions, and the competitive nature of the markets in which we compete,
our historical financial data is of limited value in anticipating future
performance. We cannot assure you that we will be able to expand our customer
base through acquisitions, or otherwise, and be able to attract new customers.
Both companies have a history of operating losses and HealthWatch expects
losses to continue for the foreseeable future.
The companies have not achieved profitability and we cannot be certain that
the combined company will realize sufficient revenue to achieve profitability.
HealthWatch incurred net losses of $2,189,260 in the year ended June 30, 1997,
$4,084,474 in the year ended June 30, 1998, $1,819,839 in the year ended June
30, 1999 and $3,575,382 in the year ended June 30, 2000. As of December 31,
2000, HealthWatch had an accumulated deficit of $30,743,303.
Halis incurred net losses of $20,502,494 in the year ended December 31,
1997, $3,148,799 in the year ended December 31, 1998, $1,444,827 in the year
ended December 31, 1999 and $776,963 in the year ended December 31, 2000. As of
December 31, 2000, Halis had an accumulated deficit of $38,838,966.
We plan to increase the combined company's operating expenses to expand our
sales and marketing operations, broaden our customer support capabilities and
continue to build our operational infrastructure. HealthWatch estimates that it
will spend approximately $700,000 on its marketing, sales and customer support
on an annual basis starting in fiscal year 2001, as compared to approximately
$60,000 spent during the fiscal year ended June 30, 2000 and zero spent during
the fiscal year ended June 30, 1999. This is only an estimate of its actual
expenditures for these costs, actual costs could be more or less depending on
the success it has in marketing its products. If growth in our revenues does
not outpace the increase in expenses, we may not achieve or sustain
profitability. We expect that the combined company will continue to lose money
for the foreseeable future. Obviously, we cannot guarantee success and we may
need an infusion of cash during fiscal 2001 in order for us to make any
significant inroads in our business plan.
We have fixed the conversion ratio to be used in the merger, which may result
in an increase or decrease in the value received by Halis stockholders.
The exchange rate for the merger is fixed at one share of HealthWatch common
stock for twenty shares of Halis common stock. As such, should the market price
for HealthWatch or Halis change, the value of the consideration received by
Halis stockholder and paid by HealthWatch will change. For example, if the
market price of HealthWatch common stock goes down, then the value received by
Halis stockholders will also go
15
down. On March 8, 2000, the date of the merger announcement, HealthWatch's
common stock had a closing price of $6.75 per share. Since that time,
HealthWatch's common stock price has decreased significantly. On January 25,
2001, HealthWatch's common stock price closed at $1.25 per share. Based on that
decrease, the merger consideration received by a Halis stockholder would
decrease from $0.34 per share to $0.06 per share.
Our operating expenses are fixed in the short term; if our forecasted sales are
delayed or do not occur, our operating results will fluctuate, which could
cause our stock price to drop.
We expect that the combined company's operating results will fluctuate
significantly in the future based upon a number of factors, many of which are
not within our control. We have based our operating expenses on anticipated
revenue growth and our operating expenses are relatively fixed in the short
term. For example, our primary expenses are related to rent, overhead and
personnel costs. As such, it is difficult to make changes to these costs
quickly without affecting future operations. For the fiscal year ending June
30, 2001, we anticipate that the combined company will incur total rent,
overhead and personnel costs of approximately $8,000,000, which represents 92%
of our total costs for fiscal 2001. We may expend substantial funds and
management resources during the development and sales cycle, but fail to make
sufficient sales. Accordingly, our results of operations for a particular
period may be adversely affected if the sales forecasted for that period are
delayed or do not occur. If this occurs, the price of our common stock would
likely decrease.
If the merger is completed, HealthWatch may be held responsible for Halis'
outstanding lawsuits.
Halis is currently subject to four outstanding lawsuits, all of which arise
out of breach of contract claims against Halis. The total of damages sought by
the respective plaintiffs in these suits, including punitive damages and costs,
aggregate to not less than $4.3 Million, the exact amount to be determined at
trial. If HealthWatch loses or settles any of these claims after the merger, it
will owe damages that may cause a reduction in available cash, a reduction in
earnings, a drop in stock price and negative publicity.
If we do not integrate all aspects of our businesses successfully, we may not
realize the potential benefits of the merger and the value of your investment
may decrease significantly.
HealthWatch anticipates realizing cost savings, operating efficiencies and
synergies from the merger of these two companies. HealthWatch will need to
overcome significant issues in order to realize any benefits or synergies from
the merger, including the timely, efficient and successful execution of a
number of post-merger events. Key events include:
. integrating the accounting, operations and administrative functions of
the two companies;
. retaining and assimilating the key technical and operational employees of
each company;
. retaining the existing customers and business relationships of each
company;
. developing uniform standards, controls, procedures and policies.
The successful execution of these post-merger events will involve
considerable risk and may not be successful. These risks include:
. the potential disruption of the combined company's ongoing business and
distraction of its management;
. unanticipated expenses related to delays in closing the merger;
. the impairment of relationships with employees and customers as a result
of any integration of new management personnel; and
. potential unknown liabilities associated with the acquired business.
The combined company may not succeed in addressing these risks or any other
problems encountered in connection with the merger, which could cause our stock
price to drop.
16
If the costs of the merger exceed the cost savings realized from the merger,
our combined financial results could be adversely affected.
If the benefits of the merger do not exceed the costs associated with the
merger, including any dilution of HealthWatch stockholders resulting from
issuing shares in connection with the merger, HealthWatch's financial results,
including earnings per share, could be adversely affected. In connection with
the merger, HealthWatch expects to incur estimated non-recurring transaction
costs of $225,000 and Halis expects to incur estimated non-recurring
transaction costs of $95,000. However, this is only an estimate and the costs
could exceed this amount, particularly if we encounter delays. Halis and
HealthWatch have already incurred many of these costs, and if the merger is not
completed, HealthWatch and Halis will have incurred significant costs but will
receive no benefits.
Halis' officers and directors have conflicts of interest that may influence
them to support or approve the merger.
The directors and officers of Halis have continuing indemnification against
liabilities that provide them with interests in the merger that are different
from, or in addition to, yours. Paul W. Harrison, Chairman of the Board, CEO
and President of both HealthWatch and Halis, has a conflict of interest as a
result of his position with both companies. In addition, Mr. Harrison owns
approximately 28% of HealthWatch's outstanding common stock, assuming the
exercise of his stock options and the issuance of 250,800 shares of common
stock if proposal 4 is approved by the HealthWatch stockholders to allow the
conversion of Series P Preferred. Mr. Harrison also owns 12% of Halis'
outstanding common stock, assuming the exercise of his stock options.
Furthermore, HealthWatch owns approximately 25% of Halis' outstanding common
stock, excluding the shares owned by Mr. Harrison directly. For these reasons,
the directors and officers of Halis could be more likely to vote to approve the
merger agreement than if they did not hold these interests. Halis stockholders
should consider whether these interests may have influenced the directors and
officers to support or recommend the merger.
Failure to complete the merger could negatively impact Halis' and/or
HealthWatch's stock price, future business and operations.
If the merger is not completed for any reason, Halis and HealthWatch may be
subject to a number of material risks, including the following:
. the price of Halis common stock and/or HealthWatch common stock may
decline to the extent that the relevant current market price reflects a
market assumption that the merger will be completed;
. Halis anticipates spending a total of $95,000 on costs related to the
merger, such as legal and accounting and financial advisor fees, most of
which have already been incurred and must be paid even if the merger is
not completed;
. HealthWatch anticipates spending a total of $225,000 on costs related to
the merger, such as legal, accounting fees, most of which have already
been incurred and must be paid even if the merger is not completed; and
. the companies are dependent on each other's technology and potential
customers may resist using either or both companies' products due to such
reliance.
In response to the announcement of the merger, Halis' and/or HealthWatch's
customers and strategic business relationships used in marketing and selling
its products may delay or defer decisions concerning the relevant company. Any
delay or deferral in those decisions by customers, resellers or suppliers could
have a material adverse effect on business of the relevant company, regardless
of whether the merger is ultimately completed. Similarly, current and
prospective Halis and/or HealthWatch employees may experience uncertainty about
their future roles with HealthWatch until HealthWatch's strategies with regard
to Halis are announced or executed. This may adversely affect Halis' and/or
HealthWatch's ability to attract and retain key management, sales, marketing
and technical personnel.
17
Halis has experienced significant operating losses in the past and its auditors
have given it a going concern opinion for the last two years.
Halis has experienced significant operating losses during the past several
years and at December 31, 2000 had an accumulated deficit of $38,838,966. If
the merger is not completed Halis will require additional debt or equity
capital to sustain operations and continue its business. In addition, due to
the limited resources available to it during the last two fiscal years it was
unable to deploy its intended business strategy to any measurable degree. Its
auditors have given it a going concern opinion for the last two years
indicating that there is substantial doubt about its ability to continue as a
going concern.
You may be subject to federal income tax on the HealthWatch shares you receive
in the merger.
We have received opinions of legal counsel that the merger will constitute a
tax-free reorganization for federal income tax purposes. However, neither
HealthWatch nor Halis has requested or obtained a ruling from the Internal
Revenue Service. Therefore, there is a risk that the merger may not constitute
a tax-free reorganization, in which case, any gain you realize as a result of
the merger may be subject to taxation. In addition, your individual financial
situation may give rise to an obligation to pay taxes even if the merger is
considered generally to be a tax-free transaction.
RISK FACTORS CONCERNING THE COMBINED COMPANY'S BUSINESS OPERATIONS
We are dependent on the healthcare industry's acceptance of our products.
We cannot guarantee that participants in the healthcare industry and in
particular, physicians, will accept our HES System as a replacement for
existing record keeping practices. Market acceptance of our product will depend
upon continued growth in the use of the software products as a source of
services for the healthcare industry. The acceptance of an electronic method of
storing, managing and processing information by healthcare professionals will
require a broad acceptance of new methods of conducting business and exchanging
information. Our future financial success will depend upon our ability to
attract and retain healthcare providers as customers. Our failure to achieve
market acceptance would have a material adverse effect on our business, results
of operations and financial condition.
We are dependent on the revenues derived from a single product.
Our primary products and services relate to the HES System. Our success is
dependent on the healthcare industry's acceptance of the HES System. If the
healthcare industry does not accept our HES System, our business, results of
operations and financial condition would be adversely affected.
We are dependent on market acceptance of our Internet delivery method.
We are expecting that many of the smaller customers, i.e., company's with
less than 100 users, of our HES System will access our products through the
Internet. We cannot guarantee that participants in the healthcare industry will
accept a software application accessed through the Internet as a replacement
for traditional sources of these services, and to date, we have no customers
using the HES System through the Internet. Market acceptance of our Internet
product will depend upon continued growth in the use of the Internet generally
and, in particular, as a source of services for the healthcare industry. The
acceptance of the Internet for storing, managing and processing information by
healthcare professionals will require a broad acceptance of new methods of
conducting business and exchanging information. Our future financial success
will depend upon our ability to attract and retain healthcare providers as
customers. Our failure to achieve market acceptance of our Internet delivery
method would have a material adverse effect on our business, results of
operations and financial condition.
18
Halis has had limited success in marketing the HES System.
Halis first began marketing a pilot version of the HES System in 1998.
However, to date it has had no sales from that effort. We believe the primary
reasons for its limited success has been (i) a lack of financial resources
needed to market the product and (ii) perception that Halis will not be able to
service the product and customer due to such limited financial resources.
However, we cannot guarantee you that we will be successful in marketing the
HES System in the future. Our failure to gain market acceptance of the HES
System will have a significant adverse effect on our business, results of
operations and financial condition.
Our management and major stockholders will retain substantial control, which
could delay or prevent a change of control.
Our executive officers, directors and preferred stockholders have
substantial control over matters requiring approval by our stockholders, such
as the election of directors and approval of significant corporate
transactions. This concentration of ownership might also have the effect of
delaying or preventing a change in control. As of December 31, 2000,
HealthWatch's executive officers and directors together beneficially owned
approximately 29% of HealthWatch's outstanding common stock. Following the
merger, they will beneficially own approximately 23% of HealthWatch's
outstanding common stock, assuming we issue 2,300,000 shares of HealthWatch
common stock to Halis stockholders in connection with the proposed merger. As
of December 31, 2000, the holders of our Series C and D 8% Convertible
Preferred Stock controlled approximately 52% of the total voting power of
HealthWatch, excluding any unexercised options and warrants. Following the
merger they will control approximately 34% of the total voting power of
HealthWatch, excluding any unexercised options and warrants.
Paul Harrison, CEO and Chairman of the board of directors of HealthWatch and
Halis, exercises control over approximately 544,503 shares of HealthWatch
common stock, including currently exercisable options and warrants. Mr.
Harrison also holds 25,080 shares of our Series P Preferred Stock, which he can
convert into shares of HealthWatch common stock if proposal 4 is approved by
the HealthWatch stockholders. If Mr. Harrison converts his Series P Preferred
Stock, he will be issued approximately 250,800 shares of additional HealthWatch
common stock. Assuming that he converts all of his Series P Preferred Stock,
Mr. Harrison would control approximately 795,303 shares of HealthWatch common
stock, or approximately 28% of the outstanding shares of HealthWatch common
stock, prior to the merger and excluding from the total shares of HealthWatch
common stock other HealthWatch securities convertible into HealthWatch common
stock, including the Series A Preferred Stock, the Series C Preferred Stock,
the Series D Preferred Stock, the Series P Preferred Stock not owned by Mr.
Harrison, and other outstanding warrants and options of HealthWatch not owned
by Mr. Harrison. Additionally, Mr. Harrison, as the designer of our technology
and the HES System, is critical to the ongoing development and deployment of
products utilizing our technology. As a result of such concentration of
ownership and importance to the development of related software products,
Mr. Harrison will have the ability to exert significant influence on the
policies and affairs of HealthWatch and corporate actions requiring stockholder
approval, including the election of the members of the board of directors.
HealthWatch officers and directors have conflicts of interest that may
influence them to support the conversion feature of the Series P Preferred,
which if approved could dilute your ownership.
In Proposal 4 contained in this joint proxy statement/prospectus,
HealthWatch stockholders are being asked to approve the convertibility of the
Series P Preferred into common stock at a ratio of ten shares of common stock
to one share of Series P Preferred. Paul W. Harrison, Chairman, President and
Chief Executive Officer of HealthWatch, owns 25,080 shares of the Series P
Preferred and David M. Engert, Chief Operating Officer of HealthWatch, owns
3,177 shares of the Series P Preferred. If the proposal to allow Series P
Preferred to convert to common stock is approved, Mr. Harrison will be entitled
to convert his shares of Series P Preferred into 250,080 shares of HealthWatch
common stock and Mr. Engert will be entitled to convert his shares of Series P
Preferred into 31,770 shares of HealthWatch common stock. Other holders of
Series P
19
Preferred may also be deemed affiliates of HealthWatch because of their family
relationship with Mr. Harrison or their employment by HealthWatch. If all
Series P Preferred held by all possible HealthWatch affiliates were converted
as of December 31, 2000, such possible affiliates would beneficially hold
1,039,890 shares of HealthWatch common stock, or 34% of the outstanding
HealthWatch common stock, including shares they currently hold and options and
warrants exercisable within 60 days. This number does not include any shares of
HealthWatch common stock that would be received in connection with the merger.
Thus, if HealthWatch stockholders approve the conversion feature of the Series
P Preferred, your ownership percentage would be diluted if such conversion
feature was exercised.
If HealthWatch stockholders approve the anti-dilution provisions contained in
the other HealthWatch proposals, your ownership could be diluted.
HealthWatch has submitted other proposals to its stockholders with regard to
approval and ratification of certain anti-dilution provisions contained in
outstanding preferred stock and related warrants (Proposals 3.A through 3.C
beginning on page 121), which could dilute your ownership percentage. The anti-
dilution provisions for the Series C and Series D Preferred and Bridge Warrants
provide that in certain circumstances if HealthWatch issues common stock or
securities convertible or exchangeable for HealthWatch common stock having a
sale, conversion or exercise price less than the conversion or exercise price
for the Series C and Series D Preferred and Bridge Warrants then in effect,
then the conversion or exercise price of the Series C and Series D Preferred
and Bridge Warrants will be automatically reset to that lower price. If
HealthWatch's stockholders do not approve the Series C and Series D Preferred
and Bridge Warrants anti-dilution provisions, the HealthWatch stockholders will
experience no negative affect by voting against these Proposals.
The anti-dilution provisions in the Offering and Line of Credit Warrants could
dilute your ownership.
HealthWatch has submitted other proposals to its stockholders with regard to
approval and ratification of anti-dilution provisions contained in the
outstanding Offering and Line of Credit Warrants (Proposals 3.D and 3.E). The
anti-dilution provisions for the Offering and Line of Credit Warrants provide
that in certain circumstances if HealthWatch issues common stock or securities
convertible or exchangeable for HealthWatch common stock having a sale,
conversion or exercise price less than the exercise price for the Offering and
Line of Credit Warrants then in effect, then the exercise price of the Offering
and Line of Credit Warrants will be automatically reset to that lower price. As
such, your ownership percentage could be diluted if the anti-dilution
provisions are triggered.
In addition, the Offering and Line of Credit Warrants contain provisions
that if the anti-dilution provisions are not approved, the number of Offering
and Line of Credit Warrants will be automatically doubled. As of December 31,
2000, if the Offering and Line of Credit Warrants were doubled, the holders
would have the right to purchase 3,537,654 shares of HealthWatch common stock
upon exercise of the Offering and Line of Credit Warrants. Thus, if
stockholders do not approve the proposals related to the anti-dilution
provisions in the Offering and Line of Credit Warrants, your ownership
percentage would be diluted if the such warrants were exercised.
We hope to grow rapidly, and the failure to manage our growth could adversely
affect our business.
As we continue to increase the scope of our operations, we may not have an
effective planning and management process in place to implement our business
plan successfully. Currently, HealthWatch is in its development stage, however,
our software products are now ready for distribution and we have begun to
increase the marketing and sales activities related to our products. This
growth may strain our management systems and resources, which could adversely
affect our operations. We will need to continue improving our financial and
managerial controls and our reporting systems in order to manage such growth.
In addition, we will need to expand, train and manage our growing work force.
Our business, results of operations and financial condition will be materially
and adversely affected if we are unable to manage and integrate our expanding
operations effectively.
20
To grow our business, we may acquire other companies and raise capital by
issuing shares of our stock, which may subject us to additional risks and will
dilute your ownership.
HealthWatch's business plan contemplates the pursuit of strategic
acquisitions necessary to gain market share. Specifically, HealthWatch will
target companies which are currently performing management, billing and
collection services for the healthcare industry. The integration of these
acquired companies involves a number of special risks, as discussed above with
respect to the merger. In addition, we may also sell additional shares of our
stock to raise money for expanding operations. We cannot guarantee that we will
be able to identify and acquire suitable candidates on acceptable terms. We
also cannot promise that we will be able to arrange adequate financing,
complete any transaction or successfully integrate the acquired business. In
addition, HealthWatch may incur debt to finance future acquisitions, which
would result in additional interest expenses and decrease net income or
increase losses, as the case may be. Alternatively, or in addition to debt
financing, HealthWatch may issue securities in connection with future
acquisitions which would dilute the ownership of the current stockholders. Our
growth strategies could be adversely affected if we are unable to successfully
complete and integrate strategic acquisitions in a timely manner.
We Need to Expand our Sales and Customer Support Infrastructure.
HealthWatch and Halis are both development stage companies with relatively
small sales and customer support functions. However, as we begin to market and
sale our software products, we will need to expand these areas of the combined
company. Competition for qualified personnel in these areas is intense. We may
not be able to successfully expand our sales force, which would limit our
ability to expand our customer base. As a result, any difficulties we may have
in expanding our sales and marketing or customer support organizations will
have a negative impact on our ability to successfully capitalize on any
acquisitions we may complete.
There is no assurance that a public market for our common stock will continue
to develop.
There has only been a limited public market for HealthWatch common stock
with regard to trading volume and number of stockholders, resulting in
fluctuations in trading prices during periods of high or low volume.
HealthWatch currently has approximately 1,300 common stockholders and its daily
trading volume averaged 24,275 shares for the month of December 2000. We cannot
predict the extent to which investor interest in our common stock will lead to
the development of an effective trading market or how liquid that market might
become, especially if a large number of shares are introduced into the market
upon conversion of the shares of HealthWatch's existing preferred stock.
HealthWatch is listed on the Nasdaq SmallCap Market which can be a volatile
market.
HealthWatch common stock is quoted on the Nasdaq SmallCap Market and
currently has a very low trading volume. Consequently, the trading of only a
few shares may affect the market and may result in wide swings in price and
volume. As of the record date, the 52-week high for HealthWatch common stock
was $9.063 per share and the 52-week low was $0.37 per share. The market price
of HealthWatch's common stock could fluctuate widely in response to the
following particular factors:
. actual or anticipated variations in operating results;
. announcements by us or our competitors of new products, significant
contracts, acquisitions, or relationships;
. additions or departures of key personnel;
. future equity or debt offerings or our announcements of these offerings;
and
. economic conditions in the healthcare industry.
In addition, the stock market as a whole has experienced significant price
and volume fluctuations, and the market prices of technology companies,
particularly Internet-related companies, have been highly volatile.
21
These fluctuations have often been unrelated or disproportionate to the
operating performance of individual companies. These broad market fluctuations
may materially adversely affect our stock price, regardless of our operating
results. HealthWatch stockholders, including Halis stockholders who receive
HealthWatch common stock in the merger, may not be able to sell their shares at
or above the current Nasdaq SmallCap Market price. Our results of operations
during future fiscal periods might fail to meet the expectations of stock
market analysts and investors. This failure could lead the market price of our
common stock to decline and cause us to become the subject of securities class
action lawsuits.
HealthWatch has been the subject of delisting proceedings relating to the
Nasdaq SmallCap Market in the past and we cannot assure you that we will be
able to maintain our listing in the future.
Our failure to continue to meet all of the Nasdaq's requirements for
continued listing, compliance with which will be in part reliant on our ability
to improve our business, increase revenues and improve our earnings, could
result in the delisting of our common stock. In the past, Nasdaq has brought
delisting proceedings against HealthWatch for violation of its continued
listing policy with regard to the $1 minimum bid price per share and the $2
million net tangible asset requirements. These proceedings were ultimately
dismissed because HealthWatch was able to bring itself back into compliance.
However, we cannot assure you that we will be able to continue to meet Nasdaq's
continued listing requirements. Delisting from the Nasdaq SmallCap Market could
impact our stock price as well as make the development of a public market for
our common stock less likely.
We do not intend to pay future cash dividends.
HealthWatch and Halis have never paid common stock dividends and we do not
anticipate paying cash dividends on our common stock at any time in the near
future. Any decision to pay dividends will depend upon our profitability at the
time, cash availability and other factors. We may never pay cash dividends or
distributions on our common stock. In addition, we have issued preferred stock
with terms and conditions that restrict our ability to declare and pay common
dividends unless all preferred stock dividends that are due and payable have
been paid.
We have Broad Discretion in the Issuance of Additional Preferred Stock.
We are authorized to issue additional preferred stock. We may issue
preferred stock 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
common stockholders. The issuance of any series of preferred stock could affect
the rights of common stockholders, and therefore, reduce the value of the
common stock and make it less likely that common stockholders would receive a
premium for the sale of their common stock. In certain instances, existing
preferred stockholders must consent to the issuance of new classes of preferred
stock having rights senior to those of existing preferred stockholders or the
rules of the Nasdaq SmallCap Market may require common stockholder approval for
large issuances of convertible preferred stock. Preferred stock may include
voting rights, preferences as to dividends and liquidation, conversion and
redemption rights and sinking fund provisions. Currently, the HealthWatch
Articles of Incorporation authorize the issuance of one million shares of
Preferred Stock. Presently, there are 5,000 shares of 6% Series A Preferred
Stock outstanding, 4,000 shares of Series C 8% Convertible Preferred Stock
outstanding, 74,130 shares of Series D 8% Convertible Preferred Stock
outstanding and 66,886 shares of Series P Preferred Stock outstanding. We are
submitting a proposal in this joint proxy statement/prospectus to the
HealthWatch stockholders to increase authorized preferred stock from one
million to fifteen million shares (See proposal 2.B on page 118).
We will depend on the efficient operation of the Internet, other networks and
systems of third parties; if they do not operate efficiently, we will not be
able to effectively provide our products and services.
We will depend on the efficient operation of network connections from our
customers and their data processing vendors to our systems. HealthWatch does
not currently have any third parties under contract to
22
provide such network connections. Further, portions of our revenue are
dependent on continued usage by end-users of Internet services and their
connections to the Internet. For the fiscal year ending June 30, 2001,
management forecasted that approximately 7% of our total revenue would be
derived from our Internet applications, based on our sales models. However, to
date HealthWatch has had no sales or earned any fees from use of the HES System
through the Internet. Each of these connections, in turn, depends on the
efficient operation of web browsers, Internet service providers and Internet
backbone service providers, all of which have had periodic operational problems
or have experienced outages. We would be unable to provide a real time
connection to these systems if they experienced any operational problems or
outages and we would be unable to process transactions for end-users, resulting
in decreased revenues. In addition, any system delays, failures or loss of
data, whatever the cause, could reduce customer satisfaction with our products
and services and harm our sales.
Competition from third parties could reduce or eliminate demand for the
combined company's products and services.
The market for Internet services is highly competitive, and we expect that
competition will intensify in the future. We may not be able to compete
successfully against our current or future competitors and, accordingly, we
cannot be certain that we will be able to expand the number of our customers
and end-users, or retain our current customers or third-party service
providers. Many of our current and potential competitors have longer operating
histories and may be in a better position to produce and market their services
due to their greater financial, technical, marketing and other resources, as
well as their significantly greater name recognition and larger installed
customer bases.
Security breaches could damage our reputation and business.
The combined company's networks may be vulnerable to unauthorized access,
computer viruses and other disruptive problems. We transmit confidential
healthcare information in providing our services. Users of Internet and other
electronic commerce services are concerned about the security of transmissions
over public networks. Therefore, it is critical that our facilities and
infrastructure remain secure and that our facilities and infrastructure are
perceived by the marketplace to be secure. A material security breach affecting
the combined company could damage our reputation, deter healthcare providers
from purchasing our products or result in liability to us. Further, any
material security breach affecting our competitors could affect the
marketplace's perception of Internet services in general and have the same
effects.
Concerns over security and the privacy of users may inhibit the growth of
the Internet and other online services generally, especially as a means of
conducting healthcare transactions. Any well-publicized compromise of security
could deter people from using the Internet or using us to conduct transactions
that involve transmitting confidential healthcare information. We may need to
expend significant capital or other resources protecting against the threat of
security breaches or alleviating problems caused by security breaches. Although
we intend to continue implementing security measures, the measures that we
implement may be circumvented in the future. Eliminating computer viruses and
alleviating other security problems may result in interruptions, delays or
cessation of service to users accessing web sites that deliver our services,
any of which could harm our business. Our failure to respond to rapid changes
in the market for Internet services could cause us to lose revenue and harm our
business.
Newly introduced products may contain undetected or unresolved defects.
Our products are complex, integrated software programs that involve many
different applications that must communicate with each other. As a result, any
new or enhanced products we introduce may contain undetected or unresolved
software or hardware defects when they are first introduced or as new versions
are released. In the past, we have discovered minor errors in our products and
it is possible that design defects will occur in new products. These defects
could result in a loss of sales and additional costs, as well as damage to our
reputation and the loss of relationships with our customers.
23
If we Fail to attract and retain experienced personnel and senior management,
our ability to grow could be harmed.
We believe that our future success will depend in large part upon our
continued ability to identify, hire, retain and motivate highly skilled
employees, who are in great demand. In particular, we believe that the combined
company must expand its research and development, marketing, sales and customer
support capabilities in order to effectively serve the evolving needs of our
present and future customers. Competition for these employees is intense and
due to our operating losses in the past and the concern regarding Nasdaq
technology companies in general, we may not be able to hire additional
qualified personnel in a timely manner and on reasonable terms. In addition,
our success depends on the continuing contributions of our senior management
and technical personnel, all of whom would be difficult to replace. The loss of
any one of them could adversely affect our ability to execute our business
strategy. Most of our employees, including Paul W. Harrison, are not currently
bound by an employment agreement. Furthermore, we do not yet have "key person"
life insurance policies covering any of our employees.
Our limited ability to protect our proprietary technology may adversely affect
our ability to compete, and we may be found to infringe on proprietary rights
of others, which could harm our business.
Our future success and ability to compete depends in part upon our
proprietary technology. None of our technology is currently patented. Instead,
we rely on a combination of contractual rights and copyright, trademark and
trade secret laws to establish and protect our proprietary technology. We
generally enter into confidentiality agreements with our employees,
consultants, resellers, customers and potential customers, limit access to and
distribution of our source code, and further limit the disclosure and use of
other proprietary information. We cannot assure you that the steps we take in
this regard will be adequate to prevent misappropriation of our technology or
that our competitors will not independently develop technologies that are
substantially equivalent or superior to our technology. Despite our efforts to
protect our proprietary rights, unauthorized parties may attempt to copy or
otherwise obtain or use our products or technology. Monitoring unauthorized use
of our products is difficult, and while we are unable to determine the extent
to which piracy of our software products exists, we expect software piracy to
be a persistent problem. In addition, the laws of some foreign countries do not
protect our proprietary rights to the same extent as do the laws of the United
States.
We are also subject to the risk of claims and litigation alleging
infringement of the intellectual property rights of others. Third parties may
assert infringement claims in the future with respect to our current or future
products. Any assertion, regardless of its merit, could require us to pay
damages or settlement amounts and could require us to develop non-infringing
technology or pay for a license for the technology that is the subject of the
asserted infringement. Any litigation or potential litigation could result in
product delays, increased costs or both. In addition, the cost of litigation
and the resulting distraction of our management resources could adversely
affect our results of operations. We also cannot assure you that any licenses
for technology necessary for our business will be available or, if available,
that we can obtain these licenses on commercially reasonable terms.
24
RISK FACTORS CONCERNING THE COMBINED COMPANY'S INDUSTRY
Governmental regulation of healthcare privacy issues may result in additional
expenditures and adversely affect our business.
The Federal Trade Commission and state governmental bodies have been
investigating the confidentiality and privacy policies and practices of
healthcare Internet companies and Internet companies in general, and may impose
regulations. In addition, proposed privacy standards for handling individually
identifiable health information that is transmitted or stored electronically
were issued by the Department of Health and Human Services on November 3, 1999
and our platform and applications must comply with the final regulations.
Finally, industry groups are also proposing various privacy and ethics
standards in an effort to maintain self-regulation. We will likely incur
additional expenses regarding privacy practices and policies. Any such policies
and practices, whether self-imposed or imposed by government regulation, could
affect the way in which we are allowed to conduct our business, especially
those aspects that involve the collection, use and access to personal
information and medical records, and could have a material adverse effect on
our business, results of operations and financial condition.
The healthcare industry is subject to extensive government regulation.
Participants in the healthcare industry are subject to extensive and
frequently changing regulation at the federal, state and local levels. Some of
the laws and regulations relate to payment and other relationships with third
party billing and collection agents as well as regulating computer software
intended for use in the healthcare setting. The impact of regulatory
developments in the healthcare industry is complex and difficult to predict. We
cannot assure you that we will not be materially adversely affected by existing
or new regulatory requirements or interpretations. These requirements or
interpretations could also limit the effectiveness of the use of the Internet
for the methods of healthcare e-commerce we are developing or even prohibit the
sale of our products or services. Healthcare service providers, payors and
plans are also subject to a wide variety of laws and regulations that could
affect the nature and scope of their relationships with us. Laws regulating
health insurance, health maintenance organizations and similar organizations,
as well as employee benefit plans, cover a broad array of subjects, including
confidentiality, financial relationships with vendors, mandated benefits,
grievance and appeal procedures, and others. State and federal laws have also
implemented so-called "fraud and abuse" rules that specifically restrict or
prohibit certain types of financial relationships between us or our customers
and healthcare service providers, including physicians and pharmacies. Laws
governing healthcare providers, payors and plans are often not uniform between
states, and could require us to undertake the expense and difficulty of
tailoring our business procedures, information systems or financial
relationships in order for our customers to be in compliance with applicable
laws and regulations. Compliance with such laws could also interfere with the
scope of our services, or make them less cost-effective for our customers.
The demand for the combined company's products and services could be negatively
affected by reduced growth of Internet commerce or delays in the development of
the Internet infrastructure.
Our future success depends heavily on the Internet being accepted and widely
used for commerce in the healthcare industry. For the fiscal year ending June
30, 2001, we estimate that the combined company will derive 7% of its revenue
from its applications that are accessed through the Internet. However, to date,
HealthWatch has had no sales or earned any fees from use of the HES System
through the Internet. If Internet commerce does not continue to grow or grows
more slowly than expected, our business will suffer. There are a number of
reasons that consumers and businesses may reject the Internet as a viable
commercial medium for healthcare transactions in particular. These reasons
include potentially inadequate network infrastructure, costs of implementing
new systems, security concerns, reliability and quality problems, limited funds
available for new spending due to healthcare cost reductions and investments
already made in legacy systems. Even if we develop the required infrastructure,
standards, protocols or complementary products, services or facilities, we may
incur substantial expenses adapting our solutions to changing or emerging
technologies.
25
THE SPECIAL MEETINGS
General
The special meeting of HealthWatch stockholders will be held at 10:00 a.m.,
local time, on April , 2001 at The W At Perimeter Center Hotel, 111 Perimeter
Center West NE, Atlanta, Georgia 30346 for the purposes set forth in the Notice
of the HealthWatch special meeting. The special meeting of Halis stockholders
will be held at 12:30 p.m., local time, on April , 2001, at The W At
Perimeter Center Hotel, 111 Perimeter Center West NE, Atlanta, Georgia 30346
for the purpose set forth in the Notice of the Halis special meeting. This
joint proxy statement/prospectus is furnished in connection with the
solicitation by the boards of directors of HealthWatch and Halis of proxies to
be used at the special meetings and at any and all adjournments or
postponements of the special meetings. Any person executing a proxy card may
revoke it prior to its exercise by filing with the Secretary of HealthWatch or
Halis, as the case may be, prior to or at the applicable special meeting, at
the address specified in "WHERE YOU CAN FIND MORE INFORMATION," either an
instrument revoking the proxy or a duly executed proxy bearing a later date.
Voting Securities and Record Dates Securities and Record Dates
HealthWatch:
At the close of business on March 16, 2001 (the "HealthWatch Record Date")
there were 2,142,751 shares of HealthWatch common stock, par value $.05 per
share, issued and outstanding and entitled to vote at the HealthWatch special
meeting, of which 144,092 shares of common stock were beneficially owned by
directors and executive officers of HealthWatch and their affiliates (excluding
shares subject to options and warrants), and 150,016 shares of preferred stock
were issued and outstanding. Each share of HealthWatch common stock issued and
outstanding on the HealthWatch Record Date entitles the holder to one vote on
each matter to be voted upon at the HealthWatch special meeting. In addition,
holders of Series C and D 8% Convertible Preferred Stock are entitled to vote
on all matters submitted to a vote of the holders of HealthWatch common stock.
Each share of Series C or D preferred stock has the number of votes equal to
the number of shares of HealthWatch common stock currently issuable upon
conversion of the Series C or D Preferred Stock. On the HealthWatch Record
Date, there were 4,000 shares of Series C preferred stock that were convertible
into 213,333 shares of HealthWatch common stock and 74,130 shares of Series D
preferred stock that was convertible into 2,117,998 shares of HealthWatch
common stock. On the HealthWatch Record Date the total "voting power of the
capital stock," which includes HealthWatch common stock and Series C and D
preferred stock, was 4,474,082 votes.
The presence, in person or by proxy, at the HealthWatch special meeting of
the holders of a majority of the voting power of the capital stock issued and
outstanding and entitled to vote on the HealthWatch Record Date is necessary to
constitute a quorum for the transaction of business at the HealthWatch special
meeting. Abstentions and broker "non votes" will be counted for the purpose of
determining the existence of a quorum. An abstention occurs when a stockholder
returns a proxy card with one or more items marked "abstain." A failure to
return a proxy card will not be treated as an abstention. To the extent
approval of a majority of the voting power of the issued and outstanding
capital stock is required for approval of a proposal, a failure to return a
proxy card will have the effect of a vote "Against" the proposal. A broker
"non-vote" occurs when a broker holding shares for a beneficial owner does not
vote on a proposal because the broker has not received instructions from the
beneficial owner and does not have discretionary power to vote the shares. The
affirmative vote of the holders of a majority of the voting power of the
capital stock present in person or by proxy at the HealthWatch special meeting
is necessary to approve the merger proposal, including approval of the
Agreement and Plan of Merger, dated as of June 29, 2000, and as amended as of
September 29, 2000, January 31, 2001 and March 28, 2001, by and among
HealthWatch, Merger Sub and Halis, and the transactions contemplated thereby,
including the issuance of HealthWatch common stock to Halis stockholders in
exchange for their shares and the conversion of employee and director options
to purchase shares of Halis common stock into options to purchase shares of
HealthWatch common stock in accordance with the provisions of the merger
agreement. Abstention from voting by a stockholder on the merger proposal or
broker "non-votes" will have
26
no effect on determining whether the merger proposal has been approved. With
regard to the other proposals submitted to HealthWatch stockholders, a majority
of the issued and outstanding capital stock entitled to vote at the HealthWatch
special meeting will be necessary to approve the amendment of the HealthWatch
Articles of Incorporation for an increase in authorized common stock and
preferred stock (Proposal No. 2.A and 2.B). The affirmative vote of the holders
of a majority of common stock present at the HealthWatch special meeting or
represented by proxy will be necessary to approve the proposals regarding the
anti-dilution provisions related to the outstanding HealthWatch Series C and D
preferred stock and related warrants (Proposals No. 3.A through 3.E). A
majority of the voting power of the capital stock present at the HealthWatch
special meeting or represented by proxy will be necessary to approve the
conversion feature of the Series P preferred stock (Proposals No. 4).
Halis:
Only holders of record of shares of common stock, par value $.01 per share,
of Halis as of the close of business on March 16, 2001 (the "Halis Record
Date") will be entitled to vote at the Halis special meeting. On that date,
there were 61,132,037 shares of Halis common stock issued and outstanding and
entitled to vote. Approximately 5%, or 3,310,849 shares of Halis common stock
were beneficially owned by directors and executive officers of Halis and their
affiliates (excluding shares subject to options and shares owned by
HealthWatch), which includes 2,990,849 shares owned by Paul W. Harrison.
15,763,655 shares of Halis common stock, or approximately 25%, were owned by
HealthWatch. Stockholders of record on the Halis Record Date are entitled to
one vote for each share of Halis common stock held on all matters to be voted
upon at the Halis special meeting. The presence at the Halis Special Meeting,
in person or by proxy, of the holders of at least a majority of the shares of
Halis common stock issued and outstanding and entitled to vote on the Halis
Record Date is necessary to constitute a quorum at the Halis special meeting.
The affirmative vote of the holders of a majority of the issued and outstanding
shares of Halis common stock is required to approve the merger agreement and
the transactions associated with it. Abstentions and broker "non-votes" will be
counted as present in determining whether the quorum requirement is satisfied.
Abstention from voting by a stockholder on a proposal has the same effect as a
vote "Against" such proposal and broker "non votes" are counted as votes
"Against" such proposals for determining whether a proposal has been approved.
Purpose of Special Meetings
HealthWatch: The purpose of the HealthWatch special meeting is to consider
and vote on the merger agreement and the transactions associated with it,
including the issuance of HealthWatch common stock and the conversion of
options to purchase shares of Halis common stock into options to purchase
shares of HealthWatch common stock in accordance with the provisions of the
merger agreement. In addition, HealthWatch stockholders will be asked to
approve an amendment to HealthWatch's Articles of Incorporation (Proposals No.
2.A and 2.B starting on page 118) and to ratify and approve other proposals
relating to prior issuances of HealthWatch preferred stock (Proposals No. 3.A
through 3.E and Proposal No. 4 starting on page 121) (collectively, the
"HealthWatch Proposals"). A copy of the merger agreement is attached hereto as
Annex A.
Halis: The purpose of the Halis special meeting is to consider and vote on
the merger agreement and the transactions associated with it, including the
merger of Halis with and into Merger Sub, with Merger Sub as the surviving
corporation. A copy of the merger agreement is attached hereto as Annex A.
Solicitation of Proxies; Expenses
All shares of HealthWatch common stock represented by properly executed
proxies received prior to or at the HealthWatch special meeting, and not
properly revoked, and all shares of Halis common stock represented by properly
executed proxies received prior to or at the Halis special meeting, and not
properly revoked, will be voted in accordance with the instructions indicated
on such proxies. If no instructions are indicated on a properly executed
returned proxy, the proxy will be voted "FOR" the approval of the merger
agreement and the transactions associated with it, and with respect to
HealthWatch, "FOR" the other HealthWatch Proposals.
27
A properly executed proxy marked "ABSTAIN," although counted for purposes of
determining whether there is a quorum and for purposes of determining the
aggregate voting power and number of shares represented and entitled to vote at
each of the special meetings, will not be voted. Accordingly, since the
affirmative vote of either (i) the holders of a majority of the voting power of
the capital stock issued and outstanding and entitled to vote is required to
approve the proposals or (ii) the holders of a majority of the voting power of
the capital stock entitled to vote represented in person or by proxy at the
special meetings is necessary to approve the proposals, a proxy marked
"ABSTAIN" will have the effect of a vote "Against" the proposals.
At the special meetings, in accordance with the Market Place Rules of the
Nasdaq Stock Market SmallCap Market System, brokers and nominees who hold
shares of stock in their names but are not the beneficial owners of such shares
are precluded from exercising their voting discretion with respect to such
shares. Thus, brokers and nominees are not empowered to vote shares of
HealthWatch common stock or Halis common stock held by them with respect to the
approval of the HealthWatch or Halis proposals absent specific instructions
from the beneficial owners of such shares.
Any proxy given pursuant to this solicitation may be revoked at any time
before the proxy is voted. A proxy given pursuant to this solicitation may be
revoked by:
. giving written notice of revocation to the Secretary of HealthWatch or
Halis, as the case may be;
. delivering a later dated proxy to the Secretary of HealthWatch or Halis,
as the case may be; or
. attending the HealthWatch special meeting or Halis special meeting, as
the case may be, and voting in person.
Attendance at the HealthWatch special meeting or the Halis special meeting
will not in and of itself constitute the revocation of a proxy; the stockholder
must attend the meeting and vote in person at the meeting. Any written notice
of revocation or subsequent proxy must be sent so as to be delivered at or
before the taking of the vote at the special meetings to the following persons
and addresses:
HealthWatch, Inc. Halis, Inc.
1100 Johnson Ferry Road 1100 Johnson Ferry Road
Suite 670 Suite 670
Atlanta, Georgia 30342 Atlanta, Georgia 30342
Attn: Corporate Secretary Attn: Corporate Secretary
The special meetings may be adjourned for the purpose of soliciting
additional proxies. Shares represented by proxies voting "Against" the approval
of the merger agreement and the transactions associated with it will be voted
"Against" a proposal to adjourn the respective special meeting for the purpose
of soliciting additional proxies. Neither HealthWatch nor Halis presently
intends to seek an adjournment of its special meeting.
In addition to the use of the mail, arrangements will be made with brokerage
houses and other custodians, nominees and fiduciaries to send proxy material to
the beneficial owners of stock held of record by such persons. HealthWatch and
Halis will, upon request, reimburse brokerage houses and other custodians,
nominees and fiduciaries for their reasonable expenses incurred in forwarding
materials to stockholders. Each of HealthWatch and Halis will bear their
respective costs of soliciting proxies and the costs and expenses incurred in
connection with the filing, printing and mailing of this joint proxy
statement/prospectus will be borne equally by HealthWatch and Halis. To the
extent necessary to ensure sufficient representation at its respective special
meeting, employees of HealthWatch or Halis, who will receive no additional
compensation for their services, may solicit votes by telephone, facsimile or
otherwise. HealthWatch or Halis, or both, may engage a proxy solicitation firm
in connection with the solicitation of proxies. The expense of any such
engagement is not expected to exceed $10,000 per company. The extent to which
this will be necessary depends entirely upon how promptly proxy cards are
returned. Stockholders are urged to send in their proxies without delay.
28
HALIS STOCKHOLDERS SHOULD NOT SEND IN ANY STOCK CERTIFICATES WITH THEIR PROXY
CARDS. A TRANSMITTAL FORM WITH INSTRUCTIONS FOR THE SURRENDER OF STOCK
CERTIFICATES FOR HALIS COMMON STOCK WILL BE MAILED TO HALIS STOCKHOLDERS AS
SOON AS PRACTICABLE AFTER THE CONSUMMATION OF THE MERGER. HEALTHWATCH
STOCKHOLDERS SHOULD NOT SEND IN THEIR STOCK CERTIFICATES, AS THE MERGER WILL
NOT REQUIRE SURRENDER OF HEALTHWATCH STOCK CERTIFICATES.
29
THE COMPANIES
HealthWatch, Inc.
General Background
HealthWatch, Inc. is a healthcare information technology company operating
as an Enterprise Applications Provider and an Application Service Provider for
a variety of healthcare businesses. We offer and market an enterprise software
program, known as the Healthcare Enterprise System (the "HES System"), which is
owned by Halis. The HES System uses proprietary technology to distribute, in a
compressed digital format, one system that includes over 50 integrated
applications for the management of a healthcare enterprise's resources, patient
data, clinical data and finances. The HES System is capable of processing and
tracking information for the entire healthcare cycle from the doctor visit,
specialty clinic or hospital stay, to the laboratory tests, pharmacy
prescriptions, home care, insurance payments and more. We are marketing, and
expect to deliver and maintain, the HES System primarily over the Internet. The
HES System can be used by physician practices, outpatient clinics, hospitals,
long-term care facilities, home health providers, health insurance payors and
other healthcare entities.
HealthWatch has been in business for over a decade, but its information
technology business is still relatively new. Prior to 1998, HealthWatch was
primarily in the business of manufacturing and selling medical devices and
related supplies. In 1998, it began to phase out the medical device business
and focus its energies on developing an information technology business. The
decision to enter the healthcare information technology business was based on
HealthWatch's desire to expand its product and service offerings in order to
increase revenues and to return HealthWatch to profitability. In this regard,
HealthWatch entered into a business collaboration agreement with Halis during
fiscal year 1998, pursuant to which HealthWatch and Halis agreed to share sales
prospects and Halis agreed to develop a healthcare application, which was
designed to monitor, capture and manage medical transactions at the point of
care (the HES System). HealthWatch still, however, continues to provide
maintenance support to a number of customers who purchased medical devices in
the past.
HealthWatch acquired Paul Harrison Enterprises, Inc. ("PHE") on October 1,
1998. PHE owned the MERAD technology, a sophisticated software application
utility. MERAD utilizes an advanced multi-media object and relational database
which creates knowledge objects that can be used and reused in a virtually
unlimited number of combinations to provide efficient applications that can be
accessed and processed in both an Internet and Intranet environment. The true
benefit of the MERAD technology is that it enables information to be stored in
a way that allows users to reference and use the same data for multiple
applications and processes. The acquisition of PHE also increased HealthWatch's
ownership of Halis from approximately 5% to 18% of Halis' common stock.
Subsequent acquisitions of additional Halis common stock through private
placements have increased HealthWatch's ownership interest in Halis to
approximately 25%, thereby allowing HealthWatch to account for Halis using the
equity method of accounting, which means that HealthWatch records its share of
Halis' income or loss in the period incurred.
HealthWatch's Business
HealthWatch is a healthcare information technology company that is offering
and marketing a software program for the healthcare industry known as the HES
System. This product is owned by Halis, but is being marketed by HealthWatch
under a business collaboration agreement. Under this agreement, HealthWatch has
the right to resell the HES System and receive a commission on the fees earned
for any sales. In addition, HealthWatch pays Halis a monthly fee for continued
development and sales and product support for the HES System.
HealthWatch is marketing the HES System as an Enterprise Application
Provider and an Application Service Provider. As an Enterprise Application
Provider, HealthWatch will license the HES System to a user
30
for use on the user's own system for a single "up-front" license fee along with
additional monthly or annual maintenance fees to support and service the
product. As an Application Service Provider, HealthWatch will provide
connectivity to the HES System through the Internet and charge the customer
based on the number of users. The benefits of the Application Service Provider
model is that a user can obtain the benefits of the HES System without the up-
front investment in the license fee and pay for the product on an actual usage
basis. The benefits of the Enterprise Application Provider model is that a
larger user can obtain the HES System and bring it in-house, which will allow
faster processing time, ability to customize the product and provide total
control over the system.
HealthWatch has identified the following major entities within the
healthcare industry as its primary customer targets:
Physician Practices Long-term Care Facilities
Clinics Laboratories
Hospitals Pharmacies
Third-party Payors Home healthcare Providers
HealthWatch is currently in the marketing and deployment stage of its
development as a healthcare information technology company. The HES System has
been fully tested and is ready for implementation. However, HealthWatch does
not currently have any customers who are using the HES System, either through
the Application Service Provider model or the Enterprise Application Provider
model.
In addition, HealthWatch's office in Vista, California provides support
services for its peripheral vascular products under the name Life Sciences: a
Pulse Wave Volume Recorder and IV Controller. These are medical device products
that HealthWatch has sold in the past, and now continues to support and
service, but is no longer making new sales of such products. For the fiscal
year ended June 30, 2000, the medical device support business provided
approximately $530,000 in gross revenue.
The Technology
The HES System is a software program with over 50 applications that create
and manage transactions for healthcare providers. For example, the HES System
could provide a doctor's office or medical clinic with a complete package of
software applications to manage its scheduling, registration, medical records,
billing, accounts receivable and financial records. The benefit to the user is
that the HES System is an integrated program that allows each application to
share common data elements, such as the patient's name and address, without
repetitive processing or duplicative data entry.
The HES System incorporates the MERAD technology, which contains advanced
architecture and intelligent information processing algorithms that allow the
healthcare industry's information processes (e.g., patient scheduling, medical
billing, etc.) to be integrated into one program, eliminating the need for
multiple and disparate systems by the various participants and facilities.
HealthWatch believes its technology is the first to be used for building
commercially available applications in a digital or compressed data format for
the Internet. The MERAD technology is owned by HealthWatch, and licensed to
Halis for use in the HES System under a perpetual license agreement.
HealthWatch and Halis both realized the value of the MERAD technology and
desired to put such technology to use in the healthcare industry. HealthWatch
has not granted any other person or entity the rights to use the MERAD
technology on a stand alone basis, and is not actively marketing it. Instead,
HealthWatch believes that the benefit of the MERAD technology is in allowing
other data intensive applications, such as the HES System, to use the MERAD
technology to run more efficiently and thus gain a competitive advantage over
other products.
The HES System is integrated-by-design and not "interfaced," thereby
avoiding the need for outside application integration technology that is often
invasive, time-consuming and requires custom coding, which restricts
flexibility and scalability. The HES System's benefits include the elimination
of fragmented and duplicate applications, which often cause information sharing
and data integrity problems. The HES System also has the ability to coexist
with legacy systems to share information.
31
The HES System can be downloaded over the Internet to a customer managed and
operated environment or its applications can run efficiently through the
Internet on an outsourced basis. This technology also permits maintenance of
the applications over the Internet, whether in a customer managed and operated
environment or in an outsourced environment.
The HES System is being offered under two models: a customer-installed and
customer-managed model and a "through the Internet" outsourced model.
HealthWatch can provide both models because it can download the actual
operating applications over the Internet, for customer-driven internal
management of processing, and it can provide the same product to customers by
allowing them to access the product through the Internet, where HealthWatch
will maintain and manage the HES System.
In addition, HealthWatch software utilizes an integrated approach where a
customer uses one program with integrated applications to process information.
This approach is a shift from the traditional layered approach, which involves
the inefficiencies of multiple separate programs with limited applications that
inherently lead to duplicate information processing. If applications are
designed and built separately, the information used is also partially or
completely duplicated for each application. Therefore, if applications are
acquired or are built using different sources, the duplicated, layered effect
applies both to the applications as well as to the data used. Conversely, if
applications are designed and built together in an integrated manner, the data
used, such as patient demographics, is only required once for all integrated
applications.
HealthWatch's Growth Strategy
HealthWatch's objective is to become the market share leader for web-based
applications to process and manage transactions for physician offices,
hospitals, outpatient clinics and other healthcare providers. HealthWatch also
intends to assist these entities in adapting to evolving communications and
interactive technologies. HealthWatch's immediate growth strategy contemplates:
. Marketing its already existing 50 applications via sales of customer-
installed models and outsourced models, for periodic recurring revenue
streams;
. Establishing revenue sharing arrangements with companies that are
operating successfully in the healthcare industry to co-brand and sell
HealthWatch's products and services; and
. Acquiring complementary healthcare information system companies and
converting the customers of these acquired companies to the HES System.
While HealthWatch would like to grow rapidly through internally generated
revenues from its business model, HealthWatch realizes that it must also be
prepared to selectively acquire complementary companies in order to more
quickly gain market share and generate revenue growth. HealthWatch will seek to
acquire service companies that are currently processing transactions for the
healthcare industry whereby HealthWatch could gain operational efficiencies and
advantage over its competition by installing the HES System into their
operations. While HealthWatch does not have any such acquisitions pending, it
would ideally like to enter into such market over the next 12 to 18 months.
However, there can be no assurances that such target companies will be
available on terms acceptable to HealthWatch, if at all.
In implementing these strategies, HealthWatch can take advantage of its
digital technology architecture that allows its applications to be easily
downloaded and operated by customers. By using electronic sales and support
instead of relying solely on the traditional direct salesperson and on site
installation approach, HealthWatch can market, install and service its products
at a lower cost with fewer resources.
HealthWatch intends to operate as a centralized data center, with
decentralized business sales and customer service units. The data center will
initially be in Atlanta, Georgia, with regional sales and customer service unit
centers initially in Atlanta, Chicago and San Diego. Additional centers may be
added to provide superior response times and backup capabilities for its
mission-critical applications.
32
Certain corporate functions such as research and development, marketing and
finance will be handled at the centralized data center. HealthWatch believes
that by combining a regional, decentralized sales and customer service approach
with a centralized data center, it will better serve the needs and demands of
its customers. In addition, the power of the Internet will support its goal to
achieve economies of scale while performing nationwide, and perhaps, global
mission-critical information transactions.
Marketing
HealthWatch is marketing its products through use of a Web site and high-
profile trade shows to build brand awareness. HealthWatch makes an actual
operating version of its products available to customers through an Internet
download for use on a trial or pilot basis, which HealthWatch believes will
provide a significant advantage in marketing its products. In addition, the
integrated single system architecture of its products allows for efficient
building, distributing and supporting numerous integrated applications.
HealthWatch plans to distribute the HES System as an Enterprise Application
Provider, which means that HealthWatch will sell its products directly to the
user as necessary to meet all of the technology needs of that particular user.
In addition, HealthWatch is marketing the HES System as an Application Service
Provider, which means that the user will be able to access the HES System
through the Internet and use it on a per transaction basis.
HealthWatch's Enterprise Application Provider marketing strategy is to:
. meet existing or exceed system requirements for availability,
scalability, security and flexibility;
. accommodate data interfaces and integration;
. support transactional integration, minimizing the need for custom coding;
and
. reduce reliance on proprietary, hard-coded business rules and workflows
usually found in other systems.
HealthWatch's Application Service Provider marketing strategy is to:
. rapidly penetrate markets by offering access to and use of the HES System
from a centralized offsite location via the Internet;
. reduce up-front capital expenditures by employing a subscription based
billing model (monthly fee based on number of users and number of
applications accessible);
. decrease the complexity and lengthy implementation times usually involved
with new application purchases; and
. offer a low and predictable cost product that is easy to use in terms of
expenditures and information technology personnel.
HealthWatch is focusing its marketing efforts initially on the physician
practice market as well as the outpatient clinic market. HealthWatch believes
that these segments of the healthcare information system market have spent
comparatively much less heavily than hospitals and healthcare insurance payors
on information technology. HealthWatch believes that recent movement toward the
adoption of information systems in physician practices will accelerate with
solutions, such as the HES System, that are accessible over the Internet and
paid for in periodic payments, rather than requiring up-front capital
expenditures or up-front license fees.
Once HealthWatch makes progress in these two markets, one or more of the
other healthcare market segments (hospitals, long term care facilities, home
healthcare and healthcare insurance payors) will be targeted. According to
research by the healthcare group at Frost & Sullivan entitled, "U.S. Physicians
Practice Management System Markets," total market revenue for companies
offering physician practice management systems have risen from $2.36 billion in
1998 to $2.66 billion 1999. This upward trend is projected to continue through
2005.
Sales
HealthWatch is marketing the HES System on its Web site to create sales.
That Website currently allows potential customers access to a live version of
the HES System through the Internet. HealthWatch believes that
33
access to the operating solutions will accelerate the required comfort levels
of a larger audience (e.g., actual users in the target entity), who in turn
will influence the decision makers to buy. In addition to using the Internet as
a distribution strategy and channel, HealthWatch also provides knowledgeable
applications and services experts by phone to qualified prospects that need
further information to make a decision. HealthWatch also provides industry
level experts and consultants to large accounts who need a face-to-face
encounter in order to make final decisions.
HealthWatch is seeking to establish revenue-sharing arrangements with other
companies to co-brand and cross-sell the HES System. Because many of the
potential business relationships will have already established a presence in
the healthcare industry, HealthWatch believes that this could serve as a
potentially strong distribution channel for its products and services.
Another important channel that may be used for distribution is the
acquisition of complementary companies and cross-selling HealthWatch's
applications and services to any acquired customers. In addition to helping
increase top-line growth more rapidly, HealthWatch believes that acquired
customers are more likely to try an enhanced offering to what they already use
rather than to switch to another company's products. HealthWatch's solutions
can be more easily interfaced with existing applications of another vendor
because it has an integrated data base, so a common interface is used to access
multiple applications, and because its database is independent of its
applications, rather than embedded in applications, providing a simpler
interface design.
Management believes that HealthWatch's sales will be driven by a recurring
revenue formula that is based on periodic fees or per transaction fees. These
recurring periodic fees will be charged and paid based on the usage of its
applications. HealthWatch will also offer additional services, such as online
billing, using the power of the Internet.
HealthWatch has tested the sales channel of downloading its actual operating
applications, to prospective customers. The results reflect typical buying
trends, with the risk-takers being very receptive and the mainstream and late
adopters somewhat reluctant to respond. While there is no guarantee,
HealthWatch believes that this sales channel will evolve and become effective
as its products and services become more well-known as "mainstream" solutions.
Product Development
We believe that some of our future success will depend in part on our
ability to continue to maintain and enhance our current technologies and
Internet-based services. Although we will continue to work closely with
developers and major customers in our development efforts, we expect that most
of our future enhancements to existing services and new Internet-based services
will be developed internally. HealthWatch spent approximately $137,000 in the
fiscal year ended June 30, 2000 and $287,000 in the fiscal year ended June 30,
1999 on product development costs.
Customer Services
HealthWatch will provide customer service at three levels. The first level
is through its Web site, the second level is through e-mail or telephone
connection to a general representative to answer basic questions and the third
level is through scheduled time with a specialist by e-mail, telephone or on
site visit, if necessary, for a consultation. HealthWatch's Web site will use
multimedia presentations to explain all aspects of its applications and
services, including answers to commonly asked questions. HealthWatch expects
the Web site to serve as a valuable front-line support and training tool to
reduce the need for human intervention to answer repetitive questions that can
easily be resolved with some minimal research and interaction with its Web
site.
As a second level of support, general customer service representatives will
be available to answer common and recurring questions that require human
intervention. These representatives will direct and guide customers to resolve
their issues and educate the customer on how to resolve these issues in the
future.
34
The third level of support will be a personal consultation by a systems
specialist. A specialist will be used to resolve unique technical issues for
the customer or to escalate high priority issues which were not resolved by the
general customer service representatives.
Due to the high quality of HealthWatch's product and the ability to
integrate its technology and application services into its customer's
operations, HealthWatch's online support and planned on-line interactive multi-
media training, management believes that HealthWatch will experience lower
customer service and operating costs than normally experienced in the industry.
These lower costs should result in a positive effect on profitability.
Competition
The HES System is targeted at physicians, hospitals, clinics, pharmacies,
laboratories, long-term care facilities, home health organizations, health
insurance companies and other healthcare entities. These markets are intensely
competitive and characterized by rapid technological change. HealthWatch's
competitors are diverse and offer a variety of solutions directed at various
segments of the healthcare industry. HealthWatch believes there are hundreds of
application software vendors whose products compete with the HES System.
HealthWatch believes the top ten competitors include Healtheon/Web MD
Corporation, McKesson HBOC, Synetic Corporation/Medical Manager/CareInsite,
Cerner Corporation, Shared Medical Systems, Eclipsys Corporation, MedicaLogic,
E-MedSoft and Avio. In addition, its products face competition from:
. internal development efforts by a prospective customer's information
technology departments;
. independent healthcare application companies which have developed or are
attempting to develop software that competes with its software solutions;
and
. other business application software vendors which may broaden their
product offerings by internally developing, or by acquiring or partnering
with independent developers of healthcare applications software.
HealthWatch believes it can quickly distinguish itself from the viable
competitors in the healthcare information systems industry. Currently, its
competitors are focused on particular segments of the market, with particular
types of technology and, often with specific applications or a variety of
interfaced applications. The three main traditional market focuses are listed
below:
. market segments, which include physician practices, clinics, pharmacies,
laboratories, home healthcare, long-term care, hospitals, payors and
consumers (patients) and sub-categories of these segments (e.g. inpatient
radiology);
. technology types, which can be categorized as either traditional customer
managed/operated or as outsourced; and
. specific applications or functionality, including scheduling,
registration, billing, medical records, etc.
HealthWatch believes it has a dynamic and comprehensive software program
that can handle all healthcare participants and market segments and can be
offered in either an outsourced or a customer managed and operated model.
HealthWatch believes its competition has not embraced a comprehensive,
standardized approach and has remained with fragmented, duplicated products. It
expects that technology competitors will eventually offer Internet products.
However, HealthWatch believes that these competitors will create separate web
front-ends (web pages) to serve as an entry point to their legacy information
systems. HealthWatch believes that because its product is designed to run on
the Internet, it will be able to provide its users with faster processing than
other products using web front-ends to access legacy systems. In addition,
because our product is integrated into one complete system designed to run on
the Internet, we believe that the HES System will also require far less capital
investment in computer hardware and require less ongoing maintenance than
legacy systems which have added web front-ends. This distinction should provide
HealthWatch with a
35
marketing advantage over its competitors when selling its product to users who
are looking to update their information technology systems to gain increased
productivity, higher quality reporting and reduced processing costs.
HealthWatch plans to distinguish itself from competitors by focusing on the
HES System's unique architecture process to integrate-by-design all of the
applications needed in a market segment (i.e., physician practices) into one
complete application. The HES System was designed with ease of use in mind,
keeping a particular focus on the speed of the processing and the costs to
produce, update and support one Internet-based application, as opposed to
several different applications.
To the extent competitors develop or acquire systems with functionality
comparable or superior to HealthWatch's products, if they have a significant
installed customer base, long-standing customer relationships and an ability to
offer a broad array of applications, they could have a significant competitive
advantage over HealthWatch. Increased competition could result in price
reductions, fewer customer orders, reduced gross margins and loss of market
share, any one of which could materially adversely affect our business, results
of operations and financial condition. Many of HealthWatch's competitors and
potential competitors have longer operating histories, significantly greater
financial, technical, marketing and other resources, greater name recognition
and a larger installed customer than it does. In order to be successful in the
future, HealthWatch must continue to respond promptly and effectively to
technological change and competitors' innovations. HealthWatch's competitors
may be able to respond more quickly to new or emerging technologies and changes
in customer requirements or devote greater resources to the development,
promotion and sale of their products than HealthWatch can.
The principal competitive factors affecting the market for HealthWatch's
products include vendor and product reputation, product architecture,
functionality and features, costs, ease and speed of implementation, return on
investment, product quality, price, performance and level of support. There can
be no assurance that HealthWatch will be able to compete successfully against
current and future competitors, and the failure to do so could have a material
adverse effect upon HealthWatch's business, results of operation and financial
condition.
HealthWatch's principal executive offices are located at 1100 Johnson Ferry
Road, Suite 670, Atlanta. Georgia 30342 and its telephone number at that
address is (404) 256-0083.
Halis, Inc.
Halis, based in Atlanta, Georgia, is a systems developer of information
technology and provider of related services focusing on the healthcare
industry. Halis 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.
The HES System
Halis' system architects have years of experience building large advanced
software systems for the healthcare and other industries. In late 1996, Halis
focused its attention on 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 manage all of the needs of a healthcare
organization in its interaction with patients or other users of their services.
Even systems that could handle more than one function often were unable to do
so in an integrated manner so that information would be shared between
functions. By way of example, a single patient visit results in scheduling,
registration, medical records update, billing, claims processing, etc. In order
to handle these types of transactions, a typical system would be made up of
many modules or programs that are interfaced together. This results in an
inefficient system made up of millions of lines of code with repetitive
processing and manual intervention occurring at various points in the process.
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
36
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 that would not be limited
by the constraints encountered by other healthcare systems.
As a result, Halis acquired a core healthcare information system and went on
to developed the HES System, a comprehensive advanced integrated system capable
of being used by all the main participants in the healthcare process:
consumers, payors, physician practices, hospitals, laboratories, pharmacies,
home health providers and long-term care facilities. To accomplish this, Halis'
developers modeled the healthcare industry to determine what information is
necessary for the various healthcare participants and the manner in which such
information is collected. By doing so, Halis was able to identify information
that is common to all participants and/or functions, thus avoiding duplication
of effort. The design of the HES System 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 System is integrated
by design not "interfaced" and is contained in one system which includes over
50 different applications. The HES System contains a computerized medical
record which is capable of tracking a patient's entire medical history. This
feature is a useful feature for providers with multiple locations because it
eliminates the need to transfer paper files between locations, offices or
users. Multiple locations can share identical data in a common database that is
available to all users, or, depending on security and confidentiality concerns,
data can be shared by a select number of locations or users. The HES System is
capable of managing a healthcare enterprise's resources, patients, finances and
contracts all in one program. This gives the HES System great flexibility in
meeting the needs of even the most complex healthcare delivery systems.
The technical innovation that enables the HES System to be so powerful, yet
simple to install and maintain, is the software utility known as "MERAD" that
Halis licenses from HealthWatch. MERAD enables the HES System to store
programming code as data scripts or digital packets in a database thereby
removing 80% of the repetitive processing that conventional programming is
required to perform. For example, a patient address would be stored as one data
script that could be accessed by any of the 50 applications in the HES System
without the need for repetitive processing or duplicative data entry.
Because MERAD is completely Internet enabled, including Intranet and
Extranet subsets, the HES System can be downloaded over the Internet and
installed in minutes to numerous locations simultaneously. This means that the
HES System is not only easier to maintain and support, but because it was built
for use on the Internet, it allows for installation and support and services to
be performed over the Internet. The HES System can also allow consumer
interaction with the healthcare providers via the Internet.
The HES System integrates all of the major functions needed by clinics,
hospitals, physician practices, payors, long-term care facilities,
laboratories, pharmacies and home health providers, which represents eight of
the major markets in the healthcare industry. Halis is currently building out
the specific features required by each of these eight markets. Presently, the
current version of the HES System is complete for clinics, physician and
management practices.
The HES System is currently targeted to healthcare industry participants
such as physician practices, outpatient clinics and hospitals that generally
have 100 users or more because the HES System is able to provide significant
efficiencies for such entities due to the large number of transactions that
must be processed. Halis expects to capitalize on the healthcare industry's
demand for more software variety, updates, convenience, lower pricing and
better support services.
Health Insurance Services
In addition to Halis' information technology business, it operates a health
insurance services and claims processing business through its wholly-owned
subsidiary, American Benefit Administrative Services, Inc.
37
American Benefit Administrative Services' offices are located in Naperville,
Illinois, a suburb of Chicago, and was founded in 1979. Halis acquired American
Benefit Administrative Services in 1997. As of December 31, 2000, American
Benefit Administrative Services had 39 employees.
American Benefit Administrative Services markets and administers employee
benefit plans nationwide for major insurance companies and large self-funded
employers. Services provided include benefit plan consulting and plan document
preparation, claims administration, billing and financial services, and COBRA
and flexible spending account administration.
American Benefit Administrative Services earns compensation and fees based
on both a percent of premium paid by the employer for plan coverage or a
capitated rate per employee/per month enrolled in the plan serviced. For the
fiscal year ended December 31, 2000, American Benefit Administrative Services
had total revenues of $3,862,105.
Halis's principal executive offices are located at 1100 Johnson Ferry Road,
Suite 670, Atlanta, Georgia 30342, and its telephone number at that address is
(404) 364-1871. Its American Benefit Administrative Services subsidiary is
located in Chicago, Illinois.
HealthWatch/Halis Relationship
Since fiscal year 1998, Halis' relationship with HealthWatch has expanded,
with HealthWatch now owning approximately 25% of Halis' outstanding common
stock. HealthWatch owns the MERAD technology which is licensed to Halis under a
perpetual license agreement. Under the terms of the perpetual license
agreement, in return for use of MERAD, Halis is obligated to pay HealthWatch a
royalty equal to 10% of the gross revenues generated by Halis from the sell of
products and services that incorporate the MERAD technology. In addition, Halis
and HealthWatch operate under a business collaboration agreement which
provides, among other things, for revenue sharing from sales of each company's
products based on a 60/40 split (i.e., the selling company would receive 60% of
the sales price received and the company that owns the technology would receive
40% of the sales price received). Furthermore, HealthWatch is obligated to pay
Halis a collaboration fee of $50,000 per month, which is applied as a credit
against any revenue sharing amount that is due to Halis. Halis is obligated to
provide support to HealthWatch for the Halis software products, provide
reasonable product enhancement as part of product release updates and cooperate
with HealthWatch in regard to product enhancement requests. HealthWatch may
terminate the $50,000 monthly collaboration fee payable to Halis on or after
October 1, 2001, under certain terms and conditions. The business collaboration
agreement terminates on September 20, 2005 and provides for automatic one-year
extensions unless terminated with a ninety-day notice by either party. During
the first quarter of fiscal year 1999, Halis' board of directors decided that
in order to conserve its resources, and to operate more efficiently, Halis
would focus its attention on the support and services of the HES System and its
claims processing capabilities, and would rely upon HealthWatch to market and
sell the HES System to new customers. HealthWatch recently relocated its
corporate offices to Atlanta and it and Halis share office space in Atlanta and
administrative support under a cost sharing arrangement. See "HEALTHWATCH
RELATED PARTY TRANSACTIONS" on page 53.
In addition to the business collaboration agreement and cost sharing
arrangement, HealthWatch and Halis have common senior management in that Paul
W. Harrison is the Chairman, CEO and President of both companies. Mr. Harrison
receives separate compensation from each company and other costs and expenses
of Mr. Harrison are allocated to each company based on time spent unless the
costs are incurred specifically for one company.
HealthWatch Merger Sub, Inc.
HealthWatch Merger Sub, Inc. ("Merger Sub") is a newly formed wholly-owned
subsidiary of HealthWatch, incorporated in Georgia on March 27, 2000 for the
sole purpose of acquiring Halis. Prior to the consummation of the merger,
Merger Sub will not engage in any activity other than the transactions
contemplated by the merger agreement. Merger Sub's principal executive officers
are located at 1100 Johnson Ferry Road, Suite 670, Atlanta, Georgia 30342 and
its telephone number is (404) 256-0083.
38
HEALTHWATCH MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward Looking Statements
The following discussion of HealthWatch's financial condition and results of
operations contains forward looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities and
Exchange Act of 1934, which are intended to be covered by the safe harbors
created thereby. These statements include the plans and objectives of
HealthWatch for future operations. The forward looking statements included
herein are based on current expectations that involve numerous risks and
uncertainties. HealthWatch's plans and objectives are based on the assumption
that HealthWatch'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
HealthWatch'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 HealthWatch's control. Although HealthWatch 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 HealthWatch, or any other person, that the objectives and
plans of HealthWatch will be achieved.
General
This discussion and analysis of financial condition and results of
operations as of December 31, 2000, and for the fiscal years ended June 30,
2000 and 1999 and the six months ended December 31, 2000 and 1999 should be
read in conjunction with the sections of HealthWatch's audited financial
statements, interim financial statements and related notes included elsewhere
in this joint proxy statement/prospectus.
Financial Condition
Total assets at December 31, 2000 were $5,699,997 representing a decrease of
$1,739,949 from June 30, 2000. Marketable securities and investment in and
advances to Halis represented $2,087,094 and $19,157, respectively, of the
decrease. The decrease in investment in and advances to Halis is attributable
to a decrease in the investment in Halis of $127,710 and an increase in the Due
from Halis account of $108,553. The decrease in marketable securities is the
result of sales of securities for the purpose of funding current operating
expenses. The decrease in assets were offset by increases in cash, property and
equipment, prepaid expense and intangible assets of $35,820, $112,266, $73,401
and $127,798, respectively, net of depreciation and amortization of $77,663.
Total assets at June 30, 2000 were $7,439,946, representing an increase of
$3,962,882 from June 30, 1999. Investment in marketable securities, other
current assets, investments in and advances to Halis, Inc. and additional
capitalized intangible assets represented $3,935,500, $256,362, $291,452 and
$217,496, respectively, of the increase. The investment in marketable
securities is the result of additional equity capital raised by HealthWatch
during fiscal 2000. The increase was offset by amortization of intangible
assets and decreases in accounts receivable and inventory of $637,918, $63,369
and $48,387, respectively.
Current liabilities decreased by $1,103,335 from $1,643,869 at June 30, 1999
to $540,534 at June 30, 2000. The decrease is primarily attributable to the
conversion of accrued expenses and shareholder loans totaling $469,028 into
HealthWatch common stock, the conversion of debentures and related accrued
interest of $455,000 and $139,356 into HealthWatch common stock and a gain on
extinguishment of debt of $165,405. These decreases are offset by an increase
in accounts payable of $140,641.
Current liabilities increased by $152,668 from $540,534 at June 30, 2000 to
$693,202 at December 31, 2000. The increase is primarily attributable to an
increase in accounts payable and accrued expenses of $154,657, offset by a
decrease in deferred revenue of $1,989.
39
Shareholders' equity decreased from $6,899,412 at June 30, 2000 to
$5,006,795 at December 31, 2000, a decrease of $1,892,617. This decrease is
attributable to a net loss for the six month period of $1,999,526 with an
offsetting decrease in accumulated other comprehensive loss, net unrealized
investment losses of $106,909.
Shareholders' equity increased from $1,833,195 at June 30, 1999 to
$6,899,412 at June 30, 2000, an increase of $5,066,217. This increase is
attributable to: (1) the issuance of 276,301 shares of common stock for
services valued at $584,109; (2) conversion of $65,000 in shareholder loans
for the issuance of 34,667 shares of common stock; (3) conversion of $53,283
of additional consideration due to former PHE shareholders for 28,417 shares
of common stock; (4) conversion of debentures and accrued interest of $594,356
into 316,990 shares of HealthWatch common stock; (5) exercise of warrants for
the issuance of 65,761 shares of common stock for $26,178; and (6) net
proceeds of $50,000, $375,000 and $6,587,522 from the issuance of 28,572
shares of common stock, 4,000 shares of Series C convertible preferred stock
and 74,130 shares of Series D convertible preferred stock, respectively.
Offsetting decreases are attributable to an unrealized holding loss on
marketable securities of $113,400 and a net loss for the twelve month period
of $3,575,382.
Results of Operations
Fiscal year 2000 versus 1999
Revenues decreased from $1,220,803 in fiscal year 1999 to $551,682 in
fiscal year 2000, a 54.81% decrease. The decrease is the result of
HealthWatch's shift from a product driven supply company to a software
information technology company. During fiscal 2000, product sales were minimal
and almost all of the revenues generated were the result of supplies, service
and repair work. The Company recognized income of $21,935 and $66,087 for the
twelve-month periods ended June 30, 2000 and June 30, 1999, respectively,
under its business collaboration agreement with Halis for sales of the HES
System. Such amounts are included in product sales.
Cost of products sold decreased from $940,950 in fiscal year 1999 to
$193,952 in fiscal year 2000, a 79.4% decrease. However, gross margin
increased from $279,853, 22.9%, in 1999 to $357,730, 64.8%, in 2000. The lower
cost of products sold and higher gross margins in 2000 were due primarily to
greatly reduced manufacturing overhead expenses of $364,306; previous write-
downs of slow moving inventory to lower of cost or market of $223,000; and a
general shift from product sales to service and support resulting in a
decrease of $159,692.
Selling, general and administrative expenses increased from $1,320,500 in
1999 to $1,964,127 in 2000. The increase in fiscal 2000 over 1999 is due
primarily to an increase of $571,682 in consulting and professional fees
resulting from HealthWatch's shift from a product supply company to a software
information technology company, $48,439 associated implementing HealthWatch's
business plan and SEC and Nasdaq compliance reporting costs totaling $23,506.
Research and development expenses decreased from $286,921 in 1999 to
$136,780 in 2000, 52.3%. This decrease is due primarily to HealthWatch's shift
from a product driven supply company to a software information technology
company and the capitalization of MERAD Technology costs totaling $217,496 in
fiscal 2000.
Depreciation and amortization increased from $400,910 in 1999 to $442,795
in 2000, a 10.4% increase.
Equity loss from investment in Halis increased from $23,702 during fiscal
1999 to $523,450 during fiscal 2000. The losses are a result of HealthWatch
changing its method of accounting for its long-term investment in Halis to the
equity method during fiscal 1999, as required by generally accepted accounting
principles. The $523,450 and $23,702 represent HealthWatch's pro-rata share of
Halis' net loss during HealthWatch's fiscal years 2000 and 1999, respectively,
plus charges totaling $184,532 and $62,674, respectively, for the amortization
of the excess carrying value of the Halis investment over its underlying net
asset value. The other-than temporary decline in investment in Halis of
$472,810 in fiscal 2000 was a write down of the investment in Halis that was
deemed to be other than temporary.
40
Interest income of $110,606 in fiscal 2000 is related to the investment in
marketable securities. Gain on extinguishment of debt of $165,405 is
attributable to a liability from the early 1990's related to a previously
acquired, inactive subsidiary, that HealthWatch determined was no longer
required. The Company has received no communication from the creditor and
management believes that HealthWatch never will. A loss from impairment of
intangible assets of $213,286 during fiscal 2000 relates to the write-off of an
intangible asset associated with the Life Sciences business. Interest expense
increased $388,216, from $67,659 in 1999 to $455,875 in 2000 due to the
beneficial conversion feature of $419,551 on warrants in connection with a line
of credit offset by a decrease in debenture interest of $31,335.
The Company has discontinued the sale of its medical products (i.e., the MVL
and Pacer products) and will continue to focus on its information technology
business, in addition to the supplies and technical support offered to it
customer base relating to its medical products still in service. As a result of
the restructuring during fiscal 1999 and 2000, HealthWatch has improved its
financial condition and management now believes it is capable of devoting its
resources to the marketing and distribution of the HES product.
Six Months Ended December 31, 2000 Versus 1999
Total revenue was $183,622 for the six months ended December 31, 2000 as
compared to $322,465 for the six months ended December 31, 1999, a decrease of
$138,843 or 43.1%. This decrease was primarily the result of HealthWatch's
continued shift from a product driven supply company to a software information
technology company. During the six months ended December 31, 2000, product
sales were minimal and most of the revenues generated were the result of sales
of supplies, service and repair work related to the medical device business.
HealthWatch recognized income of $2,940 from Halis for the six months ended
December 31, 2000, compared to $9,453 for the same period in 1999 under its
business collaboration agreement with Halis for sales of the HES System. Such
amounts are included in product sales.
Gross profit was 79.4% for the six months ended December 31, 2000, as
compared to 62.6% for the same period in 1999. The increase in gross profit
percentage is due primarily to previous write-downs of slow moving inventory to
lower of cost or market and a general shift from product sales to service and
support.
Selling, general and administrative expenses increased by $1,080,387 or
136.2% to $1,873,679 for the six months ended December 31, 2000, as compared to
$793,292 for the same period in 1999. The increase is due primarily to
increased cost associated with implementing HealthWatch's business plan of
$678,389 and SEC and NASDAQ compliance reporting of $401,998.
Depreciation and amortization decreased by $93,128, or 42.1%, to $127,911
for the six months ended December 31, 2000, as compared to $221,039 for the
same period in 1999. This decrease is the result of reduced amortization
expense during the period due to a write down of intangible assets in the
fiscal year ended June 30, 2000.
Research and development costs increased by $31,230, or 46.8%, to $98,034
for the six months ended December 31, 2000, as compared to $66,804 for the same
period in 1999. This increase is the result of HealthWatch's increasing focus
on software information technology.
Losses from investment in Halis decreased by $103,093, or 44.7%, to $127,710
for the six months ended December 31, 2000, as compared to $230,803 for the
same period in 1999. The losses represent HealthWatch's pro-rata share of
Halis' net loss, plus charges for amortization of the excess carrying value of
the Halis investment over the equity in the underlying net assets of Halis
during the six months ended December 31, 2000 and 1999, respectively.
Interest income was $95,949 for the six months ended December 31, 2000. This
represents interest on the marketable securities.
The extraordinary item for the six months ended December 31, 1999 of
$99,405, net of income tax, represents extinguishment of debt.
41
Interest expense decreased by $7,590, or 43.1%, to $10,015 for the six
months ended December 31, 2000, as compared to $17,605 for the same period
ended in 1999. This decrease is due to the conversion of interest bearing
debentures into common stock during the fiscal year ended June 30, 2000.
Liquidity and Capital Resources
At December 31, 2000, HealthWatch had $52,084 of cash and $1,848,406 of
investments in marketable securities. During the six month period ended
December 31, 2000, operating activities consumed $1,677,795 of cash compared to
$288,064 for the same period in 1999. The increase in cash used in operations
for the six month period ended December 31, 2000 is primarily the result of
increased consulting and professional fees. At June 30, 2000, HealthWatch had
$16,264 of cash and $3,935,500 of investments in marketable securities. During
the fiscal year ended June 30, 2000, operating activities consumed $1,523,796
of cash as compared to $1,074,541 for the same period in fiscal 1999. The
increase in cash used in operations for fiscal 2000 is primarily the result of
increased consulting and professional fees.
Investing activities provided $1,713,615 and $89,620 of cash during the six
month period ending December 31, 2000 and 1999, respectively. The increase is
primarily attributable to the sale of marketable securities and a decrease in
investment in and advances to Halis of $2,190,143 and $108,553, respectively.
The increases were offset by the purchase of property and equipment and
capitalized MERAD technology costs of $119,378 and $248,597, respectively.
Investing activities used $5,520,386 and $319,303 of cash during fiscal 2000
and 1999, respectively. The increase is primarily attributable to the capital
raised through private placements that was subsequently invested in $4,000,000
of marketable securities. Also during fiscal 2000 HealthWatch purchased
5,000,000 additional shares of Halis common stock for a total of $1,000,000.
Other investing activities during fiscal 2000, consisted of $217,496 and
$287,712 of capitalized MERAD technology costs and an increase in "Due from
Halis," respectively.
Due to HealthWatch's operating losses, it has been required to raise
additional equity capital to fund its operations. Since the beginning of fiscal
2000, HealthWatch has raised $7,038,700 through the sale of 28,572 shares of
its common stock, 4,000 shares of its Series C convertible preferred stock,
74,130 shares of its Series D convertible preferred stock, and the exercise of
warrants for 65,761 shares of common stock. During fiscal 2000, HealthWatch's
Series A preferred stockholders converted 224,000 shares of Series A preferred
stock into 734,908 shares of common stock in accordance with the conversion
rights under the Series A preferred stock.
The Company's 10% convertible secured debentures in the principal amount of
$480,000 were due and payable on March 1, 1998. During fiscal 2000, the
debenture holders converted $455,000 and $139,356 in related accrued interest,
calculated through the date of conversion, into 316,990 shares of HealthWatch's
common stock. As an inducement for the debenture holders to convert their
debentures into HealthWatch common stock, debenture holders received warrants
to purchase 77,495 shares of the Company's common stock, valued at $7,741. This
amount has been included in selling, general and administrative expenses in the
Company's statement of operations for the fiscal year ended June 30, 2000. The
warrants were valued using the Black-Scholes option-pricing method under the
following assumptions: no dividend yield; expected volatility of 162.50%; risk
free interest of 5.55%; and average expected warrant life of one year. At June
30, 2000, only $25,000 of the debentures remained outstanding. There has been
no additional arrangements made with the outstanding debenture holder.
In December 1999, HealthWatch retained Commonwealth Associates, LP, an
investment banking firm located in New York, to assist it in raising capital
needed for ongoing working capital and implementation of HealthWatch's business
plan.
In December 1999 and February 2000, HealthWatch completed a $400,000 equity
bridge financing (the "Bridge Financing") pursuant to which affiliates of
Commonwealth Associates purchased an aggregate of 4,000 shares of HealthWatch's
Series C preferred stock (convertible into HealthWatch common stock at a price
of $1.875 per share) and received five-year warrants (the "Bridge Warrants") to
purchase an aggregate of 666,669 shares of HealthWatch common stock at an
exercise price of $1.875 per share.
42
In February 2000, an affiliate of Commonwealth Associates agreed to make a
$2,000,000 line of credit available to HealthWatch (the "Line of Credit") as
bridge financing until the Series D preferred offering was completed. The Line
of Credit was secured by all the assets of HealthWatch and carried an interest
rate of 8% per annum, payable at maturity. The maturity date on the Line of
Credit was set as the earlier of (i) twelve months from the date of issuance,
(ii) upon HealthWatch raising $5,000,000 in equity or debt financing or
(iii) upon the merger of HealthWatch or sale of substantially all of its
assets. In February 2000, HealthWatch received advances totaling $500,000 under
the Line of Credit which was repaid in full out of the Series D preferred
offering proceeds. The Line of Credit expired on May 8, 2000, the initial
closing of the Series D preferred offering. HealthWatch issued the lender five-
year warrants to purchase 1,000,000 shares of HealthWatch common stock (the
"Line of Credit Warrants") exercisable at $3.50 per share subject to adjustment
under certain circumstances.
In March 2000, HealthWatch began an offering of its Series D 8% convertible
preferred stock. The offering consisted of units comprised of (i) 1,000 shares
of its Series D 8% convertible preferred stock (the "Series D Preferred Stock")
and (ii) five-year warrants to purchase an amount equal to 25% of the shares of
HealthWatch common stock into which the Series D Preferred Stock are initially
convertible (28,571 warrants per unit). 50 units (the "Minimum Offering") were
offered on a "best efforts, all-or-none" basis and the remaining 50 units (a
total of 100 units being the "Maximum Offering") were offered on a "best
efforts" basis.
In May 2000, HealthWatch completed the Series D Preferred Stock offering,
selling 74,130 shares of Series D Preferred Stock with related warrants for
gross proceeds of approximately $7.4 million.
Due to HealthWatch's success in raising additional capital through the
private placement of its securities, management has begun to implement its
business plan, which includes securing the additional personnel needed to
manage the marketing and advertising of its products, additional investment in
research and development, and the acquisition of strategic resellers needed to
grow HealthWatch's revenues. During the quarter ended March 31, 2000,
HealthWatch hired a Chief Operating Officer with an expertise in the healthcare
information technology industry to assist HealthWatch in marketing and
developing its products. The Company has also recently hired a Chief Financial
Officer. In addition, HealthWatch entered into a merger agreement to acquire
Halis, an information technology company which has developed transaction
processing applications for the healthcare industry. HealthWatch and Halis have
a long history with each other, as HealthWatch is the largest Halis shareholder
and Paul W. Harrison is the President, Chief Executive Officer and Chairman of
both companies. Management believes that securing the business contacts and
application products of Halis, specifically the HES System, will provide
HealthWatch with a key element needed to succeed in the development of its
information technology business. Currently, HealthWatch does not have any
material commitments outstanding for capital expenditures and does not
anticipate making any material capital expenditures in the short term. However,
HealthWatch is not currently generating positive cash flow from its operations,
and does not currently have liquid assets necessary to sustain operations over
the next twelve months. Management believes that it will be able to provide the
necessary operating capital from sales of its products and services. However,
if HealthWatch is unable to generate sufficient cash flow from its business it
will be necessary to seek additional equity or debt financing.
HealthWatch is currently contemplating a second round of equity financing
through a private placement, but does not have any definitive agreements with
regard to such financing. HealthWatch has no current plans for a public
offering of its securities. Should HealthWatch be successful in raising
additional equity capital through a private placement, it plans to further
invest in marketing and selling the HES System and building its corporate
infrastructure. In addition, it may also use such proceeds to acquire companies
in the healthcare services industry which would benefit from the efficiencies
that could be gained from using the HES System. There can be no assurances that
HealthWatch will be able to raise additional equity on terms acceptable to
management, if at all. Furthermore, there can be no assurances that if
HealthWatch is able to raise additional equity capital, it will be successful
in marketing the HES System, or that it will be able to acquire complementary
companies on terms acceptable to management, if at all.
43
OTHER HEALTHWATCH INFORMATION
Description of Property
HealthWatch's corporate offices are currently located at 1100 Johnson Ferry
Road, Suite 670, Atlanta, Georgia 30342. In addition, a portion of this space
is used by Halis under a cost sharing arrangement. This space includes 6,389
square feet leased under a three year lease agreement with monthly lease
payments of $7,242 which escalate to $12,144 per month over the term of the
lease. Finally, HealthWatch leases office and warehouse space in Vista,
California, under a lease that began in January 1999 and continues for a period
of three years. The annual lease payments under this lease are $49,200 and
escalate at a rate of 4% each year.
Legal Proceedings
HealthWatch is not a party to any material legal proceeding. From time to
time, HealthWatch is involved in various routine legal proceedings incidental
to the conduct of its business.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
On June 4, 1999, HealthWatch dismissed its independent auditors, Silverman
Olson Thorvilson & Kaufman, LTD, (Minneapolis, Minnesota), and on the same date
authorized the engagement of Tauber & Balser, P.C. (Atlanta, Georgia) as its
independent auditors for the fiscal year ended June 30, 1999. HealthWatch
formally engaged Tauber & Balser on June 4, 1999. The board of directors of
HealthWatch approved each of these actions. Because HealthWatch recently
relocated its corporate headquarters to Atlanta, Georgia, the HealthWatch board
of directors concluded that it would be more economical to use a regional firm
based in Atlanta, such as Tauber & Balser, to perform its audit for the current
fiscal year. Tauber & Balser also acts as independent auditors for Halis, in
which HealthWatch owns approximately 25 percent of its outstanding common
stock.
Silverman Olson audited the financial statements of HealthWatch for the
fiscal year ended June 30, 1998. The report of Silverman Olson on the financial
statements of HealthWatch for the fiscal years ended June 30, 1998 contained an
additional paragraph which modified each of the reports to emphasize that
Silverman Olson believed there was substantial doubt about HealthWatch's
ability to continue as a going concern. Except as set forth in the preceding
sentence, the reports on those audits did not contain any adverse opinions or a
disclaimer of opinions, nor was it qualified as to uncertainty, audit scope or
accounting principles.
In connection with the audit of the fiscal year ended June 30, 1998 and
through the period ended June 4, 1999 there were no disagreements with
Silverman Olson on any matter of accounting principle or practice, financial
statement disclosure or audit procedure or scope. Additionally, Silverman Olson
did not advise HealthWatch that:
. the internal controls necessary for HealthWatch to develop reliable
financial statements did not exist;
. 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;
. there existed a need to expand significantly the scope of its audit or
that information had come to the attention of Silverman Olson during the
fiscal periods, which, if further investigated, may:
. 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: or
. cause Silverman Olson to be unwilling to rely on management's
representations or be associated with HealthWatch's financial
statements, and due to the dismissal of Silverman Olsen, did not so
expand the scope of its audit or conduct such further investigation; or
44
. information had come to the attention of Silverman Olson that it
concluded materially impacts the fairness or reliability of either (a) a
previously issued audit report or the underlying financial statements or
(b) the financial statements issued or to be issued covering the fiscal
period subsequent to the date of the most recent financial statements
covered by an audit report (including information that, unless resolved
to the satisfaction of Silverman Olson would prevent it from rendering an
unqualified audit report on those financial statements), and due to the
dismissal of Silverman Olson, the issue was not resolved to the
satisfaction of Silverman Olson prior to its dismissal.
Further, during the fiscal year ended June 30, 1999, neither HealthWatch nor
any of its representatives sought the advice of Tauber & Balser regarding the
application of accounting principles to a specific completed or contemplated
transaction or the type of audit opinion that might be rendered on
HealthWatch's financial statements, which advice was an important factor
considered by HealthWatch in reaching a decision as to accounting, auditing or
financial reporting issue.
45
HEALTHWATCH MANAGEMENT
Executive Officers and Directors
The following table sets forth information regarding current executive
officers and directors of HealthWatch who will continue serve as executive
officers and directors of HealthWatch after the merger:
Name Age Position
---- --- --------
Paul W. Harrison 45 Chairman of the Board of Directors, President and
Chief Executive Officer
David M. Engert 50 Chief Operating Officer and Director
Marilyn May 37 Vice President--Business Development
A. E. Harrison 40 Vice President--Research & Development
Thomas C. Ridenour 39 Chief Financial Officer
John Gruber(1) 32 Director
Harold Blue(2) 39 Director
Robert Tucker 66 Director
John R. Prufeta 39 Director
--------
(1) Mr. Gruber is the director representative of the Series C Preferred
stockholders.
(2) Mr. Blue is the director representative of the Series D Preferred
stockholders.
Paul W. Harrison has served as Chairman of the board of directors since
October 1997 and has acted as CEO since October 1998. He is also Chairman and
CEO of Halis, which is approximately 25% owned by HealthWatch. Previously, Mr.
Harrison was the CEO of Paul Harrison Enterprises, Inc. ("PHE"), an information
technology management company, from February 1995 until it was merged into
HealthWatch in October 1998. Prior to PHE, Mr. Harrison was Vice President of
Managed Care at the healthcare software firm of HBO & Company, which is now
McKesson HBOC (NYSE: MCK), from June 1993 until December 1994 and was CEO of
Biven Software, Inc., a healthcare software firm, from April 1991 to June 1993
at which time Biven was acquired by HBOC. Prior to HBOC, Mr. Harrison served as
CEO of SOTRISS from 1981 to 1989. SOTRISS was an information technology company
that was sold to a publicly traded Fortune 500 company in 1989. Mr. Harrison's
education includes a Bachelors Degree from Georgia State University. He is a
Chartered Financial Consultant, a Chartered Life Underwriter and a Fellow of
the Life Management Institute. Paul W. Harrison and A.E. Harrison,
HealthWatch's Vice President--Research & Development, are brothers.
David M. Engert has served as Chief Operating Officer on a limited basis
since February 2000 and on a full time basis since April 24, 2000. On June 1,
2000, Mr. Engert was appointed to the board of directors. Most recently, Mr.
Engert was a Senior Vice President and General Manager of the Managed Care
Group at McKesson HBOC, Inc., a healthcare software company. He founded that
group in 1993 after holding the President and Chief Operating Officer position
at Biven Software, Inc., a healthcare software company. Mr. Engert was also one
of the first Directors of Sales at Sybase, Inc., an information technology
company, where he was employed from 1988 to 1992. He began his career in
information technology at Computer Corporation of America, Boeing Computer
Services and Xerox Computer Services. Mr Engert's education includes a B.S. in
Industrial Engineering from Louisiana State University.
Marilyn May is Vice President of Business Development and has served in that
capacity since January 1999. Ms. May joined HealthWatch in September 1996 and
previously served as Director of Marketing for HealthWatch and Halis. From 1993
until she joined Halis, Ms. May had temporarily left the workforce. Ms. May was
in marketing for Proctor and Gamble, a publicly traded consumer products firm,
from 1990 to 1993. She also worked in operations management for Pepsico, a
publicly traded food and beverage company, from 1985 to 1988. Ms. May's
education includes an MBA from the University of Tennessee.
46
A.E. Harrison is Vice President of Research and Development. He has been
with the HealthWatch since April 1999. From 1995 to March 1999, Mr. Harrison
served as Vice President of R&D for Halis. Previously, Mr. Harrison was in
software development for HBO and Company, which is now McKesson HBOC (NYSE:
MCK). Prior to HBOC, he was in several information technology companies
including SOTRISS, Marcom, a publicly traded telecommunications company, and
ITT, a diversified Fortune 500 communications company. A.E. Harrison and Paul
W. Harrison, HealthWatch's Chairman, President and C.E.O., are brothers.
Thomas C. Ridenour has served as Chief Financial Officer since August 2000.
Prior to joining HealthWatch, Mr. Ridenour served as Senior Vice President and
Chief financial Officer of Nationwide Credit, Inc., a consumer finance company,
from 1998 to 2000. Mr. Ridenour served in various financial management roles at
American Security Group, a financial services company, from 1995 to 1998. In
addition, Mr. Ridenour held other financial management positions at Primerica
Financial Services, a financial services company, and Southmark Corporation, a
real estate service and development company. Mr. Ridenour is a CPA and holds a
B.S. Accounting degree from the University of South Carolina.
John Gruber has served on the board of directors since September 28, 2000.
Mr. Gruber is currently a Senior Healthcare Research Analyst at Commonwealth
Associates, L.P., an investment banking firm. From 1997 to 1999, Mr. Gruber was
a Management Consultant with Ernst and Young, L.L.P. In addition, from 1990 to
1997, Mr. Gruber held several executive positions at Mount Sinai Medical Center
and St. Lukes/Roosevelt Hospital Center in New York City. Mr. Gruber has an MBA
in Healthcare Administration from a joint program of Baruch College and the
Mount Sinai School of Medicine. Mr. Gruber serves on the HealthWatch board as
the director representative of Series C Preferred stockholders.
Harold Blue has served on the board of directors since September 28, 2000.
Mr. Blue is currently Vice Chairman of ProxyMed, Inc., a publicly-held company
providing physician office software products, Internet application services and
network services to the healthcare community. Most recently, Mr. Blue served as
Chairman of the Board and Chief Executive Officer of ProxyMed, Inc. from 1993
to August 2000. Prior to ProxyMed, Inc., Mr. Blue founded Best Generics, Inc.
which was later sold to Ivax Corporation, a pharmaceutical manufacturer, where
he served as a member of Ivax's board of directors. From 1990 to 1994, Mr. Blue
served as President and Chief Executive Officer of a physician practice
management company which was acquired by InPhyNet Medical Management, Inc. Mr.
Blue has also served on numerous boards of directors of publicly-held
companies. Mr. Blue serves on the HealthWatch board as the director
representative of the Series D Preferred stockholders.
Robert Tucker has served on the board of directors since June 1, 2000. Mr.
Tucker has been president and chief executive officer of Specialty
Surgicenters, Inc. since 1997. From 1995 to 1997, Mr. Tucker was self-employed
as a private investor. From 1980 to 1995, he was chairman and chief executive
officer of Scherer Healthcare, Inc., a publicly traded healthcare products and
services company and was a member of the board of directors of Marquest Medical
Products, Inc. Mr. Tucker has been involved throughout his business career in
the medical industry, having held executive positions with Johnson and Johnson,
Howmedica and Story Instrument Company, among others. Mr. Tucker, a Korean war
veteran, is a graduate of Georgia State University and serves as an officer and
director of several closely held companies.
John R. Prufeta has served on the board of directors since July 14, 2000.
Mr. Prufeta has served as president and chief executive officer of Medix
Resources, Inc., a publicly held Internet-based healthcare communication, data
integration and transaction processing provider for the healthcare industry,
since 2000 and has been a board member since 1999. Mr. Prufeta served as
chairman and CEO of Onpoint Partners and Creative Management Strategies, a
national technology and services executive search firm, from 1989 to present.
Mr. Prufeta serves as a trustee for Silvercrest Services, a subsidiary of The
New York Hospital of Queens. He is additionally on the Advisory Board of The
National Managed Care Congress. Mr. Prufeta's education includes a B.S. in
management from St. Johns University and the Owner/President Management Program
at Harvard University, Graduate School of Business.
47
Recent Changes in Management
On September 28, 2000, Sheldon Misher and Robert Priddy resigned as
directors of HealthWatch. Messrs. Misher and Priddy had served as a directors
of HealthWatch since April 5, 2000. HealthWatch has not received any written
communication from either Mr. Misher or Mr. Priddy with regard to any
disagreements with HealthWatch relating to its operations, policies or
practices.
In March 2000, Richard T. Case and Sanford L. Schwartz resigned as directors
of HealthWatch. Mr. Case had served as a director of HealthWatch from 1997 and
had also served as a director during the period between 1990 and 1994. Mr.
Schwartz had served as a director of HealthWatch since 1983. At the time of
their respective resignations, neither Mr. Case nor Mr. Schwartz had any
disagreements with HealthWatch relating to its operations, policies or
practices.
Larry Fisher served as a director of HealthWatch from 1997 until his
resignation effective June 1999. At the time of his resignation, Mr. Fisher and
HealthWatch did not have any disagreements relating to HealthWatch's
operations, policies or practices.
Employment Agreements
Currently, only David M. Engert and Thomas C. Ridenour are under an
employment contract with HealthWatch. However, HealthWatch intends to use its
best efforts to secure the continued services of key personnel, including Paul
Harrison, in the near future.
Stock Option Plans
HealthWatch has a 1989 Incentive Stock Option Plan and 1993, 1995 and 2000
Stock Option Plans for its key employees, directors and consultants to purchase
shares of HealthWatch common stock. The plans provide that the purchase price
of the shares covered by incentive stock options may not be less than the fair
market value of the shares on the date the option was granted. Non-statutory
stock options granted can be granted at exercise prices of 85% or more of the
fair market value of HealthWatch common stock on the date of grant. To date,
all options granted under the plans have been at exercise prices equal to the
fair market value of the HealthWatch common stock on the date HealthWatch
agreed to grant the options.
As part of the acquisition of Paul Harrison Enterprises, Inc. ("PHE") by
HealthWatch on October 2, 1998, HealthWatch agreed to convert 600,000 options
for PHE common stock outstanding at the time of the merger into 125,000 non-
statutory stock options of HealthWatch common stock. Paul W. Harrison holds
116,667 of these options which have an exercise price of $4.80 per share,
exercisable on or before December 31, 2003.
HealthWatch has, from time to time, provided non-statutory stock options
outside of the plans to directors, officers and consultants and has awarded
stock grants to officers, directors, employees and consultants in consideration
for services. These non-statutory options generally have a term of three to
seven years and have exercise prices equal to the fair market value of
HealthWatch common stock on the date the options were granted. As of December
31, 2000, HealthWatch had an aggregate of 824,142 shares of HealthWatch common
stock reserved for issuance pursuant to outstanding stock options under the
plans and other stock option grants and an additional 946,850 shares of
HealthWatch common stock reserved for outstanding warrants.
Board Composition
HealthWatch currently has six directors. Pursuant to the Certificate of
Designation of Preferences and Rights of the Series C 8% Convertible Preferred
Stock of HealthWatch, Inc., for so long as the at least 800 shares of the
Series C Preferred remain outstanding, the holders of the Series C Preferred,
voting as a single class, have the right to elect one director to the
HealthWatch board of directors. Currently, Mr. Gruber is serving as the Series
C Preferred stockholder representative on the HealthWatch board. Similarly,
pursuant to the Certificate of Designation of Preferences and Rights of the
Series C 8% Convertible Preferred Stock of
48
HealthWatch, Inc., for so long as the at least 14,826 shares of the Series D
Preferred remain outstanding, the holders of the Series D Preferred, voting as
a single class, have the right to elect one director to the HealthWatch board
of directors. Currently, Mr. Blue is serving as the Series D Preferred
stockholder representative on the HealthWatch board. In accordance with the
terms of HealthWatch's Articles of Incorporation and by-laws, each director
shall serve until the next regular meeting of the stockholders and thereafter
until his successor is duly elected and qualified.
Board Committees
HealthWatch's board of directors has an audit committee. The audit committee
approves HealthWatch's independent auditors, reviews the results and scope of
annual audits and other accounting related services, and evaluates
HealthWatch's internal controls. The audit committee was established in May
2000, and currently Mr. Tucker is serving on the committee and one committee
seat remains open.
Director Compensation
HealthWatch does not currently pay any compensation to directors for serving
in that capacity. Directors are reimbursed for all reasonable expenses incurred
by them in attending board and committee meetings. The board of directors has
the discretion to grant options to directors under its Stock Option Plans.
Executive Compensation
The following table sets forth information concerning the compensation
earned during the fiscal year ended June 30, 2000 by HealthWatch's Chief
Executive Officer and the only other officer or director who received
compensation of $100,000 or more in Fiscal 2000.
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Bonus or Awards/Number
Annual Other Annual of Option
Name and Principal Fiscal Salary Compensation Shares
Position Year ($) ($)(a) Granted
------------------ ------ -------- ------------ -------------
Paul W. Harrison(b)......... 2000 $176,000(c) -- --
President and Chief 1999 75,000(d) -- 116,667
Executive Officer 1998 -- (e) -- 53,333
A.E. Harrison(g)............ 2000 $118,557(f) -- 50,000
Vice President 1999 25,000 -- --
1998 -- --
--------
(a) HealthWatch pays for 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.
(b) Mr. Harrison became President and CEO of the HealthWatch effective October
1998.
(c) Includes 9,333 shares of HealthWatch common stock valued at $17,500 paid in
lieu of salary on December 14, 1999 and 20,000 shares of HealthWatch common
stock valued at $37,500 paid in lieu of salary on February 16, 2000.
(d) Mr. Harrison entered into a consulting agreement in February 1999 whereby
he was to receive a monthly fee of $12,500 effective as of January 1, 1999.
As of June 30, 1999, $75,000 of consulting fees had accrued although Mr.
Harrison received only $12,500 of this amount. The balance of $62,500 was
paid in fiscal year 2000 on December 14, 1999 in the form of 33,334 shares
of HealthWatch common stock.
(e) During fiscal year 1998, HealthWatch was obligated under a consulting
agreement dated October 10, 1997 to pay consulting fees to PHE of $5,000
per month commencing on January 1, 1998.
49
(f) Includes 6,667 shares of HealthWatch common stock valued at $12,501 paid in
lieu of salary on December 14, 1999.
(g) A.E. Harrison joined HealthWatch effective April 1, 1999.
Option Grants in Last Fiscal Year
The following table sets forth stock options granted to each of the named
executive officers during the fiscal year ended June 30, 2000. A total of
583,333 options were granted in fiscal 2000, all under HealthWatch's Stock
Option Plans.
Options were granted at an exercise price equal to the fair market value of
HealthWatch's common stock, as determined by the board of directors, on the
date of grant based on its current stock price as quoted on the Nasdaq SmallCap
Market.
Percent of
Number Total Options Exercise
of Granted to Price
Options Employees in (Per Expiration
Name Granted Fiscal 2000 Share)($) Date
---- ------- ------------- --------- ----------
Paul W. Harrison............... 200,000 34.48% $3.50 02/07/05
20,000 3.45% 2.25 01/21/05
A.E. Harrison.................. 10,000 1.72% $2.188 12/02/04
10,000 1.72% 2.250 01/21/05
30,000 5.17% 3.50 02/07/05
Option Exercises and Holdings
The following table sets forth for each of the named executive officers of
HealthWatch information concerning the number of shares subject to both
exercisable and unexercisable stock options at June 30, 2000. Also reported are
values realized in respect thereof, by the named executive officers and the
number stock options and the value of said stock options held by the named
executive officers as of June 30, 2000.
Value of
Unexercised
Number of "in-the-
Unexercised money"
Shares Options at Options
Acquired Value 6/30/00 Exercisable/
on Realized Exercisable/ Unexercisable
Name Exercise ($) Unexercisable (a)
---- -------- -------- ------------- -------------
Paul W. Harrison(b)......... None -- 390,000/0 0/0
A.E. Harrison............... None -- 50,000/0 0/0
--------
(a) The market price of the HealthWatch's common stock on June 30, 2000 was
$1.34 per share. None of these options were "in-the-money" at June 30,
2000.
(b) Mr. Harrison also holds 14,545 warrants exercisable at a price of $2.235
per share, 3,333 warrants exercisable at a price of $8.60 per share and
15,094 warrants exercisable at a price of $4.306 per share. All of these
warrants are immediately exercisable.
Limitation of Liability and Indemnification Matters
HealthWatch's Articles of Incorporation limits the liability of directors to
the maximum extent permitted by Minnesota law. The HealthWatch Articles of
Incorporation provide that a director shall not be personally liable to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for:
. liability based on a breach of the duty of loyalty to the corporation or
its stockholders;
. liability for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law;
50
. liability of directors for improper distributions; or
. liability for any transaction in which a director derived an improper
personal benefit.
If the Minnesota law is amended to permit further elimination or limitation
of the liability of directors, then the liability of a director of the
corporation, then the director shall be indemnified to the fullest extent
authorized under the Minnesota Business Corporation Act.
51
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF HEALTHWATCH
The following table sets forth information with respect to beneficial
ownership of the HealthWatch capital voting stock by each person who
beneficially owns more than 5% of the HealthWatch capital voting stock, by each
of its executive officers named in the management section, by each of its
directors, and by all executive officers and directors as a group. The table
shows the number of shares and the percentage of the HealthWatch capital voting
stock owned as of December 31, 2000.
Percentage of
Outstanding Shares
Number of Shares of Percentage of Beneficially Owned
HealthWatch Capital Percentage of Outstanding Shares after the Merger
Stock Beneficially Outstanding Shares Beneficially Owned and Series P
Name of Beneficial Owner Owned Beneficially Owned(1) after the Merger(2) Conversion(3)
------------------------ ------------------- --------------------- ------------------- ------------------
Common Stock:
Paul W. Harrison(4).... 561,176 11.46% 7.80% 10.32%
John Gruber............ -- -- --
Harold Blue............ -- -- --
David M. Engert(5)..... 139,216 3.03% 2.02% 2.26%
Thomas C Ridenour...... -- -- --
Robert Tucker.......... -- -- --
John R. Prufeta(6)..... 8,929 0.20% 0.13% 0.12%
J.F. Shea, Inc(7)...... 285,714 6.39% 4.22% 3.84%
Robert Priddy(7)....... 285,714 6.39% 4.22% 3.84%
Rush and Company(8).... 214,286 4.79% 3.16% 2.88%
All Directors &
Executive Officers as
a Group (10
persons)(9)........... 816,003 15.94% 11.00% 13.58%
--------
(1) Based on 2,142,751 shares of outstanding HealthWatch common stock as of
December 31, 2000, plus the shares of common stock currently issuable upon
the conversion of all outstanding shares of Series C Preferred (213,333)
and (2) all outstanding shares of the Series D Preferred (2,117,998).
(2) Assumes the issuance of 2,300,000 shares of HealthWatch common stock to
Halis stockholders.
(3) Based on 2,142,751 shares of outstanding HealthWatch common stock, plus (i)
the shares of common stock currently issuable upon the conversion of all
outstanding shares of Series C Preferred (213,333) and all outstanding
shares of the Series D Preferred (2,117,998); (ii) assuming the issuance of
2,300,000 shares of Healthwatch common stock to Halis stockholders; and
(iii) assuming the issuance of 668,860 shares of common stock issued if the
conversion provisions of the Series P Preferred is approved.
(4) Includes 16,667 shares owned by Halis, of which Mr. Harrison is the
Chairman of the board of directors, President, and Chief Executive Officer
and a major stockholder, as to which he shares voting and investment power.
Also includes 422,972 shares subject to warrants and options exercisable
within 60 days. Does not include 25,080 shares of Series P Preferred Stock
which will be convertible into 250,800 shares of HealthWatch common stock
only after stockholder approval is obtained. The beneficial ownership
percentage after the merger includes beneficial ownership of 381,742 shares
of HealthWatch common based on 2,990,849 shares of Halis common stock and
4,644,000 options to purchase Halis common stock that will be converted to
HealthWatch common stock and options pursuant to the merger.
(5) Includes 123,333 shares subject to warrants and options exercisable within
60 days. Does not include 3,177 shares of Series P Preferred Stock which
will be convertible into 31,770 shares of HealthWatch common stock only
after stockholder approval is obtained.
(6) Includes 8,929 shares of common stock issuable upon conversion of Series D
Preferred and warrants exercisable within 60 days.
(7) Includes 285,714 shares of common stock issuable upon conversion of Series
D Preferred and warrants exercisable within 60 days.
(8) Includes 214,286 shares of common stock issuable upon conversion of Series
D Preferred and warrants exercisable within 60 days.
(9) Includes 655,244 shares subject to Series C Preferred, Series D Preferred,
warrants and options exercisable within 60 days.
52
Beneficial ownership is based on information provided to us, and the
beneficial owner has no obligation to inform us of or otherwise report any
changes in beneficial ownership. Except as indicated, the persons named in the
table above have sole voting and investment power with respect to all shares of
HealthWatch common stock shown as beneficially owned by them. Mr. Harrison's
and Mr. Engert's address is 1100 Johnson Ferry Road, Suite 670, Atlanta,
Georgia 30342. Mr. Gruber's address is 830 Third Avenue, New York, New York
10022. Mr. Blue's address is 2555 Davie Road, Suite 110, Ft, Lauderdale,
Florida 33317. Mr. Tucker's address is 555 Sun Valley Drive, Suite P-1,
Roswell, Georgia 30076. Mr. Prufeta's address is 305 Madison Avenue, Suite
2033, New York, New York 10165.
The percentages shown are calculated based upon 2,142,751 shares of
HealthWatch common stock outstanding on December 31, 2000 and 2,331,331 shares
issuable upon conversion of the Series C and D Preferred. In calculating the
percentage of ownership, all shares of HealthWatch common stock that the
identified person or group had the right to acquire within 60 days of December
31, 2000 upon the exercise of options and warrant are deemed to be outstanding
for the purpose of computing the percentage of shares of HealthWatch common
stock owned by such person or group, but are not deemed to be outstanding for
the purpose of computing the percentage of the shares of HealthWatch common
stock owned by any other person.
HEALTHWATCH RELATED PARTY TRANSACTIONS
The following is a description of transactions since January 1, 1998 to
which HealthWatch has been a party, the amount involved in the transaction
exceeds $60,000 and (a) in which any director, executive officer who will serve
as a director or executive officer after the merger, or holder of more than 5%
of HealthWatch's capital stock had or will have a direct or indirect material
interest other than compensation arrangements or (b) involves an affiliate of
HealthWatch.
History of Halis, HealthWatch and PHE
Since August 1997, HealthWatch has entered into a number of transactions
with Halis, and a number of its affiliates and stockholders. As stated earlier,
the HES System was developed by Halis utilizing the MERAD technology. The MERAD
technology was developed by Paul W. Harrison and originally owned by
Paul Harrison Enterprises, Inc., ("PHE") which was controlled by Paul W.
Harrison, prior to HealthWatch's acquisition of PHE in October 1998. PHE was
also a significant stockholder of Halis, at the time of its acquisition by
HealthWatch, owning 6,177,010 shares (or approximately 11%) of Halis common
stock. An additional 990,849 shares (or 2%) of Halis common stock was owned by
Mr. Harrison individually at that time.
License Agreement Between HealthWatch and PHE
In October 1997, HealthWatch entered into a software license and development
agreement with MERAD Corporation ("MERAD"), a company then owned by PHE.
Pursuant to the agreement, HealthWatch was to license certain computer
architecture, concepts, algorithms and processes from MERAD which HealthWatch
originally planned to integrate into a line of noninvasive vascular diagnostic
equipment. In addition, MERAD was to develop healthcare software for
HealthWatch. In exchange for these licenses and services, HealthWatch agreed to
pay MERAD a development fee of $15,000 per month during the period January 1998
through June 1998. In addition, HealthWatch was to pay MERAD a fee based on a
variable rate of gross software revenues. HealthWatch believes that the terms
of the license agreement between HealthWatch and PHE were at fair market value
and on no less favorable terms than could have been obtained from unaffiliated
third parties.
Private Placements between Halis, HealthWatch and PHE
During the first quarter of fiscal year 1998, HealthWatch entered into an
agreement with Halis pursuant to which Halis acquired 83,333 shares of
HealthWatch common stock for a purchase price of $125,000. During the second
quarter of fiscal year 1998 and prior to its acquisition by HealthWatch, PHE
transferred 500,000
53
shares of Halis common stock to HealthWatch in exchange for 400,000 shares of
HealthWatch common stock. During February 1998, PHE exchanged an additional
1,400,000 shares of Halis common stock for 488,400 shares of HealthWatch common
stock. The exchange ratio was based upon the market value for each company's
common stock at the time that the transaction was negotiated. For purposes of
the above transactions, the fair market value of each company's common stock
was determined by reference to the then trading price of such common stock on
the over-the-counter market with respect to Halis and on the Nasdaq SmallCap
Market with respect to HealthWatch. Adjustments were then negotiated to the
exchange ratio to reflect that the transactions related to blocks of Halis
common stock larger than would be purchasable in a short period of time over-
the-counter. At that time, there was relatively active trading in Halis common
stock over-the-counter, but relatively low volume per day, making the
acquisition of a large block of stock more difficult in the open market. As a
result of these transactions, at September 30, 1998 PHE held 888,400 shares of
HealthWatch common stock. As a result of the acquisition of PHE by HealthWatch
on October 2, 1998, these shares became treasury shares and are deemed
cancelled and not outstanding. None of the references to the shares of
HealthWatch common stock held or acquired by PHE above include shares owned
directly by Mr. Harrison nor do they reflect the five-for-one reverse stock
split effected by HealthWatch in December 1999. At the time of the PHE
acquisition, Mr. Harrison owned 1,203,849 shares of PHE (approximately 37.5%)
and 246,123 shares of HealthWatch (approximately 10%).
Summary of Private Placement Transactions
Fair Market
Party Value Received Value Paid Value
----- -------------- ---------- -----------
HealthWatch (1) $125,000 83,333 shares of HealthWatch common stock $125,000
(2) 500,000 shares of 400,000 shares HealthWatch common stock 779,759
Halis common stock
(3) 1,400,000 shares of 488,400 shares of HealthWatch common stock 448,836
Halis common stock
Halis (1) 83,333 shares of $125,000 125,000
HealthWatch common stock
PHE (2) 400,000 shares of 500,000 shares of Halis common stock 779,759
HealthWatch common stock
(3) 488,400 shares of 1,400,000 shares of Halis common stock 448,836
HealthWatch common stock
HealthWatch believes that the shares issued in these private placement
transactions were sold at fair market value and that the terms of these
transactions were no less favorable than could have been obtained from an
unrelated third party.
HealthWatch's Acquisition of PHE and Related Transactions
During October 1998, HealthWatch agreed to acquire PHE and caused its newly
created wholly-owned subsidiary MERAD Software, Inc., a Nevada corporation, to
merge with PHE. In the merger, the 55 stockholders of PHE received a total of
66,886 shares of HealthWatch's Series P Preferred Stock. Paul W. Harrison,
Chairman, President and Chief Executive Officer of HealthWatch, received 25,080
shares of the Series P Preferred in his capacity as a stockholder of PHE. David
M. Engert, Chief Operating Officer and a director of HealthWatch, received
3,177 shares of the Series P Preferred in his capacity as a stockholder of PHE.
PHE stockholders also received options for approximately 125,000 shares of
HealthWatch common stock in exchange for previously outstanding options of PHE.
Of the options issued in the PHE acquisition, 116,667 were issued to Paul W.
Harrison. These options were granted with exercise prices equal to the fair
market value of HealthWatch common stock at that time.
If approved by HealthWatch's stockholders, the Series P Preferred will
become convertible into HealthWatch common stock at a ratio of ten shares of
HealthWatch common stock for each share of Series P Preferred, or an aggregate
of 668,860 shares, at each holder's option. The Certificate of Designation for
the
54
Series P Preferred originally provided for dividends to be paid at a rate of
12% per annum from the date of issuance through January 31, 1999. If the
holders of the Series P Preferred were not granted the right to convert their
shares into shares of HealthWatch common stock prior to February 1, 1999, the
dividends were to accrue at the rate of 18% per annum from February 1 through
August 1, 1999. If the holders of the Series P Preferred were not granted the
right to convert their shares into shares of HealthWatch common stock prior to
August 1, 1999, the dividends were to accrue at the rate of 24% per annum from
August 1, 1999 and thereafter. In connection with a recent private placement,
the holders of the Series P Preferred agreed to make certain concessions with
regard to their shares including an agreement to a change in the dividend rate.
Thus, the Certificate of Designation for the Series P Preferred has been
amended to reflect a dividend rate of 8% per annum retroactive to the effective
date of issuance, deleting the penalty provisions described above. If
HealthWatch's stockholders do not approve the conversion, the Series P
Preferred will remain outstanding as a nonconvertible security.
The purchase price in the PHE acquisition was negotiated by HealthWatch's
then outside directors, Messrs. Richard Case and Sanford Schwartz, after
receiving full disclosure of Mr. Harrison's conflict of interest created by his
ownership interest in, and officer position at, PHE. Given this conflict, Mr.
Harrison did not participate in discussions of HealthWatch's board with respect
to appropriate valuations and other terms of the transaction. Similarly, the
PHE board, including Mr. Harrison, negotiated with HealthWatch's outside
directors with respect to such valuation and other terms of the transaction. No
independent appraisal of PHE was sought in order to set the value. The initial
purchase price of $3.3 million paid by the issuance of Series P Preferred Stock
was set based on the market value of HealthWatch and Halis stock owned by PHE
at the time of the acquisition and the actual cash expended to date by PHE to
develop the MERAD technology. This benchmark was deemed appropriate because PHE
had experienced little or no revenue prior to the date of the acquisition, but
had developed technology believed to be of significant market value. At the
time the Series P Preferred Stock was issued in the PHE acquisition,
HealthWatch common stock was trading at a price of between $0.65 and $1.00 per
share.
In addition to the issuance of the Series P Preferred, the PHE stockholders
are entitled be paid royalties based on revenues derived by HealthWatch from
the sale of software developed utilizing the MERAD technology. In connection
with HealthWatch's merger with PHE, each PHE stockholder entered into an
Additional Consideration Agreement with HealthWatch which provided that such
PHE stockholder would receive a pro-rata share of the total additional
consideration to be paid to all PHE stockholders based on the his pro-rata
ownership of PHE at the time of the merger. The additional consideration to be
paid was a separate component of the purchase price paid in the merger designed
to protect the PHE stockholders from selling their company at an artificially
low valuation if the MERAD technology achieved the value the parties believed
it would at the time. Originally, the additional consideration was to be paid
in equal amounts of cash and HealthWatch common stock based on sales of MERAD-
related products equal to 5% of the first $1,000,000 of gross revenues related
to sales of the MERAD technology and 10% of revenues thereafter in any fiscal
year. The additional consideration was payable quarterly for a period of ten
years or until HealthWatch had paid in the aggregate $7,000,000 in additional
consideration. During fiscal 1999, the former PHE stockholders, as a group,
earned $94,437 as additional consideration. During Fiscal 2000, the former PHE
Stockholders, as a group, earned $20,420 as additional consideration. During
fiscal 2000, HealthWatch paid $53,283 in HealthWatch common stock and $55,334
in cash to former PHE stockholder in additional consideration, and $6,241 is
owed and unpaid as of June 30, 2000. HealthWatch believes that the terms of the
PHE acquisition were at the fair market value and that the terms were no less
favorable than it could have obtained from unaffiliated third parties.
55
Summary of Consideration Paid/Received
in HealthWatch's Acquisition of PHE
Party Description Fair Market Value
----- ----------- -----------------
Paul W. Harrison........ 25,080 shares of Series P $1,237,389
Preferred
116,667 HealthWatch common (1)
stock options
Additional Consideration (2)
Agreement
David M. Engert......... 3,117 shares of Series P $153,786
Preferred
Additional Consideration (2)
Agreement
All PHE Stockholders.... 66,886 shares of Series P $3.3 Million
Preferred
116,667 HealthWatch common (1)
as a group (55 persons) stock options
Additional Consideration (2)
Agreement
--------
(1) The stock options were issued with an exercise price equal to
HealthWatch's fair market value at the time of issuance.
(2) Not readily determinable. The total paid to date under the agreement is
$114,857.
In connection with the closing of a recently completed private placement,
Paul W. Harrison, HealthWatch's Chairman, Chief Executive Officer and
President, and David M. Engert, HealthWatch's Chief Operating Officer and a
director (who were both former PHE stockholders), waived any and all future
payments of additional consideration. The remaining PHE stockholders have been
asked to agree to the following amendments to their respective Additional
Consideration Agreements: First, the additional consideration is to be
calculated based on a fixed percentage (3%) of gross revenues each fiscal year
from sales of the MERAD technology. In addition, HealthWatch has the option to
pay the additional consideration in cash, or in a combination comprised of one-
half cash and one-half shares of HealthWatch common stock. Although the maximum
aggregate payment to be made under the Additional Consideration Agreements is
still $7,000,000, the payout period has been extended from ten years to fifteen
years. As of September 30, 2000, all but three of the PHE stockholders have
agreed to these amendments.
At the time of the PHE acquisition, PHE held 6,177,010 shares of common
stock in Halis, which represented approximately 11% of the then outstanding
Halis common stock, and owned the MERAD technology. As a result of the merger,
HealthWatch increased its ownership interest in Halis to 8,939,010 shares of
Halis' common stock, representing approximately 19% of its outstanding shares.
In January 1999, HealthWatch converted outstanding debt owed by Halis to
HealthWatch into 1,824,645 additional shares of common stock of Halis, bringing
the number of Halis shares held by HealthWatch to 10,763,655, representing
approximately 21% of Halis' outstanding shares. On April 29, 2000, HealthWatch
exercised a financing option, as discussed below, for an additional 5,000,000
shares of Halis common stock. HealthWatch is now the single largest stockholder
of Halis (owning 15,763,655 shares, or approximately 25% of Halis' outstanding
common stock) and, due to the size of its holdings, accounts for its investment
in Halis under the equity method of accounting, which means it recognizes its
proportionate amount of Halis' income or loss.
Business Collaboration Agreement
In October 1997, HealthWatch and Halis entered into a business collaboration
agreement. Under the business collaboration agreement, HealthWatch has granted
Halis a non-exclusive license to HealthWatch's information technology software
in exchange for a ten percent (10%) commission on sales of products or services
incorporating such software. Additionally, Halis has granted HealthWatch a non-
exclusive license to market the HES System or other Halis products in exchange
for a ten percent (10%) commission on all revenues received from sales or
services relating to such products. In September 2000, the business
collaboration agreement was amended to provide, among other things, for revenue
sharing based on a 60/40 split (i.e., the selling company would receive 60% of
the sales price and the company that owns the technology would receive 40% of
the sales
56
price). Furthermore, HealthWatch is obligated to pay Halis a collaboration fee
of $50,000 per month beginning in September 2000, which shall be applied as a
credit against any revenue sharing amount that is due to Halis. Halis is
obligated to provide support to HealthWatch for the Halis software products,
provide reasonable product enhancement as part of product release updates and
cooperate with HealthWatch in regard to product enhancement requests.
HealthWatch may terminate the $50,000 monthly collaboration fee payable to
Halis on or after October 1, 2001, under certain terms and conditions.
In addition, Halis and HealthWatch have each agreed to use their best
efforts to utilize the services of the other company whenever and wherever
reasonably possible when contracting with third parties to provide services to
or in connection with the sale, delivery and installation of products and/or
services. Halis and HealthWatch have also agreed to use their best efforts to
share facilities in order to permit one company to obtain an initial and
temporary location in a market in which the requesting company desires to
establish a presence. Any such facilities are to be provided subject to the
reimbursement of the providing company's reasonable costs incurred in
connection with the providing of such facilities. Currently, Halis and
HealthWatch share office space and administrative support for the corporate
headquarters of both companies, which is located at 1100 Johnson Ferry Road,
Suite 670, Atlanta, Georgia, 30342.
The term of the business collaboration agreement was initially for a period
of one year, but provides for automatic one-year renewals unless terminated by
one of the parties by giving sixty-day written notice to the other party. The
September 2000 amendment extended the term through September 2005. HealthWatch
paid Halis approximately $49,500 and $55,473 in fiscal years 2000 and 1999,
respectively, under the business collaboration agreement. HealthWatch believes
that the terms of the business collaboration agreement, as amended, are at the
fair market value and were no less favorable than it could have obtained from
unaffiliated third parties.
Other Transactions
As a result of the merger of PHE into MERAD Software, Inc., the MERAD
technology is now owned by HealthWatch. Halis is obligated to pay HealthWatch
10% of the gross revenues generated by Halis from products and services
utilizing the MERAD technology under a perpetual license agreement. During
fiscal 2000 and 1999, HealthWatch earned $21,935 and $66,087, respectively, in
royalties from Halis, none of which had been paid to HealthWatch as of year-
end.
HealthWatch and Halis currently share office space and have a cost sharing
arrangement relating to key personnel under an arrangement that required
HealthWatch to pay Halis a calculated amount each month based upon a reasonable
cost basis of services provided. Pursuant to this arrangement, until the end of
1999, Halis maintained a principal office in Atlanta and HealthWatch shared
those facilities. Throughout that period, HealthWatch made payments to Halis,
calculated based on the percent of the facilities used by each party over total
cost, including phone and utilities, and including an immaterial amount for
shared personnel. From July 1 through December 31, 1999, HealthWatch paid Halis
$8,250 a month for use of office space and personnel. This amount does not
include salary for Mr. Harrison in his capacity as an executive officer of each
organization, which is paid separately by each organization for the work
performed for such company. Beginning January 1, 2000, HealthWatch is now the
primary lessor of the principal office facilities in Atlanta. Halis is now
sharing these facilities under a similar arrangement. To date, no monthly
payment amount has been determined; however, the parties intend to negotiate a
payment by Halis to HealthWatch that will be designed to reflect the relative
usage of each party of the facilities and personnel.
Effective October 10, 1997, PHE and Paul W. Harrison entered into a
consulting agreement with HealthWatch which expired on December 31, 1998. The
agreement provided for, among other things, the payment to PHE commencing on
January 1, 1998 of $5,000 per month, Mr. Harrison's continued service on the
board of directors, the granting of a five-year non-statutory stock option to
Mr. Harrison representing the right to acquire up to 50,000 shares of
HealthWatch common stock at the then fair market value for the HealthWatch
common stock. In addition, HealthWatch agreed to make a loan to Mr. Harrison of
up to $200,000 payable in four equal annual installments with interest to
accrue at 7% per annum to cover tax liabilities arising from the
57
stock swaps with PHE. Despite that loan commitment, Mr. Harrison never
requested nor received a loan from HealthWatch. In May 1998, the exercise price
for the stock options were repriced to $3.30 per share. None of the options
have been exercised. In February 1999, the consulting agreement was modified to
remove PHE as a party and to provide for the payment of $12,500 to Paul W.
Harrison on a monthly basis to manage HealthWatch, effective as of January 1,
1999.
On January 22, 1998, Paul W. Harrison and two other individuals each loaned
HealthWatch $17,000 for a period of 90 days to enable HealthWatch to meet its
payroll obligations. The loans, which have been repaid, were to bear interest
at 7% per annum. As additional compensation for making the loan, Mr. Harrison
was granted a warrant to acquire 3,333 shares of HealthWatch common stock at
$8.95 per share, the fair market value for HealthWatch common stock on January
22, 1998.
On April 29, 2000, HealthWatch exercised a financing option to purchase
5,000,000 shares of Halis common stock for a total purchase price of $1,000,000
in a private placement. This transaction increased HealthWatch's ownership of
Halis common stock to 15,763,655 shares, or approximately 25% of Halis'
outstanding common stock.
In October 2000, Halis borrowed $250,000 from HealthWatch under an unsecured
note payable. The note accrues interest at 10% and is due on demand. The note
is convertible, at the option of HealthWatch, into 12,500,000 shares of the
Halis common stock, or $.02 per share.
Summary of Other Transactions
Parties Description of Transaction Consideration
------- -------------------------- -------------
Halis/HealthWatch............. MERAD License Agreement 10% Royalty on Gross
Revenues.
Halis/HealthWatch............. Office/Cost Sharing Arrangement Cost allocated based on
actual usage.
HealthWatch/PHE/P.W. Harrison. Consulting Agreement $5,000 per month to PHE.
$12,000 per month and
50,000 HealthWatch
common stock options to
Paul Harrison.
HealthWatch/P.W. Harrison..... Shareholder Loan $17,000 note at 7% and
3,333 warrants with an
exercise price of $8.95
per share.
Halis/HealthWatch............. Private Placement $1,000,000 for 5,000,000
shares of Halis common
stock.
Halis/HealthWatch............. Unsecured Note $250,000 note at 10%
that may be converted
into 12,500,000 shares
of Halis common stock.
HealthWatch believes that all related party transactions described above
were on terms no less favorable than could have been otherwise obtained from
unrelated third parties. All future transactions between HealthWatch and its
principal officers, directors and affiliates will be approved by a majority of
the independent and disinterested members of the board of directors and will be
on terms deemed to be no less favorable than could be obtained from unrelated
third parties.
58
HALIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward Looking Statements
The following discussion of Halis' financial condition and results of
operations contains forward looking statements within the meaning of Section
27A of the Securities Act and Section 21E of the Securities and Exchange Act of
1934, which are intended to be covered by the safe harbors created thereby.
These statements include the plans and objectives of Halis for future
operations. The forward looking statements included herein are based on current
expectations that involve numerous risks and uncertainties. Halis' plans and
objectives are based on the assumption that Halis' 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 Halis' 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 Halis' control. Although Halis 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 Halis, or any other person, that the objectives and plans of
Halis will be achieved.
General
This discussion and analysis of financial condition and results of
operations as of December 31, 2000 and for the years ended December 31, 2000
and 1999 should be read in conjunction with the sections of Halis' financial
statements and related notes included elsewhere in this joint proxy
statement/prospectus.
Financial Condition
Comparison of December 31, 2000 Versus December 31, 1999
Total assets as of December 31, 2000 were $1,637,939, a decrease of $148,247
from total assets of $1,786,186 at December 31, 1999. The decrease is primarily
attributable to decreases in accounts receivable and the market value of the
Company's investment in HealthWatch of $14,991 and $39,583, respectively, and
depreciation and amortization of $597,700. The decreases were offset by a
$67,567 increase in cash, which is the residual from the sale of 5,000,000
shares of common stock to HealthWatch for a total purchase price of $1,000,000,
and increases in property and equipment, capitalized software development costs
and other current assets of $63,185, $58,150 and $28,329, respectively.
Current liabilities decreased by $707,182 from $2,460,847 at December 31,
1999 to $1,753,663 at December 31, 2000. The decrease is primarily attributable
to reducing accounts payable and accrued expenses and accrued payroll and
payroll taxes by $990,721 and $195,049, respectively, and a decrease in notes
payable-bank and increase in notes payable-related party of $70,512 and
$235,000, respectively. Accounts payable and accrued expenses were reduced
partially by the reversal of approximately $235,000 of aged accounts payable
and accrued liabilities to selling, general and administrative expense, which
management believes Halis will no longer be required to settle. These decreases
were offset by an increase in Due to HealthWatch, Inc. of $291,976.
Stockholders' equity increased from a deficit of $883,221 at December 31,
1999 to a deficit of $258,235 at December 31, 2000, an increase of $624,985.
This increase is attributable to the sale of 5,000,000 shares of Halis common
stock to HealthWatch for $1,000,000, the sale of 1,000,000 shares of Halis
common stock for $70,000 in a private placement, the issuance of 400,000 shares
of Halis common stock for current services valued at $26,000, and the issuance
of 1,187,500 shares of Halis common stock to Paul W. Harrison, Halis' Chairman
and CEO, in payment of $80,000 of accrued salary and a $15,000 loan. The
increases are offset by a
59
decrease in the market value of the Company's investment in HealthWatch common
stock of $29,167 and a net loss for the period of $776,963.
As a result of numerous factors, including but not limited to, Halis'
working capital deficit, and because Halis has sustained losses from operations
since inception, Halis' independent public accountants have included a
paragraph in their audit report accompanying Halis' financial statements for
fiscal years 2000 and 1999 regarding the substantial doubt about Halis' ability
to continue as a going concern. Until such time as Halis' healthcare software
is accepted in the marketplace and generates revenues sufficient to support the
operations of Halis, operations will be financed, in large part, from outside
sources. In order to satisfy its working capital deficit, and remove the threat
to the continuation of the business, Halis has restructured its business to
outsource the sales and marketing function to HealthWatch pursuant to the
business collaboration agreement, so that it can focus on the development side
of the business. Furthermore, Halis is seeking a merger candidate which has the
financial resources necessary to continue the marketing and development of the
HES System.
Fiscal Year Ended December 31, 2000 and 1999
Revenues which consist of sales and services, decreased 20% from $5,082,493
for the year ended December 31, 1999 to $4,051,434 for the year ended December
31, 2000. This decrease is primarily the result of significantly decreased
consulting fees of $886,204 and HES system revenues of $787,277. Due to cash
resource limitations, Halis made the decision in late 1999 to no longer
aggressively pursue its consulting business. The decreases are partially offset
by increased revenues at Halis' American Benefit Administrative Services
subsidiary totaling $642,451.
Cost of goods sold decreased 99% from $848,173 for fiscal 1999 to $12,280
for fiscal 2000 primarily due to the decrease of $774,472 related to the
consulting business, none of which was attributable to the discontinued
business. Cost of sales associated with consulting revenue was $782,672 in 1999
and $11,200 in 2000. Cost of sales on non-consulting revenue was $65,501 in
1999 and $1,080 in 2000. Cost of goods sold decreased by a much larger
percentage than revenue due to the very low margins obtained on consulting
revenue.
Selling, general and administrative expenses decreased 2% from $4,056,539
for fiscal 1999 to $3,960,447 for fiscal 2000. The decrease is primarily due to
the reduction of corporate overhead of $516,071, offset by an increase of
$89,543 in consulting and professional fees associated with the Company's
change in business focus and increased overhead resulting from growth at the
Company's American Benefit Administrative Services subsidiary totaling
$247,480. Included in the selling, general and administrative expenses for
fiscal 2000 are reversals of aged accounts payable and accrued liabilities of
approximately $235,000. The decision to make the reversals was made after a
detailed review of Halis' outstanding liabilities, in which management
discovered numerous liabilities not believed to be valid debts of Halis due to
their age, most two-to-three years old, and the lack of any contact whatsoever
with the vendor.
Amortization and depreciation decreased $22,437 (4%) from $620,137 for
fiscal 1999 to $597,700 for fiscal 2000 primarily due to the additional write
down of unamortized goodwill associated with the acquisitions of Compass Group,
Inc. during fiscal 1998, and the dispositions of PRN and the Homa Practice
during fiscal 1998.
Gain on extinguishment of accounts payable of $137,424, net of income taxes
of $92,000, represents the difference between amounts paid related to aged
payables and the original invoiced amounts. Halis negotiated reductions in
balances on certain outstanding aged payables.
Halis' net loss of $776,963 for fiscal 2000, includes a gain on asset
dispositions of $35,000 and a gain on extinguishment of accounts payable of
$137,424, net of income taxes of $92,000. Halis' earnings before interest,
taxes, depreciation and amortization ("EBITDA") for 2000 was increased by
$54,095, or 31%, from a $173,470 loss to a $119,375 loss. EBITDA is generally
used as an indicator of the net cash flow that is being produced from
operations and the amount of cash flow that will be available to pay the debts
of the company, including taxes. Because EBITDA is a generic term that is used
in may different contexts, the method in which we calculated EBITDA may not
necessarily be consistent with the method used by other companies.
60
Liquidity and Capital Resources
During the year ended December 31, 2000, operating activities consumed
$959,567 of cash as compared to $221,189 for the same period for the prior
year. The primary reasons for the increase is the Company's aggressive approach
to settling liabilities with past due vendors and paying down its accounts
payable and accrued liabilities. Halis was able to do this through the use of
cash provided by HealthWatch both in the form of loans totaling $469,289 and
$1,070,000 in proceeds from the purchase of common stock. Halis reduced its
accounts payable and accrued expenses by $1,190,687, of which $578,788 was
either settled or paid in cash, including approximately $235,000 of aged
accounts payable and accrued liabilities which were reversed, and $80,000 which
was converted to Halis common stock.
During fiscal 2000, Halis recorded a net loss of $776,963. The net loss was
primarily the result of the beneficial conversion adjustment of $250,000 and
$597,700 in depreciation and amortization, none of which affect liquidity or
cash. Halis' operating activities used $959,567 in cash during fiscal 2000, an
increase of $738,378 (334%) from $221,189 during fiscal 1999. This increase is
primarily due to a significant reduction in accounts payable and accrued
expenses which reflects Company's aggressive approach to settling past due
liabilities with vendors.
Investing activities used $134,606 during fiscal 2000, an increase of
$58,444 (77%) from the $76,162 used in fiscal 2000. The increase is primarily
due to cash paid for the purchase of property and equipment, capitalized
software development and capitalized license fees during fiscal 2000.
Financing activities provided $1,408,638 during fiscal 2000, an increase of
$1,150,267 (445%) from $258,371 for fiscal 1999. The increase is primarily due
to the issuance of common stock and proceeds received from notes payable.
No provision has been made in the financial statements for any settlements
or judgments relating to outstanding legal maters. In the event of a material
judgment or settlement resulting from Halis' outstanding legal matters, Halis
would experience an adverse effect on its liquidity. Additionally, the majority
of the agreements entered into through December 31, 1999 for the HES System
have been for pilot sites, and future sales are contingent upon the users
satisfaction with the product. 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. Furthermore, Halis
does not currently have any outstanding commitments for capital expenditures
due to its limited financial resources. Should additional capital expenditures
become necessary, Halis would have to seek additional capital to finance such
expenditures. There can be no assurances that such capital would be available
to Halis, or that it would be on terms acceptable to management.
Halis continues to monitor its cash situation very closely. Due to the down-
sizing of Halis, its cash needs are not as acute as they were during 1998 and
1999. However, if Halis is unable to increase sales of its HES System or
consummate the merger with HealthWatch, Halis may not be able to continue to
generate sufficient positive cash flow to meet its obligations without seeking
additional capital. Halis' immediate cash needs have been partially provided
for due to HealthWatch executing its financing option, which provided $1
million paid in cash for 5,000,000 shares of Halis' common stock. Management
does not believe that Halis has liquid assets sufficient to meet its operating
needs for more than the next six-to-twelve months. As discussed above, if Halis
is unable to reach profitability, it will be forced to seek additional capital
necessary to meet its operating needs, which may not be available on terms
acceptable to management, if at all.
61
OTHER HALIS INFORMATION
Description of Property
Halis' corporate headquarters are located at 1100 Johnson Ferry Road, Suite
670, Atlanta, Georgia. Halis shares this office space with HealthWatch under a
cost sharing arrangement in which the rent and facilities costs are allocated
to each company based on usage. Halis also leases additional office space in
Atlanta, Georgia at a monthly rate of $4,340. Additionally, the Company leases
approximately 11,000 sq. feet of space in Chicago, Illinois, where its American
Benefit Administrative Services subsidiary is located, at a monthly rental of
$18,541, which will escalate to $23,000 per month by the year 2003.
Legal Proceedings
(A) Penelope Sellers v. Halis, Inc., Larry Fisher and Paul W. Harrison,
State Court of the State of Georgia, County of Fulton
Civil Action File No. 97VS1294SD
On July 18, 1997, Halis was sued by Penelope Sellers, in an action seeking
actual damages against Halis 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 between her and Halis from August 1995,
under which she was to receive a commission equal to 10% of the amount of any
equity investments in Halis or software licensing fees paid to Halis, in
respect of transactions introduced to Halis by 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 Halis 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 Halis) would
not have been successful but for her introduction of the Aubis principals to
Halis. As a result, Ms. Sellers has made a claim for 10% of all amounts raised
in the notes offering. Ms. Sellers has also made a claim, based on the same
rationale, to 10% of all capital funding raised by Halis (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.
Discovery has been completed. Defendants filed a motion for partial summary
judgment, which was granted, the effect of which is to eliminate Larry Fisher
and Paul W. Harrison on claims asserted against them for tortious interference
with contractual relations. Halis continues to vigorously defend this lawsuit.
There can be no assurance, however, that Halis will be successful in its
defense of the plaintiff's complaint, or that the final resolution of this
matter will not have a material adverse effect on Halis' financial condition or
results of operation.
(B) 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,
State Court of the State of Georgia, County of Fulton
Civil Action File No. 97VS0123082.
In February 1997, Advanced Custom Computer Solutions, Inc. ("ACCS"), Wayne
W. Surman and Charlotte Surman sued Halis alleging, among other things, breach
of contract in connection with the termination by Halis of a merger agreement
with ACCS, which Halis 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 Halis, and that Halis, or individuals related to it, tortuously
interfered
62
with the business relationships of ACCS, and fraudulently induced ACCS
management to permit Halis management to take over and "systematically
destroy" the ongoing business of ACCS. The Surman's are the principals of ACCS
and claim personal damages against Halis on certain of the claims, and claim a
right to at least 150,000 shares of Halis 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 Halis
fraudulently induced them to solicit investors for Halis (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.
Halis answered, denying the allegations of liability in the complaint, and
Halis vigorously defended the lawsuit. On November 19, 1998, the trial court
granted summary judgment in favor of Halis 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 Halis on all other claims, and Halis has cross-appealed the
portions of the order denying summary judgment on the two surviving counts.
The Georgia Court of Appeals has affirmed the trial court's granting of
summary judgment in favor of Halis on seven of the nine count in the
complaint, and affirming the denial of Halis' cross appeal denying summary
judgment on the two surviving counts.
Plaintiff's filed a petition for certiorari to the Georgia Supreme Court
regarding the decision of the Georgia Court of Appeals. The Georgia Supreme
Court, on September 8, 2000, denied that petition for certiorari.
There can be no assurance, however, that Halis will be successful in its
defense of the plaintiff's petition for certiorari, or that the final
resolution of this matter will not have a material adverse effect on Halis'
financial condition or results of operation.
(C) Carrera-Maximus, Inc. (previously known as Carrera Consulting Group) v.
Halis, Inc., and Does 1 to 30, inclusive,Superior Court of the State of
California, County of SacramentoCase No. 00-AS-01605
Halis was served with this Complaint on April 1, 2000. The Complaint
asserts counts for the following:
Breach of contract seeking return of professional service fees Carrera-
Maximus, Inc. paid of $425,638, product support fees in the amount of
$55,601 and license fees in the amount of $56,750.
Halis intends to vigorously defend this case. Halis has filed an answer
asserting various defenses and denying liability, and has asserted a
counterclaim for breach of contract for unpaid fees and unreimbursed expenses.
This suit is currently in the discovery phase.
There can be no assurance, however, that Halis will be successful in its
defense of the plaintiff's complaint, or that the final resolution of this
matter will not have a material adverse effect on Halis' financial condition
or results of operation.
(D) Motivational Marketing, Inc. vs. Joseph Neely, Halis Services, Inc. and
CWA Systems & Solutions, Inc. State Court of the State of Georgia, County
of FultonCase No. 00-VS-009208E
On September 8, 2000, Plaintiff filed its Complaint in the State Court of
Fulton County seeking damages against Halis Services, Inc., a wholly-owned
subsidiary of Halis, alleging breach of contract for failure to pay
commissions due in an amount in excess of $138,000, and damages for fraud in
the inducement in an amount of not less than $100,000, plus unspecified
punitive damages and attorney's fees. The contract referenced in Plaintiff's
complaint was an agreement between Plaintiff and TG Marketing, Inc., a company
acquired by Halis in May of 1997 ("TGM"), for telemarketing services whereby
Plaintiff was supposed to receive commissions from TGM in consideration for
referrals of clients to TGM. Halis Services, Inc. denies the allegations of
the complaint and intends to vigorously defend this case. Discovery has not
yet begun.
63
There can be no assurance, however, that Halis Services, Inc. will be
successful in its defense of the complaint or that the final resolution of this
matter will not have a material adverse effect on Halis, Inc.'s financial
condition or results of operation.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
On February 1, 1999, Halis dismissed its independent auditors, Arthur
Anderson, LLP (Atlanta, Georgia) and on the same date authorized the engagement
of Tauber & Balser, P.C. (Atlanta, Georgia) as its independent auditors for the
fiscal year ended December 31, 1998. Tauber & Balser, P.C. was formally engaged
by Halis on February 1, 1999 to audit Halis' financial statements for the
fiscal year ended December 31, 1998 and reissue Halis' 1997 report previously
issued by Arthur Andersen, LLP. Each of these actions was approved by the board
of directors of Halis.
Arthur Andersen, LLP audited the financial statements for Halis for the
fiscal year ended December 31, 1997. The report of Arthur Andersen LLP on the
financial statements of Halis for the fiscal year ended December 31, 1997
contained an additional paragraph which emphasized that there was substantial
doubt about the ability of Halis 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 Halis 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 Halis'
financial statements, which advice was an important factor in Halis' decision
to engage Tauber & Balser, P.C. as its independent auditors.
In connection with the audit of the fiscal year ended December 31, 1997,
Arthur Andersen, LLP did not advise Halis that:
. the internal controls necessary for Halis to develop reliable financial
statements did not exist;
. 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;
. 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
that if further investigated may:
. 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; or
. cause Arthur Andersen, LLP to be unwilling to rely on management's
representations or be associated with Halis' 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
. that information had come to the attention of Arthur Andersen, LLP that
it concluded materially impacts the fairness or reliability of either:
. a previously issued audit report or the underlying financial statements
or
64
. 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.
65
HALIS MANAGEMENT
Executive Officers and Directors
The following table sets forth information regarding the only current
executive officer and director of Halis who will serve as an executive officer
and/or director of HealthWatch following the merger.
Name Age Position
---- --- --------
Paul W. Harrison 45 Chairman of the Board of Directors, President and
Chief Executive Officer
Paul W. Harrison has served as Chairman of the board of directors since
October 1997 and has acted as CEO since November 1996. He was appointed
President of the Halis in June 1997. He is also Chairman, President and CEO of
HealthWatch, which owns approximately 25% of Halis. Previously, Mr. Harrison
was the CEO of Paul Harrison Enterprises, Inc. ("PHE"), an information
technology management company, from February 1995 until it was acquired by
HealthWatch in October 1998. Prior to PHE, Mr. Harrison was Vice President of
Managed Care with HBO & Company, a healthcare information technology company,
which is now McKesson HBOC (NYSE: MCK), from June 1993 until December 1994.
Prior to HBOC, Mr. Harrison served as CEO of SOTRISS from 1981 to 1989. SOTRISS
was an information technology company that was sold to a publicly traded
Fortune 500 company in 1989. Mr. Harrison's education includes a Bachelors
Degree from Georgia State University. He is a Chartered Financial Consultant, a
Chartered Life Underwriter and a Fellow of the Life Management Institute.
Employment Agreements
Currently, none of the senior management team or key technical personnel are
under employment contracts.
Stock Option Plans
On November 18, 1996, Halis stockholders adopted the 1996 Stock Option Plan
for employees who are contributing significantly to the business of Halis or
its subsidiaries as determined by the board of directors or the committee
administering the Halis plan. The Halis plan currently provides for the grant
of incentive and non-qualified stock options to purchase up to 8,000,000 shares
of Halis common stock at the discretion of the board of directors or a
committee designated by the board of directors to administer the Halis 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 Halis 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 Halis plan. Incentive
stock options granted pursuant to the Halis 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 Halis or
any of its subsidiaries. Options granted under the Halis plan typically vest
over a period of four years.
In consideration of services rendered by Paul Harrison to Halis with regard
to the mergers between Halis, Aubis Hospital Systems, Inc., Aubis Systems
Integrations, Inc. and Halis Software, Inc., on June 7, 1996, Halis granted to
Mr. Harrison an option to purchase 1,400,000 shares of Halis common stock,
which options became exercisable upon consummation of the such mergers. 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 Halis common stock on the date
of grant. During 1998, the exercise price was reduced to the then market price
of $0.13 per share.
On December 6, 1996, Halis granted options to purchase up to 3,350,000
shares of Halis common stock to Mr. Harrison exercisable at a price of $2.00
per share. Of this amount, options to purchase 3,000,000 shares of Halis common
stock granted to Mr. Harrison were subsequently terminated, at his request,
during 1997 without
66
being exercised. The remaining stock options granted to Mr. Harrison are
exercisable immediately. In February 1998, 1,000,000 options were granted to
Mr. Harrison in consideration of deferral of his salary, plus an additional
650,000 as compensation at an exercise price of $.25 per share. In August 1998,
all of these options were repriced to $0.13 per share.
As of December 31, 2000, options to purchase 11,650,290 shares of Halis
common stock were outstanding.
Board Composition
Halis currently has two directors. In accordance with the terms of Halis'
Articles of Incorporation and by-laws, each director shall serve until the next
regular meeting of the stockholders and thereafter until his successor is duly
elected and qualified.
Director Compensation
Halis does not currently pay any compensation to directors for serving in
that capacity. Directors are reimbursed for all reasonable expenses incurred by
them in attending board and committee meetings. The board of directors has the
discretion to grant options and rights to directors under its 1996 Stock Option
Plan.
Executive Compensation
The following table sets forth certain summary information concerning
compensation paid, accrued or deferred by Halis for the fiscal years ended
December 31, 2000, 1999 and 1998 to or on behalf of the Halis' Chief Executive
Officer. There were no other executive officers of Halis whose total annual
compensation exceeded $100,000 during the fiscal year ended December 31, 2000.
Name and
Principal Fiscal Other
Position Year Salary Bonus Compensation(1)
--------- ------ -------- ----- ---------------
Paul W. Harrison................ 2000 $137,500 $-0-
Chairman of the Board and 1999 $107,070(2) $-0-
Chief Executive Officer 1998 $280,000(3) $-0-
--------
(1) Halis pays for 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 Mr. Harrison.
(2) Mr. Harrison agreed to reduce his salary to $107,070 with $27,070 paid in
cash and accepted 1,187,500 shares of Halis common stock with a market
value of $80,000 in lieu of cash payments due to Halis' limited operating
capital. Mr. Harrison also received options to purchase 540,000 shares of
Halis common stock at an exercise price of $0.05 per share.
(3) Mr. Harrison's employment agreement that was in effect at the time provided
for a base salary of $280,000 for fiscal year 1998, however, only $25,000
was 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 Halis common stock 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 $45,000 of deferred compensation
owed to him for his fiscal 1998 base salary.
Option Grants in Last Fiscal Year
There were no stock options or stock purchase rights granted by Halis during
the fiscal year ended December 31, 2000.
67
Option Exercises and Holdings
The following table sets forth for each of the named executive officers of
Halis certain information concerning the number of shares subject to both
exercisable and unexercisable stock options at December 31, 2000. Also reported
are values realized in respect thereof, by the named executive officers and the
number stock options and the value of said stock options held by the named
executive officers as of December 31, 2000.
Number of Value of Unexercised
Unexercised In-the-Money Options
Shares Value Options at 12/31/00 at 12/31/00
Acquired on Realized Exercisable/ Exercisable/
Name Exercise ($) Unexercisable Unexercisable(1)(2)($)
---- ----------- -------- ------------------- ----------------------
Paul W. Harrison........ 0 0 4,644,000/0 $0/0
--------
(1) The market price of Halis common stock on December 31, 2000 was $0.0156 per
share.
(2) Dollar values calculated by determining the difference between the fair
market value of the Halis common stock at December 31, 2000 ($0.0156) and
the exercise price of such options.
Limitation of Liability and Indemnification Matters
The Halis Articles of Incorporation eliminate a director's personal
liability for monetary damages to Halis or any of its stockholders for any
breach of duties of such position, except that such liability is not eliminated
for:
. any appropriation by a director, in violation of the director's duties,
of any business opportunity;
. any acts or omissions of a director that involve intentional misconduct
or knowing violation of law;
. unlawful distributions; or
. any transaction for which the director received an improper personal
benefit.
68
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF HALIS
The following table sets forth information regarding the beneficial
ownership of Halis common stock, as of December 31, 2000, by (i) those persons
or entities known by management to own beneficially more than 5% of the Halis
common stock, (ii) each of the directors and executive officers of Halis and
(iii) all directors and executive officers of Halis 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 Halis common stock shown as beneficially owned by them.
Shares of
Common Stock Percent
Name of Beneficial Owner Beneficially Owned(1) of Class
------------------------ --------------------- --------
Paul W. Harrison(2)....................... 23,398,504 35.6%
Directors and executive officers as a
group (3 persons)(3)..................... 24,419,873 36.8%
--------
(1) "Beneficial Ownership" includes shares for which an individual directly or
indirectly, has or shares voting or investment power or 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 67,561,222 shares, representing
61,132,037 shares outstanding as of December 31, 2000, plus 5,244,000 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.
(2) The amount reflected above includes (i) 4,644,000 shares subject to
presently exercisable stock options, (ii) 15,763,655 shares owned by
HealthWatch, Inc., as to which Mr. Harrison shares voting and investment
power by virtue of his position as Chairman, President and CEO of such
entity, but of which Mr. Harrison disclaims beneficial ownership and (iii)
2,990,849 shares owned by Mr. Harrison directly.
(3) Includes 5,244,000 shares subject to presently exercisable stock options.
HALIS RELATED PARTY TRANSACTIONS
The following is a description of transactions during the past two fiscal
years to which Halis has been a party, in which the amount involved in the
transaction exceeds $60,000 and (a) in which any director, executive officer or
holder of more than 5% of Halis's capital stock had or will have a direct or
indirect material interest other than compensation arrangements or (b) involves
an affiliate of Halis.
Halis has a note receivable due from Philip Spicer, President of its
American Benefit Administrative Services subsidiary and a stockholder of Halis,
in the amount of $623,377 as of December 31, 2000. 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, Halis
common stock achieving a traded market price of at least $3 per share for a
specified period of time. During fiscal year ended December 31, 1999, Halis
recorded an allowance for the total outstanding balance on the Spicer note and
discontinued accruing interest effective as of December 31, 1999.
At December 31, 1999, Halis was indebted to Paul Harrison on an unsecured
non-interest bearing basis in the amount of $15,000.
Also, see "HEALTHWATCH RELATED PARTY TRANSACTIONS" on page 53 for a
description of various transactions between Halis, HealthWatch, PHE and Paul W.
Harrison, as well as a discussion on the Halis/HealthWatch business
collaboration agreement and cost sharing arrangement.
Halis believed that all related party transactions described above, and
including those described in the HEALTHWATCH RELATED PARTY TRANSACTIONS,
between Halis, HealthWatch, PHE and Paul W. Harrison, were on terms no less
favorable than could have been otherwise obtained from unrelated third parties.
69
THE MERGER
General
At the effective time of the merger, Halis will be merged with and into
Merger Sub, with Merger Sub as the surviving corporation. In the merger, each
share of Halis common stock issued and outstanding immediately prior to the
effective time (excluding those shares owned by HealthWatch), without any
action on the part of the holder thereof, will be converted into one twentieth
(.05) of a share of HealthWatch common stock (the "Exchange Ratio"). Cash will
be paid instead of issuing fractional shares of HealthWatch common stock. The
merger will become effective when the Certificate of Merger has been filed with
the Georgia Secretary of State unless a later time is agreed upon by
HealthWatch and Halis.
Approximately 61,132,037 shares of Halis common stock were issued and
outstanding on December 31, 2000. Based on this number, upon consummation of
the merger, approximately 2,268,419 shares of HealthWatch common stock would be
issued to the Halis stockholders. As such, the shares of HealthWatch common
stock issued to Halis stockholders in the merger will constitute approximately
52% of all of the issued and outstanding shares of HealthWatch common stock
after the merger, not including HealthWatch's outstanding convertible preferred
stock, options and warrants. However, if all of the holders of HealthWatch's
outstanding convertible securities (i.e., Series A Preferred, Series C
Preferred and Series D Preferred, but excluding any unexercised options or
warrants, and Series P Preferred), were to exercise their conversion rights,
the Halis stockholders would represent approximately 34% of the outstanding
common stock of HealthWatch after such conversions.
At the effective time, each outstanding and unexercised stock option to
purchase shares of Halis common stock will be converted into an option to
purchase HealthWatch common stock. The number of shares of HealthWatch common
stock to be subject to the new option shall be equal to the product of the
number of shares of Halis common stock subject to the original option and the
Exchange Ratio, provided that any fractional shares of HealthWatch common stock
resulting from such multiplication shall be rounded up or down to the nearest
whole share. Approximately 11,650,290 shares of Halis common stock were subject
to outstanding options on December 31, 2000. Based on this number, upon
consummation of the merger, approximately 582,515 shares of HealthWatch common
stock would be subject to such converted options. The exercise price per share
of HealthWatch common stock issuable pursuant to each converted option will
equal the exercise price per share of Halis common stock issuable pursuant to
each Halis option divided the Exchange Ratio.
Background of the Merger
In 1998, HealthWatch began transforming itself into an information
technology company with a more recently articulated mission of becoming the
market share leader in healthcare web-based applications software. Over the
last several years, HealthWatch has sharpened this focus through a series of
acquisitions, such as the acquisitions of Paul Harrison Enterprises, Inc. and
investments in Halis, and through the redeployment of internal resources to
concentrate on investments within healthcare information management and
technology.
Since late 1996, Halis has completed a number of acquisitions to expand its
healthcare information technology business by both product line and service
line. The board of directors of Halis had considered, from time to time,
whether Halis should extend its acquisition strategy outside of healthcare,
although within the information technology field. Halis concluded, however, to
maintain healthcare as the focus of its strategy and continued to make
acquisitions that would enhance its efficiency and growth as a healthcare
information services provider.
With the acquisition of PHE by HealthWatch in 1998, HealthWatch's investment
in Halis increased to 18% of the outstanding shares of Halis common stock.
Subsequent investments by HealthWatch have increased HealthWatch's investment
to approximately 25% of the outstanding shares of Halis common stock as of
December 31, 2000.
70
HealthWatch and Halis have worked closely together on the development of
Halis' HES System, which uses the MERAD technology owned by HealthWatch. In
October 1997, HealthWatch and Halis entered into a business collaboration
agreement. Under this agreement, Halis gained access to HealthWatch's
technology and HealthWatch received the right to market the HES System and
receive a commission from any sales of the HES System that it made. The
business collaboration agreement has an expiration date of September 20, 2005,
with automatic one year renewals until either party decides to terminate the
agreement.
In addition, HealthWatch and Halis have common management in that Paul W.
Harrison is the Chairman, President and Chief Executive Officer of both
companies. Recently, HealthWatch relocated its executive offices to Atlanta,
Georgia and entered into a cost sharing arrangement with Halis for facilities
costs and administrative support services.
In recent months, the boards of directors of both companies determined that
HealthWatch and Halis held a shared vision of trends and opportunities in the
healthcare industry and of management and operating philosophies of their
respective companies. Messrs. Harrison and Greenspan (member of the Halis board
of directors) discussed that a combination of HealthWatch and Halis would unite
two healthcare information technology companies, and could form a compelling
strategic combination focused on serving customer bases, including integrated
delivery networks, spanning the entire continuum of the healthcare industry.
The combined company could also use technology and data to reduce costs and
improve healthcare outcomes for both provider and payor markets. Messrs.
Harrison and Greenspan determined that in view of the shared vision for a
strategic combination, further exploratory discussions were warranted.
Halis and HealthWatch have had merger discussions in the past. In August
1997 and again in July 1998, HealthWatch and Halis executed a letters of intent
for the merger of the two companies. However, after preliminary discussions,
merger talks were terminated. While management for both companies believed that
there were advantages to be gained from the combination of Halis and
HealthWatch, numerous issues, including accounting for the merger and stock
price volatility, prevented a merger of the two companies. The companies
decided that for the immediate future, they would operate under a business
collaboration agreement, as discussed above.
During the summer of 1999, Messrs. Harrison and Greenspan engaged in several
discussions regarding the terms of a potential business combination between
HealthWatch and Halis. Subject to further discussions and input from both
companies' boards of directors, Messrs. Harrison and Greenspan agreed
preliminarily on a number of structural elements of a potential business
combination contemplating a transaction structured as a stock-for-stock merger
of equals.
During January and February of 2000, the HealthWatch board reviewed the
background of discussions to date with Halis, a preliminary strategic and
financial assessment of a potential business combination as well as the
preliminary terms of the business combination that had been discussed. The
HealthWatch board authorized HealthWatch management to continue discussions
with Halis with respect to a potential strategic combination, subject to
further review of the financial and other terms of the transaction and a due
diligence investigation of Halis.
In late February and early March 2000, Messrs. Harrison and Greenspan
continued discussions of the potential Halis-HealthWatch combination on behalf
of Halis. Messrs. Harrison and Greenspan discussed issues related to a
potential combination and thereafter authorized the engagement of New York
Capital Corporation to render an opinion as to the fairness of the transaction
from a financial point of view to the Halis stockholders.
Concurrently with these meetings and the due diligence investigation
process, Mr. Harrison of HealthWatch, Carl Kleidman, Sheldon Misher and Michael
Falk of Commonwealth Associates, (HealthWatch's financial advisors), Michael
Smith of Gambrell & Stolz, LLP, (general counsel to HealthWatch), and Elizabeth
Noe of Paul, Hastings, Janofsky & Walker, LLP, (transaction counsel to
HealthWatch), began to negotiate the
71
terms of the definitive agreements in connection with the potential transaction
through a series of telephone conversations with Halis and Jed Beardsley of
Gomel & Davis, LLP, general counsel to Halis. On March 8, 2000 the companies
executed a letter of intent with regard to the principal terms of the merger
transaction, which included an exchange ratio, which would provide a premium to
stockholders of Halis with reference to the current trading price of Halis
common stock.
After the close of the market on March 8, 2000, HealthWatch and Halis issued
joint press releases to the effect that the companies had executed a letter of
intent for the merger of Halis with and into a wholly-owned subsidiary of
HealthWatch.
On March 29, 2000, Halis engaged New York Capital Corporation to assist it
in reviewing the potential transaction with HealthWatch, and to render an
opinion as to the fairness of the transaction from a financial point of view to
the Halis stockholders.
On May 24, 2000, Messrs. Harrison and Greenspan, met to review the status of
the potential transaction. The review entailed (i) a management presentation on
the negotiations, (ii) a presentation by Mr. Harrison covering the Halis
board's fiduciary duties and other legal considerations relevant to the
proposed transaction, (iii) a management review and comment on the recently
conducted due diligence, (iv) a review by management of the draft definitive
agreements and the various issues raised in the negotiation of same with
HealthWatch, (v) a structural and financial overview of the transaction. During
these discussions, Mr. Harrison disclosed his conflicts of interest due to his
position as Chairman, President and Chief Executive Officer of both companies.
Mr. Harrison and Mr. Greenspan agreed that Mr. Greenspan would conduct all
future negotiations on behalf of Halis with regard to the merger and
Mr. Harrison would abstain from any vote related to the Halis/HealthWatch
merger.
On June 1, 2000, Messrs. Harrison, Engert, Misher and Tucker, all of which
are members of the HealthWatch board, met to review the potential transaction.
The HealthWatch board again reviewed presentations by HealthWatch management
concerning a financial analysis of the transaction, the results of the due
diligence investigations that had been undertaken, a summary of the principal
terms of the transaction that had been negotiated and the issues that remained
open, and the HealthWatch board's fiduciary duties in considering a business
combination. Following review and deliberation by the HealthWatch board,
including a review of various strategic alternatives that might be available to
HealthWatch, the HealthWatch board expressed support for the transaction,
subject to reaching a satisfactory resolution of the few remaining open issues,
and authorized and directed HealthWatch management to continue to negotiate the
final terms of a definitive agreement. During this meeting, Mr. Harrison
disclosed his conflicts of interest due to his position as Chairman, President
and Chief Executive Officer of both companies. It was agreed that Mr. Harrison
would not to participate in the merger negotiations and would not participate
in a board of directors vote on the merger transaction.
On June 26, 2000, Messrs. Harrison, Engert, Tucker, Priddy and Misher met by
teleconference to review the transaction with Halis. At the HealthWatch board
meeting, the directors reviewed presentations by HealthWatch management,
concerning the terms of the transaction and governance issues, the impact of
changes in the financial condition, business and results of operations of
Halis, a financial analysis of the transaction and exchange ratio, an analysis
of synergies that might be achieved in the combined company and potential
investor reaction to the transaction. Following discussion, the HealthWatch
board determined that Mr. Tucker, a HealthWatch board member, would review the
final merger agreement and report back to the HealthWatch board to ensure the
terms of the transaction approved by the board were appropriately reflected in
the merger agreement. The board also authorized the engagement of Houlihan
Lokey Howard & Zukin Financial Advisors, Inc. to render an opinion as to the
fairness of the merger from a financial point of view to the public
stockholders of HealthWatch.
On June 29, 2000, Messrs. Harrison, Engert, Tucker and Priddy met by
teleconference to review the terms of the merger agreement. Mr. Tucker reported
that he had reviewed the final merger document and it did reflect the terms
previously approved by the board. After such report, the HealthWatch board
approved the merger
72
transaction, with Mr. Harrison abstaining from the vote, and authorized Mr.
Tucker to execute the merger agreement on behalf of HealthWatch. In approving
the merger, the HealthWatch board noted that the strategic business rationale
for the combination between Halis and HealthWatch was compelling. Specifically,
the reasons for approval of the merger by the HealthWatch board included those
stated in "--Reasons for HealthWatch Engaging in the Merger; Recommendation of
the HealthWatch Board."
On June 29, 2000, Mr. Greenspan, acting on behalf of the Halis board of
directors, reviewed of the recent events and background of the merger
transaction. Further, Mr. Greenspan was advised of the structure for the
transaction, the exchange ratio, governance matters relating to the proposed
combined company and the effect of the transaction on Halis customers and
employees. Mr. Greenspan reviewed the terms of the definitive merger agreement,
and reviewed the Halis board's fiduciary duties in the context of the revised
proposed transaction. Following his review, including questions of Halis'
advisors, Mr. Greenspan approved the merger transaction and executed the merger
agreement on behalf of Halis for the reasons stated in "--Reasons for Halis
Engaging in the Merger; Recommendations of the Halis Board." For the reasons
discussed above, Paul W. Harrison did not participate in the final negotiations
and abstained from the vote to approve the merger on behalf of Halis.
On July 11, 2000, HealthWatch and Halis issued a joint press release
announcing the execution of a definitive merger agreement.
On August 16, 2000, New York Capital delivered to the Halis board its
written opinion stating that the merger terms were fair from a financial point
of view to the Halis stockholders.
On September 8, 2000, a special committee of HealthWatch consisting of
Messrs. Tucker and Misher engaged Houlihan Lokey Howard & Zukin Financial
Advisors, Inc. to assist it in reviewing the merger transaction with Halis, and
to render an opinion as to the fairness of the merger from a financial point of
view to the HealthWatch public stockholders.
On September 29, 2000, Halis and HealthWatch amended the merger agreement to
extend the termination date from September 30, 2000 to January 31, 2001.
On January 31, 2001, Halis and HealthWatch amended the merger agreement to
extend the termination date from January 31, 2001 to March 31, 2001.
On February 3, 2001, Houlihan Lokey delivered to the special committee,
consisting only of Mr. Tucker due to the resignation of Mr. Misher on September
28, 2000, its written opinion stating that the merger was fair from a financial
point of view to the HealthWatch public stockholders.
On March 28, 2001, Halis and HealthWatch amended the merger agreement to
extend the termination date from March 31, 2001 to April 30, 2001.
Reasons for HealthWatch Engaging in the Merger; Recommendation of the
HealthWatch Board
The HealthWatch board of directors has approved the merger agreement and the
merger and has determined that the terms of the merger agreement are fair to
and in the best interests of HealthWatch and its stockholders. During the
course of its deliberations, the HealthWatch board considered, with the
assistance of management and its financial and other advisors, a number of
factors which the HealthWatch board believes could contribute to the success of
the combined company and thus inure to the benefit of HealthWatch stockholders,
the most important of which included:
. The opportunity to create a healthcare services company, with a broad
range of product offerings in the healthcare industry. The combined
company would serve the entire healthcare customer base, including
providers, manufacturers, payors and retail customers. The combined
company's breadth of product offerings, management and operational
experience and financial resources should enable it to respond more
quickly and effectively to technological change, intensifying
competition, increasing consolidation and evolving market demands.
73
. The potential to achieve operating synergies through cross-marketing of
each company's products to the other company's customers, as well as
possible cost savings related to more efficient administrative and
support functions and the elimination of the costs of the public
reporting obligations of Halis. Longer term, the potential exists to
provide innovative solutions to customers using the joint capabilities of
the combined company and comprehensive, integrated solutions to customers
using such capabilities.
. The opportunity to secure permanent rights to a comprehensive healthcare
application product, such as Halis' HES System, that could be used in
HealthWatch's Enterprise Applications Provider and Application Service
Provider business models.
. Receipt of a fairness opinion from Houlihan Lokey Howard & Zukin
Financial Advisors, Inc. as to the fairness of the merger from a
financial point of view to the public stockholders of HealthWatch.
. The compatibility of the combined company's strategic and operating
management philosophy and acquisition strategy.
. The results of the financial analyses.
. The merger being effected on a tax-free reorganization basis.
. Positive responses from customers of both companies, indicating an
interest in the broader array of product and service offerings that would
be available from the combined company.
. The likelihood that the merger would be consummated.
The foregoing discussion of factors considered by the HealthWatch board of
directors is not intended to be exhaustive, but is intended to include the
material factors considered. In light of the wide variety of factors
considered, the HealthWatch board did not find it practical to and did not
quantify or otherwise assign relative weight to the specific factors considered
and individual directors may have given different weight to different factors.
After due consideration, the HealthWatch board of directors approved the
merger and determined that the merger is fair to and in the best interests of
HealthWatch and its stockholders. Accordingly, the HealthWatch board recommends
that HealthWatch stockholders vote "FOR" approval of the merger agreement and
the transactions associated with it, including the issuance HealthWatch common
stock.
In reaching its recommendation in favor of the merger, the HealthWatch board
of directors also considered the conflict of interest presented by Mr.
Harrison's position with both companies and a number of uncertainties,
including the challenges of combining the businesses of two public corporations
and the risk of diverting management resources from other strategic
opportunities and operational matters for an extended period of time. See "RISK
FACTORS" on page 15.
Opinion of HealthWatch's Financial Advisor
HealthWatch retained Houlihan Lokey Howard & Zukin Financial Advisors, Inc.
on behalf of a special committee of the HealthWatch board of directors to
render an opinion as to the fairness of the merger to the public stockholders
of HealthWatch from a financial point of view. On February 3, 2001, Houlihan
Lokey delivered its written opinion to the special committee of HealthWatch's
board of directors to the effect that, as of the date of such opinion and based
upon the various qualifications and assumptions and limiting conditions
discussed below and contained in the opinion, the merger is fair, from a
financial point of view, to the public stockholders of HealthWatch. Houlihan
Lokey's opinion does not address HealthWatch's underlying business decision to
effect the merger.
THE COMPLETE TEXT OF HOULIHAN LOKEY'S OPINION DATED FEBRUARY 3, 2001 IS
ATTACHED HERETO AS EXHIBIT L. THE SUMMARY OF THE OPINION SET FORTH BELOW IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH OPINION. THE HEALTHWATCH PUBLIC
STOCKHOLDERS ARE URGED TO READ SUCH OPINION CAREFULLY IN ITS ENTIRETY FOR A
DESCRIPTION OF THE PROCEDURES FOLLOWED, THE FACTORS CONSIDERED AND THE
ASSUMPTIONS MADE BY HOULIHAN LOKEY.
74
Houlihan Lokey's opinion is directed only to the fairness, from a financial
point of view, of the merger to HealthWatch and is not intended and does not
constitute a recommendation to any stockholder of HealthWatch as to how such
stockholder should vote at the HealthWatch special meeting. Although Houlihan
Lokey evaluated the financial terms of the merger Houlihan Lokey was not asked
to and did not recommend the exchange ratio, which was the result of
negotiations between HealthWatch and Halis.
The preparation of a fairness opinion is a complex process and is not
susceptible to partial analysis or summary description. The following is a
brief summary and general description of the valuation methodologies utilized
by Houlihan Lokey. The summary does not purport to be a complete statement of
the analyses and procedures applied, the judgments made or the conclusions
reached by Houlihan Lokey or a complete description of its presentation.
Houlihan Lokey believes, and so advised HealthWatch's board of directors, that
its analyses must be considered as a whole and that selecting portions of its
analyses and of the factors considered by it, without considering all factors
and analyses, could create an incomplete or misleading view of the process
underlying its analyses and opinions. Houlihan Lokey's opinion is based on the
terms of the merger as contemplated as of the date of the opinion. If there are
any changes in the terms of the merger between the date of the opinion and the
consummation of the merger, it could have a material impact on the conclusions
reached in Houlihan Lokey's opinion.
In connection with the preparation of its opinion, Houlihan Lokey made such
reviews, analyses and inquiries as they deemed necessary and appropriate under
the circumstances. Among other things, Houlihan Lokey:
. reviewed HealthWatch's SEC Forms 10-KSB and audited financial statements
for the fiscal years ended June 30, 1998 through 2000, and Forms 10-QSB
and unaudited interim financial statements for the periods ending
September 30, 1999 and 2000, which HealthWatch management has identified
as the most recent financial statements available as of the date of the
opinion;
. reviewed HealthWatch's preliminary SEC Form S-4 Registration Statement
filing dated December 29, 2000;
. reviewed HealthWatch's SEC Schedule 14A Preliminary Proxy Statement dated
May 9, 2000;
. reviewed Halis's SEC Form 10-KSB and audited financial statements for the
fiscal years ended December 30, 1998 and 1999, and Forms 10-QSB and
unaudited interim financial statements for the periods ending September
30, 1999 and 2000, which HealthWatch management has identified as the
most recent financial statements available as of the date of the opinion;
. reviewed copies of the following documents: Letter of Intent from
HealthWatch, Inc. to the Board of directors of Halis, Inc., dated March
8, 2000, and Agreement and Plan of Merger By and Among Halis, Inc.,
HealthWatch Merger Sub, Inc. and HealthWatch, Inc. dated June 29, 2000;
. reviewed a Draft Confidential Private Placement Memorandum for
HealthWatch, Inc. dated March 8, 2000;
. reviewed certain other agreements and contracts of HealthWatch and Halis,
including the business collaboration agreement, as amended, dated
September 20, 2000;
. reviewed minutes of the HealthWatch, Inc. board of directors meetings for
1999 and 2000;
. met with certain members of the senior management of HealthWatch and
Halis to discuss the information regarding operations, financial
condition and the merger;
. visited the business offices of HealthWatch and Halis;
75
. reviewed certain publicly available financial data for certain companies
that Houlihan Lokey deemed comparable to HealthWatch and Halis, including
prices and premiums paid in other transactions that Houlihan Lokey
considered similar to the merger; and
. in addition to the above, conducted industry research, market research,
company research, economic research, control premium research and stock
flow analyses, as Houlihan Lokey has deemed appropriate.
In assessing the fairness of the merger to the public stockholders of
HealthWatch from a financial point of view, Houlihan Lokey:
. analyzed the reasonableness of the trading value of the Companies'
publicly traded equity securities;
. independently valued the common equity of HealthWatch and Halis on a pre-
transaction basis using widely accepted valuation methodologies;
. considered the fairness of the merger to the HealthWatch public
stockholders from a financial point of view, based on the determination
of the post-transaction fair market value of the combined company; and
. reviewed the valuation implications to HealthWatch's public stockholders
of alternatives to the merger.
Assesment of HealthWatch's and Halis' Public Stock Price
As part of its analysis, Houlihan Lokey analyzed the trading price and
volume of the common stock of Health Watch and Halis. Specifically, the
publicly available market pricing and trading activity for the publicly held
common equity shares of stock in HealthWatch and Halis during the twelve months
leading up to the date of the fairness opinion were reviewed.
Houlihan Lokey calculated the ratio of HealthWatch's and Halis' average
daily volume (over the most recent twelve months) for each company's common
stock to their respective float and total shares outstanding. Houlihan Lokey
then compared HealthWatch's and Halis' ratios to similar ratios of comparable
publicly traded companies.
Based on these analyses, Houlihan Lokey concluded that the companies' common
stock:
. has a smaller public float than that of the comparable public companies,
. does not trade as actively as that of the comparable public companies,
and
. has less analyst coverage than that of most of the comparable public
companies.
Consequently, it is Houlihan Lokey's opinion that the companies' common
stock price may not accurately reflect the underlying fair market value of
HealthWatch and Halis.
Independent Valuation of HealthWatch and Halis Fully Distributed Stock Price
Houlihan Lokey independently valued the common equity of HealthWatch and
Halis on a fully distributed basis using widely accepted valuation
methodologies, including (i) comparable publicly traded company approach; (ii)
comparable transaction approach; and (iii) discounted cash flow approach.
Houlihan Lokey then independently valued the common equity of Halis using the
same widely accepted valuation methodologies. The cost approach, which
estimates the value of a company on a liquidation basis, was considered, but
was not used in the analysis.
Comparable Publicly Traded Company Approach. This approach provides
indications of value based upon comparisons of the subject operating company to
market values and arm's-length pricing evidence of companies involved in the
same or similar lines of business. The valuation process involves the
determination of market ratios (pricing multiples) and performance
fundamentals. For purposes of this analysis, Houlihan
76
Lokey reviewed pricing evidence from a group of approximately 26 publicly
traded companies engaged in providing information services to the healthcare
information technology industry, including so-called "e-health" companies that
provide web-enabled healthcare technology or otherwise provide such information
technology services to their customers over the Internet. Revenue, assets,
earnings and cash flow multiples were calculated for the comparable companies
based upon daily trading prices. A comparative risk analysis between
HealthWatch (and Halis) and the comparable companies formed the basis for
selection of appropriate risk adjusted multiples for HealthWatch and Halis. The
risk analysis incorporates both quantitative and qualitative risk factors which
relate to, among other things, the nature of the industry in which HealthWatch,
Halis and the comparable companies are engaged.
Houlihan Lokey selected the following companies as comparables in preparing
its analysis:
.Adam.Com Inc. .Health Mgmt Systems Inc. .Pre-Se Technologies
.Allscripts Inc. .Healthcare.Com Corp. Inc.
.Carescience Inc. .IDX Systems Corp. .Quadramed Corp.
.Cerner Corp. .Infocure Corp. .Quality Systems Inc.
.Citation Computer Systems Inc. .Shared Medical Systems
.McKesson HBOC, Inc. Corp.
.Daou Systems Inc. .Medicalogic/Medscape Inc.
.Dynamic Healthcare Tech Inc. .Sunquest Info Systems
Inc.
.Mediware Information Systems
.E Medsoft.Com .Medquist Inc.
.Eclipsys Corp. .Neoforma.Com Inc. .Superior Consultant
Hldgs CP
.Trizetto Group Inc.
.WebMD Corp.
As a result of Houlihan Lokey's analysis, the comparable publicly traded
company approach was ultimately rejected for both HealthWatch and Halis due to
the following factors:
. both companies have historically operated in lines of business different
from the healthcare information technology industry, which is their
operating focus going forward;
. both companies are very small and represent start-up entities within the
healthcare information technology industry compared to the comparable
companies, which generally demonstrate a history of sustained operating
performance in the industry; and
. meaningful multiples for the healthcare information technology industry
are difficult to calculate and interpret with most companies posting
negative earnings and displaying a wide variance in revenue and asset
multiples.
In applying the pricing evidence derived from this approach, any indicated
equity values for HealthWatch and Halis would not be appropriate.
Comparable Transaction Approach. This approach also involved the
identification of comparable companies and the selection and application of
multiples of various performance measures. Multiples utilized in this approach
were determined through an analysis of acquisitions of controlling interests in
companies with operations deemed to be reasonably comparable to HealthWatch's
and Halis' principal business operations. For purposes of this analysis,
Houlihan Lokey analyzed 33 completed transactions between January 1998 and
February 2001 where financial information was publicly disclosed.
As a result of Houlihan Lokey's analysis, the comparable transaction
approach was also ultimately rejected principally because the financial
information obtained for the publicly disclosed transactions related to the
historical performance of the acquired company, with no relevant financial data
available pertaining to its outlook or future operating performance. In the
case of HealthWatch and Halis, the value of both companies is a function of the
ability of the companies to generate future revenues and earnings from
implementation of a new business strategy centered around the healthcare
information technology industry. As a result, Houlihan Lokey could not
determine appropriate forward-looking valuation parameters from the
historically-based comparable transaction evidence, and no indications of value
were derived.
77
Discounted Cash Flow Approach. The discounted cash flow approach involved an
estimation of the present value of projected future cash flows to be generated
by HealthWatch and by Halis. HealthWatch's management provided a baseline
forecast for both companies that was utilized in this approach. The forecast
assumes HealthWatch and Halis continue to operate under the business
collaboration agreement, essentially on a stand-alone basis. Management has
provided Houlihan Lokey assurances that they believe the baseline forecast
represents a conservative and achievable set of projections of future
performance for both companies.
In calculating the present value of the future stream of cash flows,
Houlihan Lokey utilized a range of discount rates around 30% for both companies
to represent the financial and business risk associated with the companies
including the risk of the companies meeting or exceeding projections. This
range of discount rates is well above the 15% to 25% weighted average cost of
capital ("WACC") range exhibited by the comparable companies that served as a
benchmark for the selection of the appropriate rates. The higher discount rate
is considered appropriate for the start-up nature of the companies and the risk
associated with achieving the product sales and earnings growth indicated in
the forecast. The selected discount rate is below a true venture capital
investment required rate of return since the HES System developed by Halis has
been successfully tested and the companies are actively marketing the product.
Houlihan Lokey relied solely on the discounted cash flow approach, and for
the reasons described in each respective section, did not rely upon the
comparable publicly traded company approach and the comparable transaction
approach. To the value derived from the discounted cash flow approach for
HealthWatch, Houlihan Lokey added the minority interest in Halis to yield an
indicated minority equity value range of $4.53 to $5.85 per common share for
HealthWatch. To the value derived from the discounted cash flow approach for
Halis, Houlihan Lokey subtracted the amount Halis owed to HealthWatch to yield
an indicated minority equity value range of $0.28 to $0.31 per common share for
Halis.
Valuation Implications to HealthWatch's Stockholders of Alternatives to the
Proposed Merger
Houlihan Lokey was advised that the HealthWatch/Halis merger is considered
by HealthWatch management to be a logical extension of the two companies'
existing relationship. Both companies share management, employees, office space
and other resources. Most importantly, the HES System developed by Halis is
based on the underlying database architecture developed by HealthWatch.
According to HealthWatch management, merging into the same corporation will
provide the best alignment of strategic and financial objectives for the
companies and eliminate confusion that may be experienced by public
stockholders.
In connection with their audit of HealthWatch's financial statements for
1999, HealthWatch's auditors issued a report that included a going concern
qualification, and Halis' auditors have given Halis a going concern
qualification for the last two years, indicating that there is a substantial
doubt about each company's ability to continue as a going concern. As of
September 30, 2000, HealthWatch had approximately $3.3 million in cash and
equivalents, and Halis had approximately $0.3 million in cash and equivalents.
Houlihan Lokey has received no information on whether auditors for the combined
entity will render a going concern qualification in their report to be
delivered in connection with their audit of the financial statements of the
combined entity. The companies continue to lose money and additional financing
would likely be required by the combined entity within the next few months.
Possible strategic alternatives for HealthWatch include:
. maintaining the status quo with HealthWatch continuing to operate under
the business collaboration agreement with Halis;
. raising additional equity financing on a stand-alone basis; and
. combining with another company.
Based on Houlihan Lokey's analysis, HealthWatch's financial position has
resulted in a situation in which HealthWatch has few options available to it.
Given its history of losses, and early stage of product development in the
healthcare information technology industry, additional capital of any kind
would be very difficult to raise and HealthWatch has failed
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in recent attempts. After discussions with leaders in the healthcare
information technology industry, HealthWatch has not received any buyout
offers. Finally, HealthWatch's dependence on technology owned by another
company and its current financial position call into question HealthWatch's
ability to continue operating as a going concern on a stand-alone basis.
Fairness of Merger
As part of its assessment, Houlihan Lokey analyzed the fairness of the
merger to the HealthWatch public stockholders from a financial point of view,
based on its determination of the fair market value of HealthWatch, Halis and
the combined company on a post-merger basis.
Houlihan Lokey also analyzed the fairness of the merger to the HealthWatch
public stockholders from a financial point of view, on the basis of the current
market capitalization for both companies as indicated by the current trading
prices of their common stock. However, due to the thinly traded nature of the
common stock of both companies, this was not considered to be an accurate
indication of the fair market value of HealthWatch or Halis.
Finally, Houlihan Lokey qualitatively considered the implications to
HealthWatch's public stockholders of various alternatives to the merger that
were reviewed by the HealthWatch special committee.
Based on the foregoing, and in reliance thereon, the exchange value met or
exceeded what was considered to be a fair exchange to the public stockholders
of HealthWatch. Therefore, Houlihan Lokey has rendered its opinion that,
subject to the assumptions and limiting conditions discussed previously and
below, and in its opinion, the merger is fair to the public stockholders of
HealthWatch from a financial point of view as of the date of its opinion.
Assumptions and Limiting Conditions
Houlihan Lokey relied upon and, without independent verification assumed
that, the financial forecasts and projections provided to them, and as adjusted
based on their discussions with management, were reasonably prepared and
reflected the best currently available estimates of the future financial
results and condition of HealthWatch and Halis, and that there had been no
material change in the assets, financial condition, business or prospects of
HealthWatch and Halis since the date of the most recent financial statements
made available to Houlihan Lokey.
Houlihan Lokey has not independently verified the accuracy and completeness
of the information supplied to them with respect to HealthWatch and Halis and
does not assume any responsibility with respect to such information. Houlihan
Lokey has not made any independent appraisal of any of the properties or assets
of HealthWatch or Halis. Houlihan Lokey's opinion was necessarily based on
business, economic, market and other conditions as they existed and could be
evaluated by them as of the date of their opinion.
Certain transactions may take place subsequent to the date of the opinion.
Houlihan Lokey has not considered any such potential transactions in its
opinion as to the fairness of the merger, from a financial point of view, to
the public stockholders of HealthWatch.
Houlihan Lokey is a nationally recognized investment banking firm with
special expertise in, among other things, valuing businesses and securities and
rendering fairness opinions. Houlihan Lokey is continually engaged in the
valuation of businesses and securities in connection with mergers and
acquisitions, leveraged buyouts, private placements of debt and equity,
corporate reorganizations, employee stock ownership plans, corporate and other
purposes. The special committee of HealthWatch's board of directors selected
Houlihan Lokey because of its experience and expertise in performing valuation
and fairness analysis. Houlihan Lokey does not beneficially own nor has it ever
beneficially owned any interest in HealthWatch.
Fees and Expenses. Pursuant to an agreement dated September 8, 2000,
Houlihan Lokey was retained by HealthWatch on behalf of the special committee,
to analyze the fairness of the merger to the public stockholders of HealthWatch
from a financial point of view. HealthWatch has agreed to pay Houlihan Lokey a
fee of $112,500 plus reasonable out-of-pocket expenses incurred in connection
with the rendering of a fairness opinion. HealthWatch has further agreed to
indemnify Houlihan Lokey against certain liabilities and expenses in connection
with the rendering of its services.
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Reasons for Halis Engaging in the Merger; Recommendation of the Halis Board
The Halis board of directors has approved the merger agreement and the
merger and has determined that the terms of the merger agreement are fair to
and in the best interests of Halis and its stockholders. During the course of
its deliberations, the Halis board considered, with the assistance of
management and its financial advisors, a number of factors which the Halis
board believes could contribute to the success of the combined company and thus
inure to the benefit of Halis stockholders, including the following:
. Access to additional capital to fund further development, marketing and
support of the HES System that Halis may or may not have been able to
achieve without the merger.
. Receipt of a fairness opinion from New York Capital Corporation as to the
fairness of the Exchange Ratio from a financial point of view to
stockholders of Halis.
. Potential operating synergies through cross-marketing of each company's
products to the other company's customers, as well as possible cost
savings related to more efficient administrative and support functions
and the elimination of the costs of the public reporting obligations of
Halis.
. The combination of the two companies' product offerings, management and
operational experience and financial resources should enable the combined
company to respond more quickly and effectively to technological change,
intensifying competition, increasing consolidation and evolving market
demands.
. Compatibility of the two companies' strategic and operating management
philosophy and acquisition strategy combined with a similar history of
successful acquisition integration.
. The exchange by Halis stockholders of Halis shares for shares of
HealthWatch being effected on a tax-free basis.
. Positive feedback from customers of both companies, indicating an
interest in the broader array of product and service offerings that would
be available from the combined company.
. The likelihood that the merger would be consummated.
. The merger provides Halis stockholders with a premium over the market
price of its shares prior to announcement of the merger agreement and
provides Halis stockholders the opportunity to continue to participate in
Halis' business through an ownership interest in HealthWatch.
The foregoing discussion of factors considered by the Halis board of
directors is not intended to be exhaustive, but is intended to include the
material factors considered. In light of the wide variety of factors
considered, the Halis board did not find it practical to and did not quantify
or otherwise assign relative weight to the specific factors considered and
individual directors may have given different weight to different factors.
After due consideration of the risks associated with the merger and the
conflict of interest associated with Mr. Harrison's involvement in both
companies, the Halis board of directors approved the merger and determined that
the merger is fair to and in the best interests of Halis and its stockholders.
Accordingly, the Halis board recommends that Halis stockholders vote "FOR"
approval of the merger agreement and the transactions associated with it.
Opinion of Halis' Financial Advisor
Halis retained New York Capital Corporation to act as its financial advisor
in connection with a possible business combination with HealthWatch. In
connection with its engagement, Halis instructed New York Capital to evaluate
the fairness, from a financial point of view, of the merger Exchange Ratio to
Halis. On August 14, 2000, New York Capital delivered its written opinion to
the Halis board of directors to the effect that, as of the date of such opinion
and based upon the various qualifications and assumptions contained in the
opinion, the
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Exchange Ratio of one share of HealthWatch common stock for twenty shares of
Halis common stock is fair, from a financial point of view, to the public
stockholders of Halis.
The full text of the New York Capital's opinion dated August 14, 2000 is
attached as Annex D to this joint proxy statement/prospectus. We urge you to
read this opinion in its entirety for assumptions made, procedures followed,
matters considered and limits of the review by New York Capital in arriving at
its opinion. The summary of the opinion of New York Capital is qualified in its
entirety by reference to the full text of New York Capital's opinion.
New York Capital's opinion is directed only to the fairness, from a
financial point of view, of the merger Exchange Ratio to Halis and is not
intended and does not constitute a recommendation to any stockholder of Halis
as to how such stockholder should vote at the Halis special meeting. No
limitations were imposed by Halis upon New York Capital with respect to the
investigations made or procedures followed in rendering its opinion. Although
New York Capital evaluated the financial terms of the merger and participated
in discussions concerning the determination of the merger Exchange Ratio, New
York Capital was not asked to and did not recommend this Exchange Ratio, which
was the result of negotiations between HealthWatch and Halis.
In formulating its opinion, New York Capital reviewed:
. drafts of proxy material of HealthWatch and Halis covering the proposed
merger;
. drafts of the Agreement and Plan of Merger by and among Halis,
HealthWatch Merger Sub, Inc. and HealthWatch;
. a business plan of HealthWatch, which set forth, among other things, its
projected results of operations and financial condition through the year
ended June 30, 2003;
. a confidential Private Placement Memorandum of HealthWatch relating to
over $10 million of financing in late 1999 and early 2000;
. recent HealthWatch public filings with the SEC on Form 10-KSB, Form 10-
QSB and Form 8-K;
. recent Halis public filings with the SEC on Form 1O-KSB and Form 10-QSB;
. recent prices and trading volumes of HealthWatch and Halis common stock;
. Reports and Forms 10-K and 10-Q of publicly traded companies regarded by
New York Capital as comparable in nature of business to HealthWatch and
Halis;
. recent merger and acquisition and similar transactions in the business in
which HealthWatch and Halis are engaged; and
. discussions with the Chief Executive Officer of HealthWatch and Halis
with regard to the purposes of the merger and its probable effects on the
business and results of operation of the two companies.
In addition, New York Capital conducted other analyses and examinations and
considered other published financial, economic and market criteria as it deemed
appropriate concerning the economic and competitive scene and market values
(inflated and collapsed) of companies in the healthcare software business.
In arriving at its opinion, New York Capital relied on the accuracy and
completeness of the information provided to it by HealthWatch and Halis and
their personnel, as well as the publicly available information, in each case
without independent verification. It did not make or obtain any evaluations or
appraisals of the properties and facilities of HealthWatch or Halis.
New York Capital deemed that it was impracticable to apply conventional
measures of value such as price/earnings ratios, market value to revenues
ratios, market value to book value ratios or unlevered multiple comparisons, in
view of the following factors:
. the general absence of earnings in the industry of HealthWatch and Halis
(including HealthWatch and Halis);
81
. the relatively very small size of HealthWatch and Halis in revenues and
market value in that industry; and
. the absence of meaningful publicly available information concerning small
acquisitions and mergers in that industry.
Accordingly, New York Capital utilized other approaches to assess the
fairness to Halis public stockholders of the terms of the proposed merger with
HealthWatch.
First, New York Capital compared the market prices of HealthWatch to the
market prices of Halis over the past year and found that the average ratio of
Halis price to HealthWatch price was about .04, within a very narrow range.
Thus, the proposed ratio of .05 shares of HealthWatch per share of Halis, would
constitute approximately a 20% premium over the market value of Halis.
Similarly, New York Capital compared .05 times the market prices of HealthWatch
to the market prices of Halis (essentially the same mathematical process) and
found the same approximately 20% premium over market value in the acquisition
terms. In the more recent past, since early April 2000, the ratios indicate a
premium over Halis market value of 36%.
New York Capital also relied on the aforementioned business plan of
HealthWatch for another approach, which buttressed its conclusion as to the
fairness of the terms of the proposed merger. The business plan projected
revenues, earnings and financial condition for the fiscal year ending June 2003
and projected substantial issuances of stocks for acquisitions (including
Halis) and financing to achieve the projected 2003 results. Projected net
income for fiscal 2003 was $19.3 million and projected EBITDA (earnings before
interest, taxes and depreciation and amortization) was $30.2 million. The
number of shares of HealthWatch that were estimated to be outstanding at that
time was 13.9 million (versus 2.6 million after dilution currently).
Considering Halis and HealthWatch analogous to a venture capital investment,
New York Capital took the present values of these amounts (over the three years
from 2003 to 2000) at discount rates of 30%, 35%, 40% and 60%, which are the
typical target rates of return of venture capital investors. Then, expecting
more normal price/earnings ratios to prevail in 2003, applied a multiple of 15
to the discounted earnings and then took .05 of the resultant per share value
figure. The 15 multiple was based on 3 of the 14 comparable companies that had
meaningful price/earnings ratios. These ratios averaged 14.6 and had a median
of 16.6, with a range of 9.5 to 17.6. New York Capital deemed that a 15
multiple was appropriate for a growth business and historically reasonable
based on its experience.
Similarly, New York Capital took the present values at the aforesaid
discount rates of projected EBITDA, multiplied the results by an EBITDA
multiple of 7, subtracted and estimated $500,000 of interest-bearing debt to be
outstanding, and added $7,200,000 of excess cash. The results were calculated
on a per share basis and multiplied by .05 to obtain a calculated value per
equivalent share of Halis. New York Capital determined that a 7 multiple of
EBITDA was appropriate based on 6 of the 14 comparable companies that had
positive EBITDA and historical EBITDA multiples used in similar transactions in
the early-to-mid 1990's over a wide range of industries. The multiples ranged
from 8.6 to 38, with an average of 19.7 and a median of 17.2. However, New York
Capital felt that a double-digit multiple of EBITDA was illogical based on the
15 price/earning ratio and historical unlevered EBITDA multiples used in recent
acquisitions and leveraged buyouts reported in the financial press.
Furthermore, New York Capital used a 7 multiple, which is lower than the range
of multiples seen in the comparable companies, because of the adverse financial
condition of Halis and the accumulated deficits of HealthWatch.
Even at the 60% discount rate, the per Halis share equivalents were $.22 to
$.25, which constitute more than 100% premiums over the average recent prices
of Halis since early April, 2000.
The following table sets forth the results of the estimated per share value
based on:
. Management forcasted EBITDA through 2003, discounted based on rates
typically used by venture capital firms which deal with companies such as
Halis; and
. A multiple of 7 on EBITDA, adjusted for estimated debt and excess cash.
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P/E Multiple Unlevered Multiple
Approach-Per Approach-Per Share
Discount Rate Share Value Value
------------- ------------ ------------------
30% $0.48 $0.38
35% $0.42 $0.34
40% $0.37 $0.31
50% $0.31 $0.26
60% $0.25 $0.22
In the absence of comparable transactions over the past year for which data
were publicly available, New York Capital used, as a proxy, premiums paid
generally in the acquisition market. They are equaled or substantially exceeded
by those set forth above.
New York Capital selected the following 14 companies as comparable to
HealthWatch in preparing its fairness opinion.
Healthwatch/WebMD Corporation On Health Network Co.
McKesson HBOC Inc. Creative Computer Applications, Inc.
Medical Manager Health Systems Corp. Trizetto Group Inc.
Cerner Corporation IMS Health Inc.
Careinsite Inc. Medquist Inc.
Ecllpsys Corporation Allscript, Inc.
E-Medsoft.com Media Logic Inc.
These companies were selected on the basis of their principal business being
the development and/or provision of software designed for healthcare industry.
To illustrate the impracticability of applying conventional measures of
value, as indicated in the fourth paragraph of its letter, New York Capital
applied four measures to the 14 companies it considered comparable to
HealthWatch and Halis for which information was publicly available:
. market value of equity plus interest-bearing debt, as a multiple of
earnings before interest, taxes and depreciations and amortization
(EBITDA);
. market value of equity as a multiple of latest twelve months' revenue;
. market value of equity as a multiple of latest book value of stockholder
equity; and
. market value of equity as a multiple of latest twelve months' net income.
The results for the 14 comparable companies were as follows:
. only 6 companies had meaningful multiples, which ranged from 8.6 to 38
and averaged about 18;
. 13 of the companies had meaningful multiples, which ranged from .45 to
20.5 and averaged about 6.25;
. the range of multiples was .43 to 10.8 and averaged about 3.1; and
. only 3 companies had earnings to which to apply market value of equity
and the range of multiples was 9.5 to 17.6 with an average of about 15.5.
As evidenced above, the range of multiples for comparable companies to Halis
is extremely wide, which creates doubt about the reliability of such multiples
when used to calculate a per share value. Therefore, New York Capital used a
multiple of 7, which is an industry standard according to New York Capital for
companies such as Halis.
Halis had marginal EBITDA for the twelve months measured, revenues that were
a very minor fraction of those of the compared companies, a negative book value
and substantial losses. HealthWatch had the same pattern of negative
parameters.
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On the basis of the foregoing, it is New York Capital's opinion that the
terms of the proposed merger of HealthWatch and Halis are fair from a financial
standpoint to the public stockholders of Halis.
New York Capital Corporation is an investment banking firm founded in 1991
and is located in New York, New York. New York Capital was engaged because of
its expertise in emerging and middle market companies. As part of its business,
New York Capital is regularly engaged in the valuation of businesses and their
securities in connection with mergers, acquisitions and divestitures, private
placements of debt and equity securities, public offering advisory services and
funding of illiquid assets.
Pursuant to an engagement letter dated March 29, 2000, Halis has agreed to
pay New York Capital a financial advisory fee of $75,000. In addition, Halis
has agreed to reimburse New York Capital for reasonable out-of-pocket expenses
incurred by New York Capital in performing its services, including fees and
expenses of its legal counsel, and to indemnify New York Capital against
liabilities under the federal securities laws, arising out of New York
Capital's engagement. New York Capital has had no prior business dealing with
either Halis or HealthWatch.
Board and Management of the Surviving Corporation Following the Merger
If the merger is completed, holders of Halis common stock will become
stockholders of HealthWatch, which will be under the direction of the board of
directors and management of HealthWatch. The surviving corporation of the
merger will be a subsidiary of HealthWatch. Paul W. Harrison is the initial
sole-director of the surviving corporation, and will serve until his respective
successor is duly appointed and qualified. Additionally, the officers of the
Merger Sub immediately prior to the effective time will be the initial officers
of the surviving corporation and will serve until their successors are duly
appointed and qualified.
Board and Management of HealthWatch Following the Merger
Paul W. Harrison, the Chairman , CEO and President of HealthWatch and Halis,
will continue to serve as the Chairman of the board of directors, CEO and
President of HealthWatch following the merger. In addition, the following
persons will serve as officers of HealthWatch until their resignation or
removal, in the capacities indicated: David M. Engert, Chief Operating Officer;
Thomas C. Ridenour, Chief Financial Officer; Marilyn May, Vice President--
Business Development; and A. E. Harrison, Vice President--Research &
Development. Other officers of HealthWatch may be appointed by the board of
directors of HealthWatch in accordance with the HealthWatch By-Laws.
Conflicts of Interest
In considering the recommendations of the Halis and the HealthWatch board of
directors with respect to the merger agreement and the transactions associated
with it, stockholders should be aware that members of the management of Halis
and HealthWatch and the Halis board and HealthWatch board have interests in the
merger that are in addition to, or different from, the interests of the
stockholders of Halis and HealthWatch generally. In particular, Paul W.
Harrison is Chairman, CEO and President of both Halis and HealthWatch, and will
continue to serve as Chairman, CEO and President of HealthWatch after the
merger. In addition, Mr. Harrison is a significant stockholder of both
companies and holds options to buy Halis and HealthWatch common stock.
HealthWatch
As of December 31, 2000, HealthWatch's directors and executive officers hold
an aggregate of 153,031 shares of HealthWatch common stock (including preferred
stock convertible into common stock, but excluding unexercised options and
warrants). The number of shares of common stock held by HealthWatch's directors
and senior executive officers as of December 31, 2000 is as follows: Mr. Paul
Harrison, 121,531 shares; Mr. John Gruber; none, Mr. Harold Blue, none; Mr.
David M. Engert, 15,883 shares; Mr. Robert Tucker, none; Mr. John Prufeta,
8,939 shares; Mr. A.E. Harrison, 6,678 shares; Mr. Thomas C. Ridenour, none;
and Ms. Marilyn May, none.
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In addition, pursuant to the Amended and Restated Agency Agreement between
Commonwealth Associates and HealthWatch dated February 7, 2000, Commonwealth
Associates will receive a fee equal to five percent (5%) of the total
consideration paid or received in the Halis/HealthWatch merger. Based on the
Exchange Ratio and the outstanding shares of Halis common stock (excluding
shares owned by HealthWatch) and the HealthWatch common stock closing price as
of February 28, 2001, Commonwealth Associates will receive a fee of $104,200
upon completion of the merger. Certain members of the HealthWatch board of
directors have current or prior business relationships with Commonwealth
Associates, including, John Gruber who is a current employee of Commonwealth
Associates, John Prufeta who performs consulting services for Commonwealth
Associates and its affiliates and Robert Tucker who is an investors and client
of Commonwealth Associates and its affiliates. While there are no agreements in
place that would convey any direct or indirect benefits on the directors as a
result of their relationship with Commonwealth Associates, such directors may
be more likely to vote in favor of the merger as a result of their current or
past relationship with Commonwealth Associates.
Halis
As of December 31, 2000, Halis' executive officers and directors hold an
aggregate of 3,310,849 shares of Halis common stock. The number of shares of
Halis common stock held by Halis' directors and senior executive officers as of
December 31, 2000 are as follows: Mr. Paul Harrison, 2,990,849 shares; and
Mr. Greenspan, 320,000 shares.
Indemnification Agreements
Both HealthWatch's and Halis' Articles of Incorporation limit directors and
officers personal liability for monetary damages to HealthWatch or Halis and
their respective stockholders for any breach of duties of such position, with
limited exceptions.
Dissenters' Rights
Holders of HealthWatch common stock will not have dissenters' rights in
connection with, or as a result of, the matters to be acted upon at the special
meetings. However, the holders of Halis common stock who have timely filed with
Halis a written objection to the merger shall not be converted into or
represent a right to receive HealthWatch common stock, but such dissenting
stockholders shall be entitled only to such rights as are granted by Article 13
of the Georgia Business Corporation Code (O.C.G.A. (S) 14-2-1301 et seq.), a
copy of which is attached to this joint proxy statement/prospectus as Annex I.
Under Georgia law, a dissenting stockholder must demand payment for his shares
and deposit such shares in accordance with the instructions provided to him.
Failure to comply with these requirements will prevent the dissenting
stockholder from being able to demand payment for his shares. If the dissenting
stockholder complies with the above requirements, Halis shall offer to pay the
dissenting stockholder the amount management believes to be the fair market
value of Halis common stock. Such offer shall be accompanied by:
. Halis' financial statements:
. A statement of Halis' estimate of fair value;
. A statement of the dissenting stockholders right to make a demand for
payment if unsatisfied with the management's offer; and
. A copy of Article 13 of the Georgia Business Corporation Code.
If the dissenting stockholder believes that the fair market value of his
Halis common stock is greater than the amount offered by Halis, he may demand
payment based on his estimate of fair market value by giving written notice to
Halis. If the dissenting stockholder's demand remains unsettled, Halis may
petition the Superior Court of Fulton County, Georgia to establish the fair
market value. However, if Halis does not petition the court within sixty days
of receiving a demand notice, it must pay the dissenting stockholder the amount
demanded.
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Stock Exchange Listings
It is a condition to the merger that, upon consummation of the merger, the
shares of HealthWatch common stock be approved for listing on the Nasdaq
SmallCap Market, subject to official notice of issuance.
Delisting and Deregistration of Halis Common Stock
When the merger is completed, Halis common stock will be delisted from the
OTC Bulletin Board and will be deregistered under the Securities Exchange Act
of 1934.
Treatment of Stock Certificates
After the effective time, each stock certificate previously representing
shares of Halis common stock will automatically, with no further action by the
holder thereof, convert into one twentieth (.05) of a share of HealthWatch
common stock together with the associated HealthWatch rights, for each share of
Halis common stock represented by such stock certificate. Promptly after the
effective time, HealthWatch's exchange agent will mail a letter of transmittal
with instructions to each holder of record of Halis common stock outstanding
immediately prior to the effective time for use in exchanging, by book-entry
transfer or otherwise, stock certificates formerly representing shares of Halis
common stock for stock certificates representing shares of HealthWatch common
stock. No stock certificates should be surrendered by any holder of Halis
common stock until he or she has received the letter of transmittal and
instructions from Corporate Stock Transfer, Inc., HealthWatch's exchange agent.
HealthWatch stockholders will keep their current certificates as the merger
does not require surrender of HealthWatch stock certificates.
Accounting Treatment of the Merger
HealthWatch intends to account for the merger as a "purchase" for financial
reporting and accounting purposes, under generally accepted accounting
principles. It is a condition to completion of the merger that Tauber & Balser,
P.C. concur with its conclusion that the merger can be accounted for as a
purchase.
Regulatory Filings and Approvals Required to Complete the Merger
HealthWatch is not aware of any material governmental or regulatory approval
required for completion of the merger, other than the effectiveness of the
registration statement of which this proxy statements/prospectus is a part, and
compliance with applicable corporate laws of Minnesota and Georgia.
Tax-Free Reorganization
It is a condition to the merger that Halis receive an opinion of Gomel &
Davis, L.L.P. and that HealthWatch receive an opinion of Gambrell & Stolz,
L.L.P. that the merger will qualify as a "tax-free reorganization" and that,
accordingly, the holders of Halis common stock should recognize no gain or loss
in connection with the merger for federal income tax purposes, except to the
extent that cash is received in lieu of fractional shares of HealthWatch common
stock. See "MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE
MERGER" on page 97.
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THE MERGER AGREEMENT
The following is a brief summary of the material provisions of the merger
agreement, a copy of which is attached as Annex A to this joint proxy
statement/prospectus and is incorporated herein by reference. While we believe
this summary covers the material terms of the merger agreement, this summary
may not contain all the information that is important to you. Thus, we urge you
to read the merger agreement in its entirety. Capitalized terms that are used
in this section and are not defined have the respective meanings given to such
terms in the merger agreement.
The Merger
Pursuant to the merger agreement, upon the satisfaction or waiver of the
conditions that are contained in the merger agreement, Halis will be merged
with and into Merger Sub, a wholly-owned subsidiary of HealthWatch, with Merger
Sub continuing as the surviving corporation. The parties will cause the merger
to be accomplished by filing a Certificate of Merger with the Georgia Secretary
of State in accordance with the laws of Georgia. The merger will become
effective at the time the Certificate of Merger has been filed with the Georgia
Secretary of State or at such later time as may be agreed upon by HealthWatch
and Halis and specified in the Certificates of Merger. That time is called the
effective time.
Except as described below, as a result of the merger and without any action
on the part of the Halis stockholders, at the effective time, each share of
Halis common stock issued and outstanding immediately prior to the effective
time (other than those shares held in the treasury of Halis or those shares
owned by HealthWatch or Merger Sub) will be converted into one twentieth (.05)
of a share of HealthWatch common stock. Each share of Halis common stock will,
by virtue of the merger, cease to be outstanding and will be canceled and
retired, and each holder of a stock certificate representing shares of Halis
common stock will thereafter cease to have any rights with respect to those
shares of Halis common stock except the right to receive, without interest,
upon surrender of his or her stock certificate, shares of HealthWatch common
stock, cash for fractional interests of HealthWatch common stock and any
dividends paid by HealthWatch on HealthWatch common stock in the interval
between the effective time and the date of surrender of the stock certificate.
At the effective time, each Halis stock option then outstanding will be
converted into an option (an "Assumed Option") to purchase that number of
shares of HealthWatch common stock equal to the number of shares of Halis
common stock issuable immediately prior to the effective time upon exercise of
the Halis option multiplied the Exchange Ratio, provided that any fractional
share of HealthWatch common stock resulting from such multiplication will be
rounded up or down to the nearest whole share. The exercise price per share for
any shares subject to an Assumed Option will be equal to the exercise price per
share of the Halis option immediately prior to the effective time divided by
the Exchange Ratio, rounded to the nearest whole cent, and such Assumed Option
will have such other terms and conditions that are the same as those of the
Halis option. HealthWatch has agreed to register the shares of HealthWatch
common stock issuable upon exercise of the Assumed Options and to use its
commercially reasonable efforts to (i) cause such registration statement to be
declared effective reasonably promptly following the effective time and (ii)
maintain the effectiveness of such registration statement for so long as any
Assumed Option remains outstanding and exercisable.
Exchange Procedures
HealthWatch has retained Corporate Stock Transfer, Inc. to act as the
exchange agent. As soon as practicable after the effective time, the exchange
agent will mail to each person who was, at the effective time, a holder of
record of shares of Halis common stock, a letter of transmittal to be used by
the holder in either forwarding his or her Halis common stock certificates or
completing the procedure for delivery by book-entry transfer of such shares,
together with the instructions for effecting the surrender of the stock
certificates in exchange for shares of HealthWatch common stock.
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Halis stockholders should not send in their stock certificates until they
receive the letter of transmittal and instructions from the exchange agent,
which will not occur unless and until the merger has taken place.
Upon surrender to the exchange agent of his or her stock certificate for
cancellation, together with the letter of transmittal and any other required
documentation, the holder of the stock certificate for Halis common stock will
be entitled to receive that number of whole shares of HealthWatch common stock
equal to the number of shares of Halis common stock evidenced by the stock
certificate surrendered multiplied by the Exchange Ratio.
No fractional shares of HealthWatch common stock will be issued and any
holder of shares of Halis common stock entitled under the merger agreement to
receive a fractional share will receive a cash payment in lieu of the
fractional share, in an amount equal to the value of such fractional interest
determined with reference to the average closing price per share for shares of
HealthWatch common stock as reported by the Nasdaq SmallCap Market during the
ten trading days preceding the closing of the transactions under the merger
agreement.
Any dividends or other distributions declared after the effective time on
shares of HealthWatch common stock will be paid to holders of Halis common
stock only after the stock certificates representing the Halis shares have been
surrendered to the Exchange Agent for exchange. No interest will be paid or
accrued on cash in lieu of fractional shares, if any, and unpaid dividends and
distributions, if any.
Stock certificates that are surrendered for exchange by any person
constituting an "affiliate" of Halis for purposes of Rule 145(c) under the
Securities Act will not be exchanged until such person has executed and
delivered the written undertakings in the form attached to the merger
agreement.
Once the effective time has occurred, there will be no further registration
of transfers on the transfer books of Halis of shares of Halis common stock
which were outstanding immediately prior to the effective time.
Any portion of the exchange fund, including cash for payment of fractional
shares, which remains undistributed to holders of Halis common stock for six
months after the effective time will be delivered to HealthWatch upon demand,
and any stockholder of Halis who has not complied with the exchange procedures
in the merger agreement by that time will thereafter have to look only to
HealthWatch to receive his or her shares of HealthWatch common stock, cash in
lieu of fractional shares and any unpaid dividends and distributions on shares
of HealthWatch common stock, if any. None of Halis, HealthWatch, Merger Sub or
the exchange agent will be liable to any person in respect of any shares of
HealthWatch common stock or any cash from the exchange fund delivered to a
public official pursuant to applicable abandoned property, escheat or similar
laws.
If any Halis common stock certificate has been lost, stolen or destroyed,
then, upon the making of an affidavit of that fact by the person claiming such
stock certificate to be lost, stolen or destroyed and, if required by the
surviving corporation, the posting by such person of an appropriate indemnity
or surety bond, the exchange agent will issue in exchange for the lost, stolen
or destroyed stock certificate the shares of HealthWatch common stock and any
cash in lieu of fractional shares, as described above.
Corporate Organization and Governance
Articles of Incorporation and By-laws of the Surviving Corporation
At the effective time, the Articles of Incorporation and the By-laws of
Merger Sub, as in effect immediately prior to the effective time, will be the
Articles of Incorporation and the By-laws of the surviving corporation.
Board of Directors and Officers of the Surviving Corporation
From and after the effective time, Paul W. Harrison will continue to serve
as sole-director of the surviving corporation until his resignation or
respective successor(s) is duly elected and qualified. From and after the
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effective time, the officers of Merger Sub immediately prior to the merger will
be the officers of the surviving corporation until their successors are duly
appointed and qualified.
Board of Directors and Officers of HealthWatch
Following the merger, Paul Harrison, the Chairman, President and Chief
Executive Officer of HealthWatch and Halis, will continue to serve as the
Chairman, President and Chief Executive Officer of HealthWatch. In addition, in
accordance with the merger agreement, the following persons will serve as
officers of HealthWatch in the capacities indicated, until their resignation or
removal: David M. Engert, Chief Operating Officer; Thomas C. Ridenour, Chief
Financial Officer; Marilyn May, Vice President--Business Development; and
A. E. Harrison, Vice President--Research and Development. Other executive
officers of HealthWatch may be appointed by the board of directors of
HealthWatch in accordance with the HealthWatch By-laws. The current board of
directors of HealthWatch will continue to serve in their capacity as directors
until their resignation or removal.
Stockholders' Meetings
HealthWatch and Halis will each convene a meeting of their respective
stockholders in accordance with Georgia law or Minnesota law, as the case may
be, to consider and vote upon (i) in the case of HealthWatch, the approval, by
the vote of the holders of a majority of the shares of HealthWatch capital
stock issued and outstanding and entitled to vote, of the merger agreement and
the transactions associated with it, including the issuance of the shares of
HealthWatch common stock; in addition, HealthWatch stockholders will be asked
to consider proposals relating to the amendment of its Articles of
Incorporation to increase the number of authorized shares of capital stock and
ratify and approve proposals relating to the previous issuance of preferred
stock, and (ii) in the case of Halis, the approval, by the vote of the holders
of a majority of the shares of Halis common stock issued and outstanding and
entitled to vote, on the merger agreement and the transactions associated with
it, including the merger. The stockholders' meetings of HealthWatch and Halis
are both currently scheduled to be held on April , 2001.
Representations and Warranties
The merger agreement contains customary mutual representations and
warranties by HealthWatch and Merger Sub to Halis and by Halis to HealthWatch
and Merger Sub relating to, among other things:
. Their due organization, existence, good standing, corporate power and
similar corporate matters;
. Their capital structure;
. Their authorization, execution, delivery and performance and the
enforceability of the merger agreement and related matters;
. The absence of any conflicts, violations and defaults under their
respective Articles of Incorporation and By-laws and other agreements and
documents or any need for consents, approvals or authorizations of third
parties by reason of the execution of the merger agreement, other than
those approvals contemplated by the merger agreement, filings with the
SEC and other governmental entities and as may be required by Nasdaq in
connection with the issuance of HealthWatch common stock;
. The accuracy of reports and other documents filed with the Commission
(including the registration statement of which this joint proxy
statement/prospectus is a part and the accuracy and completeness of the
financial and other information contained therein;
. The absence of undisclosed liabilities or obligations of any nature which
would have a material adverse effect on either party, as applicable;
. The absence of material changes or events and the operation of the
respective businesses of HealthWatch and Halis in the ordinary course
since March 31, 2000;
. Compliance with laws and permits applicable to the respective businesses
of HealthWatch and Halis, and the absence of material pending or
threatened investigations or litigation;
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. The absence of certain changes or amendments in the benefit plans of
HealthWatch and Halis and matters relating to the Employee Retirement
Income Security Act of 1974, as amended ("ERISA");
. Tax matters;
. The required stockholder votes in connection with the merger agreement
and the transactions associated with it;
. The satisfaction of the requirements of Georgia and Minnesota state
takeover statutes and charter requirements in respect of the merger;
. The receipt of fairness opinions from the companies' respective financial
advisors;
. Matters relating to qualification of the merger as a "tax-free
reorganization" within the meaning of the Code;
. Ownership by HealthWatch and its affiliates of Halis common stock and
ownership by Halis and its affiliates of HealthWatch common stock;
. The existence, validity and status of material contracts; and
. Environmental matters.
All representations and warranties of HealthWatch, Merger Sub and Halis
will expire at the effective time.
Covenants
Pursuant to the merger agreement, HealthWatch and Halis have each agreed
that, except as otherwise expressly contemplated by the merger agreement or as
consented to by the other party, during the period from the date of the merger
agreement to the effective time, each party will, and will cause its
subsidiaries to, carry on their respective businesses in the ordinary course
consistent with past practice and in compliance in all material respects with
all applicable laws and regulations and, to the extent consistent therewith,
to use all reasonable efforts to preserve intact their current business
organizations, use reasonable efforts to keep available the services of their
current officers and other key employees and preserve their relationships with
those persons having business dealings with them to the end that their
goodwill and ongoing businesses will be unimpaired at the effective time.
The merger agreement provides that neither HealthWatch and its subsidiaries
nor Halis and its subsidiaries, respectively, will take certain actions such
as, among other things and with certain exceptions, amending its
organizational documents; issuing, selling or encumbering any shares of
capital stock or options to acquire any shares of such capital stock; selling,
leasing or encumbering property or assets outside of the ordinary course of
business; declaring or paying dividends or recapitalizing or redeeming its
capital stock; making acquisitions; or taking any action that would cause the
representations and warranties regarding absence of changes or events in the
merger agreement to no longer be true and correct in all material respects.
In addition, HealthWatch and Halis have each agreed, among other things:
. To cooperate in the prompt preparation and filing with the Commission of
this joint proxy statement/prospectus and the registration statement;
. To use commercially reasonable efforts to obtain and deliver to the other
party, letters, in the case of Halis, from persons who are "affiliates"
of Halis under Rule 145 of the Securities Act; and
. To use commercially reasonable efforts to cause to be delivered to the
other party two letters from its independent accountants, one dated as of
the date the registration statement is declared effective and one dated
as of the closing date, customary in scope and substance for letters
delivered by independent accountants in connection with registration
statements similar to the registration statement.
HealthWatch has further agreed, among other things, that, prior to the
effective time, it will use commercially reasonable efforts to cause the
shares of HealthWatch common stock issuable pursuant to the
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merger (including the shares issuable upon any exercise of the Assumed Options)
to be approved for listing on the Nasdaq SmallCap Market, subject to official
notice of issuance.
Each of HealthWatch and Halis has also agreed to provide, immediately
following the effective time, employee benefits and compensation arrangements
for all of their respective employees at a level no less favorable in the
aggregate than those benefits provided to such employees immediately prior to
the effective time, subject to later amendment or other alteration as may be
directed by the HealthWatch Board following the effective time.
No Solicitation of Transactions
Until the merger is completed or the merger agreement is terminated, Halis
has agreed, subject to limited exceptions, not to directly or indirectly take
any of the following actions:
. solicit, initiate or encourage (including by way of furnishing
information), or take any other action designed to facilitate any
inquiries or the making of any proposal, the consummation of which would
constitute an Alternative Transaction (as hereinafter defined); or
. participate in any discussions or negotiations regarding any Alternative
Transactions.
However, if at any time prior to the adoption of the merger agreement by the
holders of Halis common stock, the board of directors of Halis determines in
good faith, after receipt of advice from outside counsel, that the failure to
provide such information or participate in such negotiations or discussions
would result in a reasonable possibility that the board of directors of Halis
would breach its fiduciary duties to Halis' stockholders under applicable law,
Halis may, in response to any such proposal that was not solicited by it, take
the following actions:
. furnish information with respect to Halis and its subsidiaries to any
person pursuant to a customary confidentiality agreement; and
. participate in negotiations regarding any such proposal.
For purposes of the merger agreement, "Alternative Transaction" means any of
the following:
. a transaction or series of transactions pursuant to which any person or
group of persons other than Halis and its subsidiaries (a "Third Party")
acquires or would acquire, directly or indirectly, beneficial ownership
(as defined in Rule 13d-3 under the Exchange Act) of more than 20% of the
outstanding shares of Halis whether from Halis or pursuant to a tender
offer, exchange offer or otherwise;
. any acquisition or proposed acquisition of Halis or any of its
significant subsidiaries or by a merger or other business combination,
including any so called "merger of equals" and whether or not Halis or
any of its significant subsidiaries is the entity surviving any such
merger or business combination; or
. any other transaction pursuant to which any Third Party acquires or would
acquire, directly or indirectly, control of assets (including for this
purpose the outstanding equity securities of subsidiaries of Halis and
any entity surviving any merger or combination including any of them) of
Halis or any of its subsidiaries for consideration equal to 20% or more
of the fair market value of all of the outstanding shares of Halis common
stock or all of the outstanding shares of HealthWatch common stock, as
the case may be, on the date prior to the date of the merger agreement.
Neither the board of directors of Halis nor any committee thereof shall:
. except as expressly permitted by the merger agreement, withdraw, qualify
or modify, or propose publicly to withdraw, qualify or modify, in a
manner adverse to HealthWatch, the approval or recommendation by such
board of directors, or any such committee, of the merger, or the merger
agreement;
. approve or recommend, or propose publicly to approve or recommend, any
Alternative Transaction; or
. cause Halis to enter into any letter of intent, agreement in principle,
acquisition agreement or other similar agreement (each, an "Halis
Acquisition Agreement") related to any Alternative Transaction.
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Notwithstanding the foregoing, in the event that prior to the adoption of
the merger agreement by the holders of Halis common stock, the board of
directors of Halis determines in good faith, after it has received a Halis
Superior Proposal (as defined below) and after receipt of advice from outside
counsel, that the failure to do so would result in a reasonable possibility
that the board of directors of Halis would breach its fiduciary duties to
Halis' stockholders under applicable law, the board of directors of Halis may
inform Halis stockholders that it no longer believes that the merger or the
merger agreement is advisable and no longer recommends approval (a "Halis
Subsequent Determination"), but only after the fifth business day following
HealthWatch's receipt of written notice advising HealthWatch that the board of
directors of Halis has received a Halis Superior Proposal, specifying:
. the material terms and conditions of such Halis Superior Proposal;
. identifying the person making such Halis Superior Proposal; and
. stating that it intends to make a Halis Subsequent Determination.
After providing such notice, Halis shall provide a reasonable opportunity to
HealthWatch to make such adjustments in the terms and conditions of the merger
agreement would enable Halis to proceed with its recommendation to stockholders
without making a Halis Subsequent Determination; provided, however, that any
such adjustments shall be at the discretion of the parties at such time.
For purposes of the merger agreement, a "Halis Superior Proposal" means any
proposal made by a Third Party to enter into an Alternative Transaction on
terms which the board of directors of Halis determines in its good faith
judgment to be more favorable to Halis' stockholders than the merger taking
into account all relevant factors. Notwithstanding any other provision of the
merger agreement, Halis shall submit the merger agreement to its stockholders
whether or not the board of directors of Halis make a Halis Subsequent
Determination.
In addition, Halis shall promptly advise HealthWatch orally and in writing
of any request for information or of any proposal in connection with an
Alternative Transaction, the material terms and conditions of such request or
proposal and the identity of the person making such request or proposal. Halis
will keep HealthWatch reasonably informed of the status and details of any such
request or proposal on a current basis.
Nothing contained in the merger agreement shall prohibit Halis from (i)
taking and disclosing to its stockholders a position contemplated by Rule 14d-9
or Rule 14e-2(a) promulgated under the Exchange Act or (ii) from making any
disclosure to its stockholders if, in the good faith judgment of the board of
directors of Halis, after receipt of advice from outside counsel, failure so to
disclose would be inconsistent with its fiduciary duties to Halis' stockholders
under applicable law.
Indemnification and Insurance
HealthWatch has agreed to maintain in effect all rights to indemnification
and exculpation from liabilities for acts or omissions occurring at or prior to
the effective time existing as of the date of the merger agreement in favor of
the current or former directors or officers of Halis and its subsidiaries, as
provided in their respective organizational documents and any indemnification
agreements of Halis. In addition, from and after the effective time, directors
and officers of Halis who become directors or officers of HealthWatch will be
entitled to the same indemnification rights and directors' and officers'
liability insurance as are provided to other directors and officers of
HealthWatch.
In the event that HealthWatch or any of its successors or assigns (i)
consolidates with or merges into any other person and is not the continuing or
surviving corporation or entity of such consolidation or merger or
(ii) transfers or conveys all or substantially all of its properties and assets
to any person, then, and in each such case, proper provision will be made so
that the successors and assigns of HealthWatch assume the obligations described
under this section "--Indemnification and Insurance."
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Conditions
The obligations of HealthWatch, Merger Sub and Halis to effect the merger
are subject to, among other things, the satisfaction or waiver of conditions,
including without limitation:
. Approval of the merger agreement and the transactions associated with it,
by the requisite vote of each company's stockholders;
. The effectiveness of the registration statement, of which this joint
proxy statement/prospectus is a part of, and the absence of a stop order
suspending such effectiveness;
. Subject to limited exceptions set forth in the merger agreement, the
receipt or completion, as applicable, of all consents, approvals and
actions of, filings with and notices to any governmental entity required
by either of HealthWatch or Halis to consummate the merger and the other
transactions associated with the merger agreement;
. The absence of any law, judgment, order or decree preventing the
consummation of the merger or which is otherwise reasonably likely to
have a material adverse effect on HealthWatch or Halis, as applicable;
. The approval of listing on the Nasdaq SmallCap Market, subject only to
official notice of issuance, of the shares of HealthWatch common stock to
be issued in the merger;
. The receipt by HealthWatch from Gambrell & Stolz, L.L.P. and the receipt
by Halis from Gomel & Davis, L.L.P. of opinions, dated as of the date
that the registration statement is declared effective, to the effect that
the merger will constitute a "reorganization" within the meaning of
Section 368(a) of the Code, which opinions will not be withdrawn or
materially modified as of the closing date;
. Halis and HealthWatch shall have received an opinion from their
respective financial advisors to the effect that from a financial point
of view the merger agreement is fair to the stockholders of the company
which such financial advisor represents; and
. Halis obtains from all stockholders owning five percent (5%) or more of
the outstanding stock fully executed lock-up agreements.
The obligations of each of HealthWatch and Halis to effect the merger are
subject to the satisfaction or waiver of additional conditions, including:
. The continued accuracy of the other party's representations and
warranties and such other party's performance of its obligations under
the merger agreement in all material respects; and
. The absence of any material adverse change relating to the other party.
Resale Restrictions
All shares of HealthWatch common stock received by Halis stockholders in the
merger will be freely transferable under the Securities Act, except for shares
of HealthWatch common stock received by any person deemed to be "affiliates" of
Halis at the time of the Halis special meeting. Persons who may be deemed to be
affiliates include individuals or entities that control, are controlled by or
are under common control of Halis and may include Halis executive officer and
directors, as well as Halis significant stockholders. Affiliates may not sell
their shares of HealthWatch common stock received in connection with the merger
except pursuant to:
. an effective registration statement under the Securities Act covering the
resale of those shares;
. an exemption under paragraph (d) of Rule 145 under the Securities Act; or
. any other applicable exemption under the Securities Act.
HealthWatch registration statement on Form S-4, of which this joint proxy
statement/prospectus forms a part, does not cover the resale of shares of
HealthWatch common stock to be received by Halis affiliates in the merger.
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Termination
The merger agreement may be terminated at any time prior to the effective
time, with limited exceptions, notwithstanding any approval of the merger
agreement by the stockholders of Halis or the stockholders of HealthWatch, by:
. Mutual written consent of HealthWatch and Halis if the board of directors
of each company has determined to terminate the merger agreement by a
vote of a majority of its entire board;
. Either the HealthWatch board of directors or the Halis board of
directors:
. If the merger has not been consummated by April 30, 2001; provided,
however, that the right to terminate the merger agreement will not be
available to any party whose failure to perform any of its
obligations under the merger agreement results in the failure of the
merger to be consummated by such time;
. If the approval of HealthWatch stockholders has not been obtained at
a HealthWatch stockholders' meeting or any postponement or
adjournment thereof;
. If the approval of Halis stockholders has not been obtained at a
Halis stockholders' meeting or any postponement or adjournment
thereof; or
. If any judgment, order, decree, statute or rule enacted, promulgated
or issued by a court or other entity preventing the consummation of
the merger or otherwise reasonably likely to have a material adverse
effect on either HealthWatch or Halis is in effect and has become
final and nonappealable or if a governmental entity, the approval of
which is necessary for the consummation of the merger, has denied
approval of the merger and such denial has become final and
nonappealable; provided, that the party seeking to terminate the
merger agreement will have used commercially reasonable efforts to
prevent or remove such restraint or obtain such requisite regulatory
approval;
. By the Halis board of directors, if HealthWatch breaches or fails to
perform any of its representations, warranties, covenants or other
agreements contained in the merger agreement, which breach or failure to
perform (A) would give rise to the failure of the condition to Halis'
consummation of the merger with respect to the accuracy of HealthWatch's
representations and warranties and HealthWatch's performance of its
obligations under the merger agreement and (B) is incapable of being
cured by HealthWatch or is not cured within 30 days of written notice of
such breach or failure;
. By the HealthWatch board of directors, if Halis breaches or fails to
perform in any material respect any of its representations, warranties,
covenants or other agreements contained in the merger agreement, which
breach or failure to perform (A) would give rise to the failure of the
condition to HealthWatch's consummation of the merger with respect to the
accuracy of Halis' representations and warranties and Halis' performance
of its obligations under the merger agreement and (B) is incapable of
being cured by Halis or is not cured within 30 days of written notice of
such breach or failure;
. By the Halis board of directors, at any time prior to the HealthWatch
special meeting, if the HealthWatch board has (A) failed to include in
this joint proxy statement/prospectus to the HealthWatch stockholders,
its recommendation without modification or qualification that such
stockholders approve the merger agreement and the transactions associated
with it, (B) subsequently withdrawn such recommendation or (C) modified
or qualified such recommendation in a manner adverse to the interests of
Halis;
. By the HealthWatch board of directors, at any time prior to the Halis
special meeting, if the Halis Board has (A) failed to include in this
joint proxy statement/prospectus to the Halis stockholders, its
recommendation without modification or qualification that such
stockholders approve the merger agreement and the transactions associated
with it, (B) subsequently withdrawn such recommendation or (C) modified
or qualified such recommendation in a manner adverse to the interests of
HealthWatch; or
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. By HealthWatch if the Halis board of directors has failed to take certain
actions with respect to the registration statement or its special meeting
contemplated by the merger agreement as a result of the exercise of its
rights to make a Subsequent Determination in accordance with the terms of
the merger agreement.
In the event of termination of the merger agreement, the merger agreement
shall become void and there will be no liability on the part of any of the
parties, except for:
. Payment of termination fees, if applicable;
. Confidentiality provisions;
. Payment of fees and expenses related to the merger; and
. Payment of any broker fees by each of the parties.
Termination Fee
If the merger agreement is terminated at any time prior to the effective
time, then:
. HealthWatch will pay to Halis a termination fee of Five Hundred Thousand
Dollars ($500,000.00) if the termination is because:
. at any time prior to the HealthWatch Stockholders' Meeting, the
HealthWatch board of directors shall have (A) failed to include in
the joint proxy statement/prospectus to the HealthWatch stockholders
its recommendation without modification or qualification that such
stockholders approve the merger agreement and the transactions
contemplated hereby, (B) subsequently withdrawn such recommendation
or (C) modified or qualified such recommendation in a manner adverse
to the interests of Halis;
. if the required HealthWatch stockholder approval is not obtained at a
HealthWatch stockholders' meeting duly convened therefor or at any
adjournment or postponement thereof; or
. HealthWatch shall have failed to meet its obligations with regard to
the filing of a Form S-4 registration statement with the SEC, and
such breach is not cured within thirty days after notice thereof to
HealthWatch;
. Halis will pay to HealthWatch a termination fee of Five Hundred Thousand
Dollars ($500,000.00) if the termination is because:
. the Halis board of directors shall have (A) failed to include in the
joint proxy statement/prospectus to the Halis stockholders its
recommendation without modification or qualification that such
stockholders approve the merger agreement and the transaction
contemplated hereby, (B) subsequently withdrawn such recommendation
or (C) modified or qualified such recommendation in a manner adverse
to the interests of HealthWatch;
. the failure to obtain the required approval from the Halis
stockholders and at the time of such termination or prior to the
meeting of Halis' stockholders there shall have been an offer or
proposal for an announcement of any intention with respect to a
transaction that would constitute an Alternative Transaction;
. Halis will have breached its obligations with regard to the
solicitation of an Alternative Transactions;
. Halis shall have failed to meet its obligations with regard to the
filing of a Form S-4 registration statement with the SEC, and such
breach is not cured within thirty days after notice thereof to Halis;
or
. the board of directors of Halis shall have failed to take any of the
actions required for the filing of this joint proxy
statement/prospectus or holding a meeting to approve the merger
because they had made a Subsequent Determination with regard to the
merger.
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Any termination fee payable under the merger agreement will be payable in
cash, no later than one business day following the delivery of notice of
termination to the other party which triggers such termination fee.
Expenses
All fees and expenses incurred in connection with the merger and the merger
agreement and the transactions associated with such agreements will be paid by
the party incurring such fees and expenses, whether or not the merger is
consummated, except that the expenses incurred in connection with the filing,
printing and mailing of the registration statement and this joint proxy
statement/prospectus will be paid equally by the two companies. In the event
that any state or local transfer taxes ("Transfer Taxes") are imposed on the
stockholders of Halis, HealthWatch or their respective subsidiaries in
connection with the merger at or after the effective time, Halis, HealthWatch
or such subsidiary will pay such Transfer Taxes on behalf of their respective
stockholders.
Amendment; Extension and Waiver
The merger agreement may be amended by Halis and HealthWatch, by action
taken by their respective boards of directors, at any time before or after the
approval of the stockholders of HealthWatch or the approval of the stockholders
of Halis. However, after any such stockholder approval, no amendment will be
made that changes the amount or the form of the consideration to be delivered
to the holders of Halis common stock pursuant to the merger agreement, or which
by law otherwise requires the further approval of such stockholders.
At any time prior to the effective time, any party may:
. extend the time for the performance of any of the obligations or other
acts of the other party, including, without limitation, each company's
stockholders approving the merger, the SEC declaring the registration
statement effective, receipt of tax and legal opinions as required and
receipt of favorable fairness opinions as required;
. waive any inaccuracies in the representations and warranties of the other
party contained in the merger agreement or in any document delivered
pursuant to the merger agreement; or
. waive compliance by the other party with any of the agreements or
conditions contained in the merger agreement.
Any agreement on the part of HealthWatch or Halis to any such extension or
waiver will be valid only if set forth in an instrument in writing signed on
behalf of such party. The failure of HealthWatch or Halis to assert any of its
rights under the merger agreement or otherwise will not operate as a waiver of,
or estoppel with respect to, any subsequent or other failure.
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MATERIAL UNITED STATES FEDERAL INCOME
TAX CONSEQUENCES OF THE MERGER
The following discussion is a summary of the material U.S. Federal Income
Tax consequences of the merger. The discussion which follows is based on the
Code, Treasury Regulations promulgated thereunder, administrative rulings and
pronouncements and judicial decisions as of the date hereof, all of which are
subject to change, possibly with retroactive effect. The discussion below is
for general information only and does not address the effects of any state,
local or foreign tax laws on the merger. The tax treatment of a Halis
stockholder may vary depending upon his or her particular situation, and
certain stockholders (including insurance companies, tax-exempt organizations,
financial institutions and broker-dealers, persons who do not hold Halis stock
as capital assets, individuals who received Halis common stock pursuant to the
exercise of employee stock options or otherwise as compensation, non-U.S.
persons and persons who hold Halis stock as part of a "straddle," "hedge" or
conversion transaction), may be subject to special rules not discussed below.
Consummation of the merger is conditioned upon the receipt by HealthWatch of
an opinion from Gambrell & Stolz, L.L.P., counsel to HealthWatch, and by Halis
of an opinion from Gomel & Davis, L.L.P., counsel to Halis, dated as of the
date that the registration statement is declared effective, to the effect that
the merger will qualify as a "reorganization" within the meaning of Section
368(a) of the Code for U.S. Federal Income Tax purposes, which opinions shall
not have been withdrawn or materially modified as of the Closing Date. Such
opinions of counsel are based on certain representations as to factual matters
made by HealthWatch and Halis. Such representations, if incorrect in certain
material respects, could jeopardize the conclusions reached in the opinions.
Neither HealthWatch nor Halis is currently aware of any facts or circumstances
which would cause any such representations made to counsel to be untrue or
incorrect in any material respect. Any opinion of counsel is not binding on the
Internal Revenue Service (the "IRS") or the courts.
Provided that the merger is consummated in the manner described in the
merger agreement and this joint proxy statement/prospectus, and that there are
no changes in the Code or other applicable laws, the merger will be a
reorganization within the meaning of Section 368(a) of the Code. Assuming that
the merger is a reorganization, the merger will have the following federal
income tax consequences:
. no income, gain or loss will be recognized by HealthWatch, Merger Sub or
Halis as a result of the merger;
. a Halis stockholder will not recognize any income, gain or loss as a
result of the receipt of HealthWatch common stock pursuant to the merger,
except to the extent of any cash received in lieu of fractional shares of
HealthWatch common stock and except as described below with respect to
transfer taxes;
. a Halis stockholder's tax basis for the HealthWatch common stock received
pursuant to the merger, including any fractional share interest in
HealthWatch common stock for which cash is received, will equal such
Halis stockholder's tax basis in the Halis common stock exchanged
therefor;
. a Halis stockholder's holding period for the HealthWatch common stock
received pursuant to the merger will include the holding period of the
Halis common stock surrendered in exchange therefor; and
. a Halis stockholder that receives cash in lieu of a fractional share
interest in HealthWatch common stock pursuant to the merger will be
treated as having received such cash in exchange for such fractional
share interest and generally will recognize capital gain or loss on such
deemed exchange in an amount equal to the difference between the amount
of cash received and the basis of the Halis common stock allocable to
such fractional share.
Copies of these opinions are attached as Exhibits 8.1 and 8.2 to the
registration statement of which this joint proxy statement/prospectus forms a
part. Any change in currently applicable law, which may or may not
97
be retroactive, or failure of any factual representation or assumption to be
true, correct and complete in all material respects, could affect the
continuing validity of the Gambrell & Stolz tax opinion and the Gomel & Davis
tax opinion.
In the event that any transfer taxes are imposed on the stockholders of
Halis, HealthWatch or their respective subsidiaries in connection with the
merger, Halis, HealthWatch or such subsidiary will pay such transfer taxes on
behalf of their respective stockholders. Any such payments may result in
dividend income to the stockholders of the company making the payment in an
amount which is not expected to be material.
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COMPARISON OF RIGHTS OF HOLDERS OF
HALIS COMMON STOCK AND
HEALTHWATCH COMMON STOCK
This section of the joint proxy statement/prospectus describes material
differences between Halis common stock and HealthWatch common stock. While we
believe that the description covers the material differences between the two,
this summary may not contain all of the information that is important to Halis
stockholders, including the Articles of Incorporation and by-laws of
HealthWatch and the Articles of Incorporation and by-laws of Halis. Halis
stockholders should read this entire document and the other documents referred
to carefully for a more complete understanding of the differences between Halis
common stock and HealthWatch common stock.
Halis' Articles of Incorporation and by-laws currently govern the rights of
stockholders of Halis. After the completion of the merger, Halis' stockholders
will become stockholders of HealthWatch. As a result, former Halis
stockholders' rights will be governed by HealthWatch's Articles of
Incorporation and by-laws. Furthermore, because HealthWatch is a Minnesota
corporation, after the merger former Halis stockholders' rights will be
governed by the Minnesota Business Corporation Act (the "MBCA"), rather than by
Georgia law. The following paragraphs summarize material differences between
the rights of HealthWatch stockholders and Halis stockholders under the
Articles of Incorporation and by-laws of HealthWatch and Articles of
Incorporation and by-laws of Halis, and under Minnesota and Georgia law, as
applicable.
Authorized Capital Stock
HealthWatch
One class of common stock is issued and outstanding. Holders are entitled to
one vote per share. The HealthWatch Articles of Incorporation authorizes the
issuance of up to 10,000,000 shares of common stock. Note, however, the
HealthWatch stockholders are being asked to approve an amendment to the
HealthWatch Articles of Incorporation to increase the number of shares of
common stock HealthWatch is authorized to issue to 50,000,000.
The HealthWatch Articles of Incorporation authorize the board of directors
to issue shares of preferred stock in series, to establish from time to time
the number of shares to be included in such series, and to fix the designation,
powers preferences and rights of the shares to be included in each series and
the qualifications, limitations and restrictions thereof. The HealthWatch
Articles of Incorporation reserve for issuance 1,000,000 shares of preferred
stock. Note, however, the HealthWatch stockholders are being asked to approve
an amendment to the HealthWatch Articles of Incorporation to increase the
number of shares of preferred stock HealthWatch is authorized to issue to
15,000,000.
Under the MBCA, all shares of a corporation will have the par value of one
cent per share, unless a different par value is specified in the Articles of
Incorporation. Minnesota law permits a corporation to make distributions only
if the board determines that the corporation will be able to pay its debts in
the ordinary course of business after making the distribution and the board
does not know before the distribution is made that the determination was or has
become erroneous. In addition, Minnesota law generally provides that a
corporation may redeem or repurchase its shares.
The holders of HealthWatch common stock are entitled to one vote for each
share held of record on all matters submitted to a vote of stockholders.
Holders of HealthWatch common stock have no preemptive rights or rights to
convert their HealthWatch common stock into any other securities. There are no
redemption or sinking fund provisions applicable to HealthWatch common stock.
All outstanding shares of HealthWatch common stock are fully paid and non-
assessable and have a par value of $0.05 per share.
Subject to preferences that may be applicable to any outstanding shares of
preferred stock, the holders of HealthWatch common stock are entitled to
receive ratably such dividends, if any, as may be declared by the board of
directors out of funds legally available for the payment of dividends. In the
event of a liquidation,
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dissolution or winding up of HealthWatch, the holders of HealthWatch common
stock are entitled to share ratably in all assets remaining after payment of
liabilities and liquidation preferences of any outstanding shares of preferred
stock.
Pursuant to HealthWatch's Articles of Incorporation, as amended, the board
of directors has the authority, without further action by the stockholders, to
issue up to 1,000,000 shares of preferred stock, $0.05 par value per share, in
one or more series and to fix the designations, powers, preferences, privileges
and relative participating, optional or special rights and the qualifications,
limitations or restrictions thereof, including dividend rights, conversion
rights, voting rights, terms of redemption and liquidation preferences, any or
all of which may be greater than the rights of HealthWatch common stock. The
board, without stockholder approval, can issue preferred stock with voting,
conversion or other rights that could adversely affect the voting power and
other rights of the holders of HealthWatch common stock. Preferred stock could
thus be issued quickly with terms calculated to delay or prevent a change in
control of HealthWatch or make removal of management more difficult.
Additionally, the issuance of preferred stock may have the effect of decreasing
the market price of the HealthWatch common stock, and may adversely affect the
voting and other rights of the holders of HealthWatch common stock.
Halis
One class of common stock is issued and outstanding. Holders are entitled to
one vote per share. The Halis Articles of Incorporation authorize the issuance
of up to 100,000,000 shares of common stock.
The Halis Articles of Incorporation authorize the board of directors to
issue shares of preferred stock in one or more series and to set the
designations, preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications, and terms and
conditions of redemption thereof. The Halis Articles of Incorporation provide
that Halis has the authority to issue up to 5,000,000 shares of preferred
stock.
Under Georgia law, a corporation may make distributions to its stockholders
subject to any restrictions imposed in the corporation's articles of
incorporation, except that no distribution may be made if as a result the
corporation would not be able to pay its debts as they become due in the usual
course of business or its total assets would be less than the sum of its total
liabilities plus the amount that would be needed, if the corporation were to be
dissolved at the time of the distribution, to satisfy the preferential rights
upon dissolution of stockholders whose preferential rights are superior to
those receiving the distribution. A Georgia corporation may acquire its own
shares and shares so acquired will constitute authorized but unissued shares,
unless the articles of incorporation provide that such shares become treasury
shares or prohibit the reissuance of reacquired shares. If such reissuance is
prohibited, the number of authorized shares will be reduced by the number of
shares reacquired.
The holders of Halis common stock are entitled to one vote for each share
held of record on all matters submitted to a vote of stockholders. There are no
cumulative voting rights and each share has a par value of $0.01. Holders of
Halis common stock have no preemptive rights or rights to convert their Halis
common stock into any other securities. There are no redemption or sinking fund
provisions applicable to the Halis common stock. All outstanding shares of
Halis common stock are fully paid and nonassessable.
Pursuant to Halis' Articles of Incorporation, as amended, the board of
directors has the authority, without further action by the stockholders, to
issue up to 5,000,000 shares of preferred stock, no par value per share, in one
or more series and to fix the designations, powers, preferences, privileges and
relative, participating, optional or special rights and the qualifications,
limitations or restrictions thereof, including dividend rights, conversion
rights, voting rights, terms of redemption and liquidation preferences, any or
all of which may be greater than the rights of the Halis common stock. The
board of directors, without stockholder approval, can issue preferred stock
with voting, conversion or other rights that could adversely affect the voting
power and other rights of the holders of Halis common stock. Preferred stock
could thus be issued quickly with terms calculated to delay or prevent a change
of control of Halis or make removal of management more difficult. Additionally,
the issuance of preferred stock may have the effect of decreasing the market
price of the Halis
100
common stock and may adversely affect the voting and other rights of the
holders of Halis common stock. Halis has no plans to issue any preferred stock.
Summary of Comparison of
Authorized Capital Stock
HealthWatch Halis
----------- -----------
Common Stock:
Authorized............................................. 10,000,000 100,000,000
Par Value.............................................. $.05 $.01
Issued and Outstanding................................. 2,142,751 61,132,037
Votes Per Share........................................ 1 1
Preferred Stock:
Authorized............................................. 1,000,000 5,000,000
Par Value.............................................. $.05 $.10
Issued and Outstanding................................. None
Series A.............................................. 5,000
Series P.............................................. 66,886
Series C.............................................. 4,000
Series D.............................................. 74,130
Votes Per Share:....................................... N/A
Series A.............................................. None
Series P.............................................. None
Series C.............................................. 53.33
Series D.............................................. 28.57
Stockholder Meetings
HealthWatch
Under Minnesota law, a special meeting of stockholders may be called for any
purpose at any time by (i) the chief executive officer, (ii) the chief
financial officer, (iii) two or more directors, (iv) a person authorized in the
articles of incorporation or by-laws to call special meetings or (v) a
stockholder or stockholders holding ten percent or more of the voting power of
all shares entitled to vote (except a special meeting to vote on an action to
directly or indirectly effect a business combination must be called by
stockholders holding 25 percent of the voting power entitled to vote).
Under Minnesota law, any action permitted to be made at a meeting of the
stockholders may be taken without a meeting by written action signed by all
stockholders entitled to vote. The written actions is effective when it has
been signed by all stockholders entitled to vote, unless another effective time
is provided for in the written action.
Halis
Under Georgia law, a special meeting of stockholders may be called by the
board of directors or any other person authorized to do so in the articles of
incorporation or the by-laws. In addition, Georgia law provides that a special
meeting of stockholders may also be called by the holders of at least 25%, or
such greater or lesser percentages as the articles of incorporation or by-laws
provide, of all votes entitled to be cast on any issue proposed to be
considered at a special meeting. Halis' by-laws provide that a special meeting
may be called by the chief executive officer, or the presiding officer of the
board of directors. The chief executive officer or secretary will call a
special meeting when: (1) requested in writing by two or more of the directors;
or (2) when requested in writing by stockholders owning at least twenty-five
percent (25%) of all the votes entitled to be case on any issue proposed to be
considered at such meeting.
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Under Georgia law, stockholders may take action by written consent in lieu
of voting at a stockholders' meeting. Under Georgia law, all actions taken by
written consent must be unanimous unless the articles of incorporation provide
otherwise. Halis' articles of incorporation require that in actions to approve
any plan of merger, share exchange, asset sale or other transaction as to which
stockholder approval is required and specific disclosure requirements to voting
stockholders are imposed by Georgia law, written consent shall not be effective
unless (a) prior to the execution of the written consent, stockholder shall
have received the same material which, under Georgia law, would have been
required to be furnished to stockholders in a notice of such meeting, including
dissenters' rights or (b) the written consent contains an express waiver of the
rights to receive the materials otherwise required to be furnished to
stockholder in a notice of a meeting at which the proposed action would have
been submitted to stockholder vote, including dissenters' rights.
HealthWatch Halis
---------------------------- ----------------------
Who may call a stockholder CEO, CFO, 2 or more CEO or presiding
meeting: directors, or stockholders officer, 2 or more
owning at least 25% of directors or
voting power stockholders owning at
least 25% of voting
power
Record Date for Stockholder Action
HealthWatch
The HealthWatch by-laws provide that the board of directors may, but need
not, fix a record date that will not be more than 60 days prior to any intended
action or meeting.
Halis
The Halis by-laws provide that the board of directors may fix a record date
for a stockholders' meeting, which shall not be more than 70 days before the
date of the meeting or action. If no date is fixed for the determination of
stockholders entitled to notice of or to vote at a meeting of stockholders, the
last business day before the first notice of such meeting is delivered to
stockholders shall be the record date. If no record date is fixed for
determining stockholders entitled to take action without a meeting, the date
the first stockholders signs the consent shall be the record date for such
purpose.
HealthWatch Halis
---------------------------- ------------------------
Record date for stockholder Not required, but not more Not more than 70 days
action: than 60 days before action before action; if not
set, the last day before
the notice is delivered
Notice of Stockholder Meeting
HealthWatch
The HealthWatch by-laws require that notice of all meetings of stockholders
stating the date, time and place thereof, and any other information required by
law or desired by the board of directors or by such other person or persons
calling the meeting, and in the case of special meetings, the purpose thereof,
shall be given to each stockholder of record entitled to vote at such meeting
not less than three (3) nor more than sixty (60) days prior to the date of such
meeting. In the event that a plan of merger or the sale or other disposition of
all or substantially all of the assets of the corporation is to be considered
at a meeting of stockholders, notice of such meeting shall be given to every
stockholder, whether or not entitled to vote, not less than fourteen (14) days
prior to the date of such meeting.
Notice of meeting shall be given to each stockholder entitled thereto by
oral communication, mailing a copy to such stockholder, by handing a copy
thereof to such stockholder or by any other method of delivery that conforms to
Minnesota law. Notice by mail shall be deemed given when deposited in the
United States mail with sufficient postage affixed.
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Any stockholder may waive notice of any meeting of stockholders. Waiver of
notice shall be effective whether given before, at, or after the meeting and
whether given orally, in writing or by attendance. Attendance by a stockholder
at a meeting is waiver of notice of that meeting, except where the stockholder
objects at the beginning of the meeting of the transaction of business because
the meeting is not lawfully called or convened and does not participate
thereafter in the meeting, or objects before a vote on an item of business
because the item may not lawfully be considered at that meeting and does not
participate in the consideration of that item at the meeting.
Under Minnesota law, in all instances where a specific notice provision has
not otherwise been fixed by law, the notice shall be given at least ten (10)
days before the date of the meeting, or a shorter time provided in the articles
of incorporation or by-laws, and not more than sixty (60) days before the date
of the meeting.
Halis
Under the Halis by-laws, each stockholder entitled to vote thereat shall
receive notice including the date, time and place of each annual and special
stockholders' meeting no fewer than ten (10) nor more than sixty (60) days
before the meeting. Unless otherwise required by law, notice of an annual
meeting need not contain the actions which will be considered at such meeting.
Notice of a special meeting must include a description of the purpose or
purposes for which the meeting is called.
If an action at a stockholders meeting would or might give rise to statutory
dissenters' rights under Georgia law, the notice shall state that the meeting
is to include consideration of such proposed corporate action, and that the
consummation of such action will or might give rise to such dissenters' rights,
and shall include the description of such statutory dissenters' rights required
by Georgia law.
HealthWatch Halis
---------------------------- ------------------------
What is required in a notice date, time and place, and date, time and place
of stockholder meeting: any other information
required by law
Timing of notice: Not less than 3 nor more Not less than 10 nor
than 60 days before the more than 60 days before
meeting; unless meeting to the meeting
approve business
combination, then not less
than 14 days before the
meeting
Board of Directors
HealthWatch
The HealthWatch by-laws provide that the board of directors shall be fixed
from time to time by resolution of the stockholders, subject to increase by
resolution of the board of directors. In the event the stockholders fail to fix
the number of directors, the number of directors shall be the number provided
for in the articles of incorporation, subject to increase by resolution of the
board of directors. The HealthWatch Articles of Incorporation provides that the
board of directors shall consist of three (3) directors. The board of directors
of HealthWatch has increased the number of directorships to six (6) by
resolution, as required under the HealthWatch Articles of Incorporation and by-
laws. Each member of the board of directors shall hold office until the annual
meeting of the stockholders held next after his election and until his
successor has been duly elected and has qualified, or until his earlier
resignation, removal from office or death.
Under Minnesota law, any one or all of the directors may be removed at any
time, with or without cause, by the affirmative vote of the holders of a
majority of the voting power of all shares entitled to vote at an election of
directors; provided that, if a director has been elected solely by the holders
of a class or series of shares, as stated in the articles of incorporation or
by-laws, then that director may be removed only by the affirmative vote of the
holders of a majority of the voting power of all shares of that class or series
entitled to vote at an election of that director.
103
Under Minnesota law, vacancies and newly created directorships may be filled
by a majority of the directors then in office, even though less than a quorum,
unless otherwise provided in the articles of incorporation or by-laws. The
HealthWatch by-laws provide that vacancies on the board of directors may only
be filled by the vote of the majority of directors then in office, including,
in the case of any vacancy created by resignation which is to be effective at a
future date, those directors who have so resigned. The HealthWatch by-laws also
provide that vacancies and newly created directorships resulting from any
increase in the authorized number of directors may be filled by a majority of
the directors then in office, although less than a quorum, or by a resolution
of the stockholders.
The HealthWatch by-laws provide that HealthWatch may lend money to or
otherwise assist any officer or other employee whenever a majority of the board
of directors judge such a loan or assistance reasonably to be expected to
benefit HealthWatch.
Halis
The Halis by-laws provide that the number of the board of directors shall be
one or more individuals, the precise number to be fixed by resolution of the
board of directors from time to time. The Halis board of directors is currently
fixed at two (2) directors.
Under Georgia law, the stockholders may remove one or more directors with or
without cause unless the articles of incorporation or a by-laws adopted by the
stockholders provides that directors may be removed only for cause. If a
director is elected by a voting group of stockholders, only the stockholders of
that voting group may participate in the vote to remove him. A director may be
removed by the stockholders only at a meeting called for the purpose of
removing him and the meeting notice must state that the purpose, or one of the
purposes, of the meeting is removal of the director.
Halis' by-laws provides that a vacancy may be filled by the affirmative vote
of a majority of the remaining directors, even if less than a quorum. A
director so chosen shall hold office until the next annual meeting of
stockholders of Halis. No decrease in the number of directors constituting the
board of directors shall shorten the term of any incumbent director.
HealthWatch Halis
---------------------------- ------------------------
Number of board members: Shall consists of 3 Shall consists of one or
directors, subject to more directors, subject
increase by resolution by to increase by
the existing board. resolution by the
HealthWatch currently has existing board. Halis
six (6) directors on its currently has two (2)
board directors on its board
Removal of directors: Directors may be removed by Directors may be removed
a majority of the voting by a majority of the
power entitled to vote on voting power entitled to
election of directors vote on election of
directors, but only at a
meeting called for the
purpose of removing the
director, and the notice
must indicate that the
purpose is to remove the
director
Vacancies and newly created May be filled by a majority May be filled by a
directorships: of the directors then in majority of the
office or by a majority vote directors then in office
of the stockholders entitled or by a majority vote of
to vote on directors the stockholders
entitled to vote on
directors
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Officer and Director Indemnification
HealthWatch
The HealthWatch Articles of Incorporation provide that a director shall not
be personally liable to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for (i) liability
based on a breach of the duty of loyalty to the corporation or the
stockholders; (ii) liability for acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of the law,
(iii) liability of directors for improper distributions or (iv) liability for
any transaction in which a director derived an improper personal benefit. If
the Minnesota law is amended to permit further elimination or limitation of the
liability of directors, then the liability of a director of the corporation,
then the director shall be indemnified to the fullest extent authorized under
the MBCA.
Halis
The Halis by-laws provide that unless otherwise stated in the Halis Articles
of Incorporation, to the extent that a director has been wholly successful, on
the merits or otherwise, in the defense of any proceeding to which he was a
party because he is or was a director of the corporation, the corporation shall
indemnify the director against reasonable expenses incurred by him in
connection therewith.
The corporation may indemnify and hold harmless any director of the
corporation who was or is a party to a proceeding because he is or was a
director of the corporation, against any liability incurred in the proceeding
if he acted in a manner he believed in good faith to be in or not opposed to
the best interests of the corporation, in the case of any criminal proceeding,
he had no reasonable cause to believe his conduct was unlawful.
Without regard to the limitations contained above, the corporation may
indemnify a director if authorized by its stockholders by a majority of votes
which would be entitled to be cast in a vote to amend the corporations Articles
of Incorporation. The Halis by-laws provide that payment of expenses in advance
of the final disposition of an action shall be authorized by the board of
directors in some circumstances, and may be authorized by the board of
directors in other circumstances, upon receipt of an affirmation by the
director or officer that he or she has met the applicable standard of conduct
and has agreed to repay the corporation any advances made.
HealthWatch Halis
---------------------------- ------------------------
Officer and director HealthWatch officers and Halis may indemnify a
indemnification: directors shall only be director if: he acted in
liable for: breach of duty good faith; he acted in
or loyalty; acts not in good or not opposed to the
faith; intentional best interests of the
misconduct; knowing corporation; he had no
violation of law; improper reasonable cause to
distributions; or believe that his conduct
transactions in which the was unlawful; or in any
officer or director derived proceeding in which he
an improper personal benefit was wholly successful in
defending
Limitation on Liability
HealthWatch
The HealthWatch Articles of Incorporation limits or eliminates, to the
fullest extent permitted under Minnesota law, the personal liability of a
director to HealthWatch or its stockholders for monetary damages for breach of
fiduciary duty as a director. Under Minnesota law, such provision may not
eliminate or limit director monetary liability for:
. breaches of the director's duty of loyalty to the corporation or its
stockholders;
. acts or omissions not in good faith involving intentional misconduct or
knowing violations of law;
105
. the payment of unlawful dividends under the MBCA; or
. any transaction in which the director received an improper personal
benefit.
Halis
The Halis Articles of Incorporation eliminate a director's personal
liability for monetary damages to Halis or any of its stockholders for any
breach of duties of such position, except that such liability is not eliminated
for:
. any appropriation by a director, in violation of the director's duties,
of any business opportunity;
. any acts or omissions of a director that involve intentional misconduct
or knowing violation of law;
. unlawful distributions; or
. any transaction for which the director received an improper personal
benefit.
Required Stockholder Approval
HealthWatch
Under Minnesota law, an issuing public corporation may not engage in any
business combination with any interested stockholder of the issuing public
corporation for a period of four years following the interested stockholder's
share acquisition date unless specified conditions are met. Under Minnesota
law, an interested stockholder may avoid the prohibition against effecting
certain significant transactions with the corporation if the board of
directors, prior to the time such stockholder becomes an interested
stockholder, approves such transaction or the transaction by which such
stockholder becomes an interested stockholder or if at or subsequent to such
time the board of directors and the stockholders approve such transaction.
These provisions of Minnesota law apply to a Minnesota corporation unless the
corporation's articles of incorporation or by-laws contain a provision
expressly electing not to be subject to this section of the MBCA. HealthWatch
has not opted out of these provisions in its Articles of Incorporation or By-
laws and consequently is subject to these provisions.
Halis
The Halis by-laws do not contain such a provision electing to be governed by
similar provisions under Georgia law.
Dissenters' Rights
HealthWatch
Unless the articles of incorporation or by-laws provide otherwise, the right
to obtain payment under the MBCA does not apply to a stockholder of the
surviving corporation in a merger, if the shares of the stockholder are not
entitled to be voted on the merger. The HealthWatch Articles of Incorporation
or by-laws do not provide otherwise. Thus, HealthWatch stockholders are
entitled to dissenters' rights under the MBCA, where applicable.
Halis
Notwithstanding any other provision under Georgia law, there shall be no
right of dissent in favor of the holder of shares of any class or series which,
at the record date fixed to determine the stockholders entitled to receive
notice of and to vote at a meeting at which a plan of merger or share exchange
or a sale or exchange of property or an amendment of the articles of
incorporation is to be acted on, were either listed on a national securities
exchange or held of record by more than 2,000 stockholders, unless:
. In the case of a plan of merger or share exchange, the holders of shares
of the class or series are required under the plan of merger or share
exchange to accept for their shares anything except shares of the
surviving corporation or another publicly held corporation which at the
effective date of the merger or share exchange are either listed on a
national securities exchange or held of record by more than 2,000
stockholders, except for cash payments in lieu of fractional shares; or
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. The articles of incorporation or a resolution of the board of directors
approving the transaction provides otherwise.
Thus, because HealthWatch's by-laws or Articles of Incorporation have not opted
out of the dissenter's rights under MBCA, Halis stockholders will continue to
be entitled to dissenter's rights after the merger.
Derivative Actions
HealthWatch
Under Minnesota law, a stockholder may only bring a derivative action on
behalf of the corporation if the stockholder was a stockholder at the time of
the transaction in question. In addition, dissenter's rights shall not apply to
a stockholder in a merger transaction, if the stockholder was not entitled to
vote on the merger transaction.
Halis
Under Georgia law, a stockholder may not commence or maintain a derivative
proceeding unless the stockholder was a stockholder of the corporation at the
time of the act or omission complained of or became a stockholder through
transfer by operation of law from one who was a stockholder at that time. In
addition, Georgia law requires that the stockholder fairly and adequately
represent the interests of the corporation in enforcing the rights of the
corporation. Thus, Halis stockholders will continue to have the right to bring
a derivative action on behalf of the corporation after the merger.
107
HEALTHWATCH, INC.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
On June 29, 2000, HealthWatch and Halis entered into an agreement to merge
in a transaction where Halis would become a subsidiary of HealthWatch to be
accounted as a purchase by HealthWatch. Under the terms of the merger
agreement, each share of Halis common stock would be exchanged for .05 shares
of HealthWatch common stock, resulting in an exchange ratio of one share of
HealthWatch common stock for twenty shares of Halis common stock. Additionally,
stock options to purchase Halis common stock will convert into stock options to
purchase HealthWatch common stock.
The following unaudited pro forma consolidated financial statements present
the effect of the proposed merger of Halis with and into HealthWatch on a
purchase basis. The unaudited pro forma consolidated balance sheet presents the
financial position of HealthWatch and Halis as of December 31, 2000, assuming
that the proposed merger was consummated as of December 31, 2000 based on the
historical balance sheet of HealthWatch and Halis as of December 31, 2000.
The unaudited pro forma consolidated statements of operations give effect to
the proposed merger by combining the historical statements of operations of
HealthWatch and Halis for the year ended June 30, 2000 and the six months ended
December 31, 2000, with necessary adjusting entries. For purposes of preparing
this pro forma information, the transaction was assumed to be consummated at
the beginning of the preceding fiscal year (July 1, 1999 for the year and six
months ended June 30, 2000 and December 31, 2000, respectively). These
unaudited pro forma consolidated financial statements should be read in
conjunction with the historical financial statements and notes thereto of
HealthWatch and Halis included elsewhere in this joint proxy
statement/prospectus.
The unaudited pro forma consolidated financial statements are presented for
illustrative purposes only and are not necessarily indicative of the operating
results or financial position that wold have occurred if the merger had been
consummated for the periods noted, nor are they necessarily indicative of
future operating results or financial position.
108
HEALTHWATCH, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2000
(unaudited)
Pro Forma Pro Forma
HealthWatch, Inc. HALIS, Inc. Acquisition Consolidating HealthWatch, Inc.
Consolidated Consolidated Adjustment Entries Consolidated
----------------- ------------ ----------- ------------- -----------------
CURRENT ASSETS
Cash.................... $ 52,084 $ 327,968 $ -- $ -- $ 380,052
Restricted cash......... 36,308 36,308
Receivables, net........ 48,427 242,397 -- -- 290,824
Marketable securities... 1,848,406 -- -- -- 1,848,406
Inventory............... 25,449 -- -- -- 25,449
Other current assets.... 339,694 102,487 -- -- 442,181
---------- ---------- ---------- ----------- -----------
TOTAL CURRENT ASSETS... 2,314,060 709,160 -- -- 3,023,220
---------- ---------- ---------- ----------- -----------
OTHER ASSETS
Property and equipment,
net.................... 127,320 291,106 -- -- 418,426
Due from HALIS, Inc..... 541,976 -- -- (541,976)(3) --
Intangible assets (HES
Technology), net....... 1,014,570 467,308 4,949,431(1) 6,431,309
Investment in
HALIS/HealthWatch...... 1,645,701 9,375 -- (1,655,076)(2) --
Other assets............ 56,370 160,990 -- -- 217,360
---------- ---------- ---------- ----------- -----------
TOTAL OTHER ASSETS...... 3,385,937 928,779 4,949,431 (2,197,052) 7,067,095
---------- ---------- ---------- ----------- -----------
TOTAL ASSETS............ $5,699,997 $1,637,939 $4,949,431 $(2,197,052) $10,090,315
========== ========== ========== =========== ===========
109
HEALTHWATCH, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2000
(unaudited)
Pro Forma
HealthWatch, Pro Forma HealthWatch,
Inc. HALIS, Inc. Acquisition Consolidating Inc.
Consolidated Consolidated Adjustment Entries Consolidated
------------ ------------ ----------- ------------- ------------
CURRENT LIABILITIES
Accounts payable and
accrued expenses....... $ 661,701 $ 844,679 $ -- $ -- $ 1,506,380
Deferred revenue and
customer deposits...... 6,501 52,508 -- -- 59,009
Due to HealthWatch,
Inc.................... -- 291,976 -- (291,976)(3) --
Notes payable--bank..... -- 248,379 -- -- 248,379
Note payable--related
party.................. 250,000 (250,000) --
Obligations under
capital leases--current
portion................ -- 66,121 -- -- 66,121
Debentures payable...... 25,000 -- -- -- 25,000
------------ ------------ ---------- ------------ ------------
TOTAL CURRENT
LIABILITIES ........... 693,202 1,753,663 -- (541,976) 1,904,889
------------ ------------ ---------- ------------ ------------
LONG-TERM DEBT
Obligations under
capital leases, net of
current portion........ -- 142,511 -- -- 142,511
------------ ------------ ---------- ------------ ------------
SHAREHOLDERS' EQUITY
Cumulative preferred
stock, 1,000,000 shares
authorized
Series A, 5,000 shares
issued and
outstanding........... 250 -- -- -- 250
Series P, 66,886 shares
issued and
outstanding........... 3,344 -- -- -- 3,344
Series C, 4,000 shares
issued and
outstanding........... 200 -- -- -- 200
Series D, 74,130 shares
issued and
outstanding........... 3,707 -- -- 3,707
Common stock, par value. 107,137 611,320 -- (498,865)(2) 219,592
Additional paid-in-
capital................ 35,641,951 38,085,036 -- (35,161,371)(2) 38,565,616
Accumulated deficit..... (30,743,303) (38,838,966) -- 38,838,966 (2) (30,743,303)
Accumulated other
comprehensive loss, net
unrealized investment
losses................. (6,491) (115,625) -- 115,625 (2) (6,491)
Pro forma equity
adjustment............. -- -- 4,949,431(1) (4,949,431)(2) --
------------ ------------ ---------- ------------ ------------
TOTAL SHAREHOLDERS'
EQUITY................. 5,006,795 (258,235) 4,949,431 (1,655,076) 8,042,915
------------ ------------ ---------- ------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY... $ 5,699,997 $ 1,637,939 $4,949,431 $ (2,197,052) $ 10,090,315
============ ============ ========== ============ ============
110
HEALTHWATCH, INC.
NOTES TO THE PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2000
(unaudited)
(1) To reflect the acquisition of HALIS as if the acquisition had occurred on
December 31, 2000 by recording an intangible asset for the excess of the
purchase price over the fair value of the net tangible assets acquired
($5,416,739)and eliminating HALIS' goodwill ($467,308). The total value of
the consideration is based on the trading value of the Company's stock as
of the measurement date of the transaction. The intangible asset recorded
in conjunction with the merger represents the total consideration
(2,265,761 shares of HealthWatch's common stock issued to HALIS
shareholders valued at the trading price at June 30, 2000 of $1.34 per
share, or $3,036,120, plus HealthWatch's investment in and advances to
HALIS at December 31, 2000 of $2,187,677), or $5,223,797, over the fair
market value of the net tangible assets acquired from HALIS (at December
31, 2000, HALIS' liabilities exceeded the fair market value of its net
tangible assets by $192,942). The excess purchase price over the fair
market value of the net tangible assets acquired has been identified as the
HES Technology and will be amortized over a five year period.
(2) To eliminate HealthWatch's investment in HALIS carried on the equity method
($1,645,701) and HALIS' investment in HealthWatch ($9,375).
(3) To eliminate intercompany balances as of December 31, 2000.
111
HEALTHWATCH, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 2000
(unaudited)
Pro Forma Consolidated Statement of Operations (Unaudited)
-----------------------------------------------------------------------------
Pro Forma Pro Forma
HealthWatch, Inc. HALIS, Inc. Acquisition Consolidating HealthWatch, Inc.
Consolidated Consolidated Adjustment Entries Consolidated
----------------- ------------ ----------- ------------- -----------------
SALES................... $ 551,682 $ 4,326,750 $ -- $(21,936)(3) $ 4,856,496
COST OF SALES........... 193,952 188,941 -- (21,936)(3) 360,957
----------- ----------- ----- -------- -----------
GROSS PROFIT........... 357,730 4,137,809 -- -- 4,495,539
----------- ----------- ----- -------- -----------
OPERATING COSTS AND
EXPENSES
Selling, general &
administrative......... 1,964,127 4,236,625 -- -- 6,200,752
Depreciation &
amortization........... 442,795 642,776 -- 716,592 (2) 1,802,163
Research & development.. 136,780 181,651 -- -- 318,431
Writedown of
intangibles............ -- 63,996 -- -- 63,996
----------- ----------- ----- -------- -----------
TOTAL OPERATING COSTS
AND EXPENSES.......... 2,543,702 5,125,048 -- 716,592 8,385,342
----------- ----------- ----- -------- -----------
OPERATING LOSS.......... (2,185,972) (987,239) -- (716,592) (3,889,803)
----------- ----------- ----- -------- -----------
OTHER INCOME (EXPENSE)
Provision for losses on
note receivable........ -- (623,378) -- -- (623,378)
Equity loss from
investment in HALIS,
Inc.................... (523,450) -- -- 523,450 (1) --
Other than temporary
decline in value of
investment in HALIS,
Inc.................... (472,810) -- -- 472,810 (1) --
Loss from impairment of
intangible assets...... (213,286) (213,286)
Gain on disposal of
equipment.............. -- 35,000 -- -- 35,000
Interest income......... 110,606 13,798 -- -- 124,404
Interest expense........ (455,875) (87,877) -- -- (543,752)
Other income (expense).. -- 22,474 -- -- 22,474
----------- ----------- ----- -------- -----------
TOTAL OTHER INCOME
(EXPENSE)............. (1,554,815) (639,983) -- 996,260 (1,198,538)
----------- ----------- ----- -------- -----------
LOSS FROM CONTINUING
OPERATIONS............. $(3,740,787) $(1,627,222) $ -- $279,668 $(5,088,341)
=========== =========== ===== ======== ===========
BASIC AND DILUTED NET
LOSS PER COMMON SHARE.. $ (3.93) $ (1.95)
=========== ===========
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING............ 1,538,924 3,788,019
=========== ===========
112
HEALTHWATCH, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 2000
(unaudited)
(1) To eliminate equity loss from investment in HALIS ($523,450) and other-
than-temporary decline in value ($472,810).
(2) To record amortization of intangible asset recorded as a result of the
HealthWatch/HALIS merger ($1,119,475) over a five year period and to
reverse the amortization recorded for the HALIS goodwill which was
eliminated in the merger ($402,883).
(3) To eliminate MERAD royalties on HES sales.
113
HEALTHWATCH, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2000
(unaudited)
Pro Forma Consolidated Statement of Operations (Unaudited)
-----------------------------------------------------------------------------
Pro Forma Pro Forma
HealthWatch, Inc. HALIS, Inc. Acquisition Consolidating HealthWatch, Inc.
Consolidated Consolidated Adjustment Entries Consolidated
----------------- ------------ ----------- ------------- -----------------
SALES................... $ 183,622 $2,076,606 $ -- $ (540)(3) $ 2,259,688
COST OF SALES........... 37,888 810 -- (540)(3) 38,158
----------- ---------- ----- ---------- -----------
GROSS PROFIT............ 145,734 2,075,796 -- -- 2,221,530
----------- ---------- ----- ---------- -----------
OPERATING EXPENSES
Selling, general &
administrative......... 1,873,679 1,986,684 -- -- 3,860,363
Depreciation &
amortization........... 127,911 292,107 -- 340,232 (2) 760,250
Research & development.. 98,034 137,736 -- -- 235,770
----------- ---------- ----- ---------- -----------
TOTAL OPERATING
EXPENSES.............. 2,099,624 2,416,527 -- 340,232 4,856,383
----------- ---------- ----- ---------- -----------
OPERATING LOSS.......... (1,953,890) (340,731) -- (340,232) (2,634,853)
----------- ---------- ----- ---------- -----------
OTHER INCOME (EXPENSE)
Equity loss from
investments in HALIS,
Inc.................... (127,710) -- -- 127,710 (1) --
Interest income......... 95,949 -- -- -- 95,949
Interest expense........ (10,015) (282,731) -- -- (292,746)
Realized loss on sale of
marketable securities.. (3,860) -- -- -- (3,860)
----------- ---------- ----- ---------- -----------
TOTAL OTHER INCOME
(EXPENSE)............. (45,636) (282,731) -- 127,710 (200,657)
----------- ---------- ----- ---------- -----------
NET LOSS................ $(1,999,526) $ (623,462) $ -- $ (212,522) $(2,835,510)
=========== ========== ===== ========== ===========
BASIC AND DILUTED NET
LOSS PER COMMON SHARE.. $ (2.54) $ (1.43)
=========== ===========
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING............ 2,142,751 4,391,846
=========== ===========
114
HEALTHWATCH, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2000
(unaudited)
(1) To eliminate equity loss from investment in HALIS.
(2) To record amortization of intangible assets recorded as a result of the
HealthWatch/HALIS merger ($541,674) over a five year period and to reverse
the amortization recorded for the HALIS goodwill which was eliminated in
the merger ($201,442).
(3) To eliminate MERAD royalties on HES sales.
115
MARKET PRICE AND DIVIDEND INFORMATION
The HealthWatch common stock is listed and traded on the Nasdaq SmallCap
Market and the Halis common stock is listed and quoted on OTC Bulletin Board.
The following table sets forth the high and low trading prices per share of
each of the HealthWatch common stock and Halis common stock, based on published
financial sources, and the dividends paid per share for such periods by
HealthWatch and Halis. The time periods referred to in this table are to
calendar quarters beginning January 1, 1997 through December 31, 2000.
HealthWatch Halis
Common Stock Common Stock
Prices(1) Prices
------------- -------------
High Low High Low
------ ------ ------ ------
1997
First Quarter..................................... $76.50 $51.50 n/a n/a
Second Quarter.................................... 75.75 25.50 $ 2.67 $ 1.55
Third Quarter..................................... 30.50 9.38 2.42 1.92
Fourth Quarter.................................... 18.75 6.25 2.05 0.44
1998
First Quarter..................................... 10.95 4.70 0.64 0.23
Second Quarter.................................... 5.45 3.15 0.28 0.16
Third Quarter..................................... 6.60 3.15 0.48 0.13
Fourth Quarter.................................... 5.15 1.88 0.20 0.09
1999
First Quarter..................................... 10.90 1.70 0.30 0.08
Second Quarter.................................... 11.10 4.05 0.30 0.13
Third Quarter..................................... 5.15 1.88 0.19 0.11
Fourth Quarter.................................... 5.90 1.55 0.16 0.05
2000
First Quarter..................................... 9.06 2.00 0.55 0.09
Second Quarter.................................... 4.75 1.31 0.22 0.06
Third Quarter..................................... 2.81 1.16 0.09 0.05
Fourth Quarter.................................... 1.94 0.44 0.06 0.02
--------
(1) The trading prices of HealthWatch common stock in this table have been
adjusted to reflect a one-for-five reverse stock split that was effective
on February 23, 1998 and a one-for-five reverse stock split that was
effective on December 23, 1999.
Neither HealthWatch nor Halis has paid a common stock dividend in any of the
periods shown in the above table.
On March 7, 2000, the last full trading day prior to the first public
announcement of the execution of a binding letter of intent regarding the
merger, the reported high and low sales prices per share and closing price per
share of HealthWatch common stock and Halis common stock on the Nasdaq SmallCap
Market or OTC Bulletin Board, as the case may be, were as follows:
High Low Close
----- ----- ------
HealthWatch............................................ $7.00 $6.50 $6.875
Halis.................................................. $0.45 $0.33 $0.39
On April , 2001, the last full trading day prior to the date of this joint
proxy statement/prospectus, the reported high and low sales prices per share
and closing price per share of HealthWatch common stock and Halis common stock
on the Nasdaq SmallCap Market or OTC Bulletin Board, as the case may be, were
as follows:
High Low Close
----- ----- ------
HealthWatch............................................ $ $ $
Halis.................................................. $ $ $
Stockholders are urged to obtain current market quotations for shares of
HealthWatch common stock and Halis common stock.
116
EXPERTS
The consolidated financial statements of HealthWatch in this joint proxy
statement/prospectus for the years ended June 30, 2000 and 1999 and have been
audited by Tauber & Balser, P.C., independent certified public accountants, as
stated in their report dated September 26, 2000, except as to Note O, which
date is as of March 3, 2001. Such consolidated financial statements have been
so incorporated in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
The audited financial statements and related financial statement schedules
of Halis in this joint proxy statement/prospectus, to the extent and for the
periods indicated in their reports dated March 1, 2001, have been audited by
Tauber & Balser, P.C., independent certified public accountants, and are
included herein in reliance upon the authority of said firm as experts in
giving said reports.
The unaudited interim financial information of HealthWatch included
elsewhere in the registration statement, of which this joint proxy
statement/prospectus is a part, for the interim periods ended December 31,
2000, has not been audited by Tauber & Balser, P.C. Accordingly, the degree of
reliance on that information should be restricted in light of the fact that
such information has not been audited.
117
ADDITIONAL MATTERS BEING SUBMITTED TO A
VOTE OF ONLY HEALTHWATCH STOCKHOLDERS
Proposals No. 2.A and 2.B
Amendment to Articles of Incorporation to Increase Authorized Capital Stock
HealthWatch's board of directors has approved and recommends the adoption by
the stockholders of the following amendments to Article III of the Articles of
Incorporation, which amendments would:
A. increase the number of authorized shares of HealthWatch common stock
from 10,000,000 shares to 50,000,000 shares; and
B. increase the number of authorized shares of preferred stock from
1,000,000 shares to 15,000,000 shares.
Stockholders of HealthWatch may vote separately on proposals 2.A and 2.B
Text of the Amendments
. Assuming Proposal 2.A is approved and Proposal 2.B is not, the
HealthWatch Articles of incorporation will be amended as follows:
"Article III of the Articles of Incorporation of the Corporation hereby
is amended by deleting the first paragraph thereof in its entirety, and
inserting in lieu thereof the following (Sections A and B thereof not being
amended or otherwise changed):
"ARTICLE III
The total number of shares of all classes of stock that the corporation
shall be authorized to issue shall be fifty-one million (51,000,000)
shares, divided into the following: (i) fifty million (50,000,000) shares
of Common Stock, $.05 par value per share, and (ii) one million (1,000,000)
shares of Preferred Stock, $.05 par value per share. A description of the
respective classes of stock and a statement of the designations,
preferences, limitations and relative rights of such classes of stock and
the limitations on or denial of the voting rights of the shares of such
classes of stock are as described in Sections A and B of this Article III."
. Assuming Proposal 2.B is approved and Proposal 2.A is not, the
HealthWatch Articles of incorporation will be amended as follows:
"Article III of the Articles of Incorporation of the Corporation hereby
is amended by deleting the first paragraph thereof in its entirety, and
inserting in lieu thereof the following (Sections A and B thereof not being
amended or otherwise changed):
"ARTICLE III
The total number of shares of all classes of stock that the corporation
shall be authorized to issue shall be twenty-five million (25,000,000)
shares, divided into the following: (i) ten million (10,000,000) shares of
Common Stock, $.05 par value per share, and (ii) fifteen million
(15,000,000) shares of Preferred Stock, $.05 par value per share. A
description of the respective classes of stock and a statement of the
designations, preferences, limitations and relative rights of such classes
of stock and the limitations on or denial of the voting rights of the
shares of such classes of stock are as described in Sections A and B of
this Article III."
. Assuming Proposal 2.A and Proposal 2.B are both approved, the HealthWatch
Articles of incorporation will be amended as follows:
"Article III of the Articles of Incorporation of the Corporation hereby
is amended by deleting the first paragraph thereof in its entirety, and
inserting in lieu thereof the following (Sections A and B thereof not being
amended or otherwise changed):
118
"ARTICLE III
The total number of shares of all classes of stock that the corporation
shall be authorized to issue shall be sixty-five million (65,000,000)
shares, divided into the following: (i) fifty million (50,000,000) shares
of Common Stock, $.05 par value per share, and (ii) fifteen million
(15,000,000) shares of Preferred Stock, $.05 par value per share. A
description of the respective classes of stock and a statement of the
designations, preferences, limitations and relative rights of such classes
of stock and the limitations on or denial of the voting rights of the
shares of such classes of stock are as described in Sections A and B of
this Article III."
The Articles of Incorporation, as presently in effect, provide that the
aggregate number of shares of stock which HealthWatch shall have authority to
issue is 11,000,000 shares, consisting of 10,000,000 shares of HealthWatch
common stock and 1,000,000 shares of HealthWatch preferred stock. On December
31, 2000, there were 2,142,751 issued and outstanding shares of HealthWatch
common stock. Of the 1,000,000 shares of preferred stock, the following classes
have been designated and reserved for issuance: 300,000 shares of 6% Series A
Convertible Preferred Stock of which 5,000 shares are issued and outstanding;
4,500 shares of Series C 8% Convertible Preferred Stock of which 4,000 shares
are issued and outstanding; 300,000 shares of Series D 8% Convertible Preferred
of which 74,130 shares are issued and outstanding; and 80,000 shares of Series
P Preferred Stock of which 66,886 shares are issued and outstanding. In
addition, there were 9,524 shares of HealthWatch common stock reserved for
issuance upon conversion of outstanding 6% Series A Convertible Preferred
Stock; 213,333 shares of HealthWatch common stock reserved for issuance upon
conversion of the outstanding shares of Series C 8% Convertible Preferred
Stock; 2,117,998 shares of HealthWatch common stock reserved for issuance upon
conversion of the outstanding shares of Series D 8% Convertible Preferred
Stock; 668,860 shares of HealthWatch common stock reserved for issuance upon
the conversion of the outstanding shares of Series P Preferred Stock (assuming
the Series P Preferred Stock conversion features in Proposal 4 are approved by
the HealthWatch common stockholders at the HealthWatch special meeting);
824,143 shares of HealthWatch common stock reserved for issuance upon the
exercise of outstanding stock options; and 3,143,018 shares of commons stock
reserved for issuance under other outstanding options and warrants. Thus, as of
the Record Date, 880,373 shares of HealthWatch common stock remain available
for issuance and 315,500 shares of HealthWatch Preferred Stock remained
available for designation and issuance without further action by the
HealthWatch's stockholders.
Reasons For and Possible Effects of the Proposed Amendment
The proposed increase in the authorized shares of HealthWatch common stock
is necessary to permit HealthWatch to carry out its obligations under its
existing convertible preferred stock (including the convertible Series P
Preferred Stock, if Proposal 4 is approved) and outstanding options and
warrants as well as to meet its obligations under the merger agreement with
respect to the issuance of HealthWatch common stock to Halis stockholders. In
addition, the HealthWatch Board believes the proposed increase in the
authorized shares of HealthWatch common stock and HealthWatch preferred stock
is desirable to enhance HealthWatch's flexibility in connection with possible
future actions, such as stock splits, stock dividends, financings, mergers,
acquisitions and other general corporate purposes, including stock or option
incentive grants for employees, directors and consultants. Adoption of the
proposed amendment would enable HealthWatch to meet all of its obligations to
issue additional shares of HealthWatch common stock and to issue future shares
of HealthWatch common stock and HealthWatch preferred stock, without the
expense and delay of a special meeting of stockholders, other than in those
circumstances where the issuance of shares or the terms of a particular
transaction would, under the Marketplace Rules of the Nasdaq SmallCap Market,
require stockholder approval. Elimination of the delay occasioned by the
necessity of obtaining stockholder approval may better enable HealthWatch to
pursue financing and acquisition opportunities which can be impacted by
changing market conditions. There are no present agreements, arrangements or
understandings concerning the issuance of such shares other than in connection
with the merger and the various outstanding convertible preferred securities,
options and warrants discussed herein.
119
The proposed shares of HealthWatch common stock for which authorization is
sought would be part of the existing class of such stock and would increase the
number of shares of HealthWatch common stock available for issuance, but would
have no effect upon the terms of the HealthWatch common stock or the rights of
the holders of such stock. If and when issued, the proposed additional
authorized shares of HealthWatch common stock would have the same rights and
privileges as the shares of HealthWatch common stock presently outstanding.
The proposed shares of HealthWatch preferred stock for which authorization
is sought would be subject, as is the case with the current authorized
HealthWatch preferred stock, to the right of HealthWatch's board of directors
to establish and designate series of the HealthWatch preferred stock and to
determine the relative rights and preferences of the shares of any series so
established, but would have no effect upon the terms of any outstanding
HealthWatch preferred stock or the rights of the holders of such stock.
However, additional shares of HealthWatch preferred stock could be issued in
the future with dividend, liquidation, conversion, voting or other rights which
could adversely impact the holders of the HealthWatch common stock and existing
HealthWatch preferred stock.
Anti-Takeover Effect of Proposed Amendment
The existence of the additional authorized shares of HealthWatch common
stock and preferred stock could have the effect of discouraging an attempt by
any person or entity, through the acquisition of a substantial number of shares
of HealthWatch common stock, to acquire control of HealthWatch with a view to
imposing a merger, sale of all or any part of HealthWatch's assets or a similar
transaction. Although the board of directors has no present intention of doing
so, it could issue shares of HealthWatch common stock or HealthWatch preferred
stock in a public or private sale to purchasers who might agree with the board
of directors in opposing an attempt to change control of HealthWatch. Thus, the
issuance of the additional shares of HealthWatch common stock and HealthWatch
preferred stock could be used to dilute the stock ownership of a takeover
bidder. In addition, the board of directors may issue, without stockholder
action, HealthWatch common stock, HealthWatch preferred stock, or warrants or
other rights to acquire such stock, with terms designed to protect against
certain takeovers, including partial takeovers and front-end loaded, two-step
takeovers and freeze-outs and to control stockholder acquisitions, should the
board of directors consider the action of such entity or person not to be in
the best interests of HealthWatch and its stockholders. To the extent that
potential takeovers are thereby discouraged, stockholders may not have the
opportunity to dispose of all or a part of their stock at a price that may be
higher than that prevailing in the market. However, it also is possible that
making shares of authorized, but unissued, HealthWatch common stock and
HealthWatch preferred stock available for issuance may have the effect of
increasing the price offered to HealthWatch's stockholders in a tender or
exchange offer.
The proposed amendment to the Articles of Incorporation is not intended as
an anti-takeover measure and is not part of a plan by the board of directors to
adopt a series of anti-takeover measures. The board of directors does not
presently intend to propose any measures designed to discourage any unfair or
unnegotiated takeovers, but reserves the right to propose and adopt such
measures if the board of directors determines that such measures are in the
best interests of HealthWatch and its stockholders.
If the HealthWatch stockholders approve the issuance of shares of
HealthWatch common stock in connection with the merger, but vote "Against"
proposal 2.A, HealthWatch will not have sufficient shares of common stock
available to consummate the merger. As noted above, as of the Record Date, only
880,373 shares of HealthWatch common stock remain available for issuance after
taking into account those shares reserved to meet existing obligations.
Therefore, a vote "Against" proposal 2.A could prevent the consummation of the
Halis merger even if the merger were approved.
A vote "Against" proposal 2.B could make future activities involving
preferred stock more difficult in that HealthWatch may need to seek approval
from the stockholders for future issuance once the remaining 315,500 shares are
used. However, a vote "Against" proposal 2.B will not affect HealthWatch's
ability to consummate the Halis merger.
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Required Vote and Related Matters
The affirmative vote of a majority of the outstanding voting power is
required to approve the amendment to the Articles of Incorporation to increase
HealthWatch's number of authorized shares of HealthWatch common stock from
10,000,000 shares to 50,000,000 shares and to increase HealthWatch's number of
authorized shares of HealthWatch preferred stock from 1,000,000 shares to
5,000,000 shares.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL NO. 2.A and 2.B.
Proposals No. 3.A through 3.E
Matters Relating to Series C Preferred, Series D Preferred and Related Warrants
Proposals No. 3.A through 3.E below are separate and distinct proposals
which will be voted on separately by the HealthWatch stockholders. The
following is a summary of matters relating to recent issuances by HealthWatch
of:
. the Series C Preferred;
. the Series D Preferred;
. warrants to purchase HealthWatch common stock issued to purchasers of the
Series C Preferred in a bridge financing completed in February 2000 (the
"Bridge Warrants");
. warrants to purchase HealthWatch common stock issued to purchasers of the
Series D Preferred in a private placement initiated in March 2000 (the
"Offering Warrants"); and
. warrants to purchase HealthWatch common stock issued to an affiliate of
Commonwealth Associates, L.P. ("Placement Agent") in connection with a $2
million line of credit (the "Line of Credit Warrants").
The following summary is not complete and is qualified in its entirety by
reference to the Certificate of Designation, Preferences and Rights of the
Series C Preferred, the Certificate of Designation, Preferences and Rights of
the Series D Preferred and the form of warrant which is representative of the
Bridge Warrants, the Offering Warrants and the Line of Credit Warrants, copies
of which are being filed as Appendix F, Appendix G and Appendix H,
respectively, to this joint proxy statement/prospectus.
Background of Recent Financings
In December 1999 and February 2000, HealthWatch completed a $400,000 equity
bridge financing (the "Bridge Financing") pursuant to which accredited
investors purchased an aggregate of 4,000 shares of the Series C Preferred
(convertible into HealthWatch common stock at a price of $1.875 per share) and
five-year Bridge Warrants to purchase an aggregate of 666,669 shares of
HealthWatch common stock at $1.875 per share.
In February 2000, HealthWatch entered into a $2,000,000 line of credit with
an affiliate of Commonwealth Associates as a bridge financing until the Series
D Preferred offering was completed, pursuant to which it issued five-year Line
of Credit Warrants to purchase an aggregate of 1,000,000 shares of HealthWatch
common stock at $3.50 per share subject to adjustment under certain
circumstances. In March 2000, HealthWatch had drawn down $500,000 under the
line of credit. This amount has been repaid in full upon the initial closing of
the Series D Preferred.
In March 2000, HealthWatch began a private placement of units (the "Unit
Offering") consisting of shares of the Series D Preferred (convertible into
HealthWatch common stock at a price of $3.50 per share) and five-year Offering
Warrants to purchase shares of HealthWatch common stock at $3.50 per share.
HealthWatch sold approximately $7.4 million in the Unit Offering which was
completed in early May 2000.
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Each of the above issuances were made in reliance upon the exemption from
registration afforded by Section 4(2), including Regulation D, of the
Securities Act of 1933, as amended.
Terms of the Series C and Series D Preferred
Ranking. The Series C Preferred and Series D Preferred will rank, with
respect to distributions upon a liquidation, equally with each other and with
HealthWatch's Series A Preferred Stock and senior to all of HealthWatch's other
capital stock. As such, if distributions are made in liquidation, Series A,
Series C and Series D Preferred stockholders must be paid before any other
capital stockholders are paid. If there are insufficient corporate assets to
fully pay the Series A, Series C and Series D Preferred stockholders, then the
available corporate assets will be allocated pro rata based on the total amount
due.
Liquidation Value. The Series C Preferred and Series D Preferred each have a
liquidation value of $100.00 per share plus any declared but unpaid dividends.
Dividends. Beginning on the date the shares are issued until they are
converted by the holders, the holders of Series C Preferred and Series D
Preferred will be entitled to receive, when, and if declared by the board of
directors of HealthWatch, dividends at the rate of 8% per annum per share (as
adjusted for any stock dividends, combinations or splits with respect to such
shares), payable out of funds legally available for the payment of dividends.
Accrued and unpaid dividends will be paid upon HealthWatch's liquidation or
upon conversion of the Series C Preferred and Series D Preferred and may be
paid, at HealthWatch's option, in either cash or in additional shares of Series
C or Series D Preferred, as the case may be. The dividends are payable semi-
annually, on June 30 and December 31 of each year.
Optional Conversion. Holders of Series C Preferred and Series D Preferred
shares will have the right, at any time, to convert their shares into shares of
HealthWatch common stock at $1.875 and $3.50 per share, respectively.
Automatic Conversion. The Series C Preferred and Series D Preferred will
automatically convert into shares of HealthWatch common stock at the conversion
price then in effect (i) in the event HealthWatch completes a public offering
or private placement raising gross proceeds in excess of $25 million at a per
share price in excess of $5.00 for Series C Preferred and $10.50 for Series D
Preferred, or (ii) at such time as the closing bid price for HealthWatch common
stock has equaled at least twice the conversion price for the relevant series
for a period of 20 consecutive trading days, so long as HealthWatch common
stock is then trading on a national securities exchange or the Nasdaq SmallCap
Market or National Market System and the conversion shares are fully registered
for resale and not subject to any lock-up provisions.
Voting Rights. In addition to their right to vote on certain matters as a
separate class, holders of the Series C Preferred and Series D Preferred will
vote together as a single class with the holders of HealthWatch common stock on
all matters submitted to a vote of HealthWatch's stockholders, based on the
number of conversion shares into which their Series C or Series D Preferred
shares are then convertible.
Lock-Up Agreements. The holders of the Series C Preferred and Series D
Preferred have agreed not to sell, transfer or otherwise dispose of any of the
Series C Preferred and Series D Preferred shares and any conversion shares for
one year following issuance and thereafter, will not sell, transfer or
otherwise dispose of more than 25% of these securities on a cumulative basis
during each subsequent 90-day period thereafter (the "Lock-Up Period");
provided, however, that if HealthWatch undertakes a public offering within the
first 12 months of the Lock-Up Period, the holders cannot sell, transfer or
otherwise dispose of these securities for such period of time after completion
of such public offering (not to exceed one year) as the managing underwriter
may request in writing and Commonwealth Associates for the Bridge Financing and
Unit Offering may agree to.
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Terms of the Warrants
Exercise Terms. Each of the Bridge Warrants, Offering Warrants and Line of
Credit Warrants are exercisable for a period of five years from their
respective issuances for one share of HealthWatch common stock. The exercise
price per share for the Bridge Warrants is equal to $1.875, the exercise price
for the Offering Warrants is $3.50 and the exercise price for the Line of
Credit Warrants is $3.50. These prices are subject to adjustment as set forth
below. Each of the above warrants contain a provision allowing for exercise on
a cashless basis, which means a holder could convert his warrants into the
number of shares of HealthWatch common stock equal to the trading price of
HealthWatch common stock less the exercise price of such warrants divided by
the trading price HealthWatch common stock.
Redemption. In the event that the market price of HealthWatch common stock
is at least 300% of the exercise price (subject to adjustment) for a period of
20 consecutive trading days and subject to the following conditions,
HealthWatch may elect to redeem the Bridge Warrants and the Offering Warrants
for $.05 per warrant on written notice. Prior to a redemption date, the
warrants may be exercised in whole or part by the holder. HealthWatch may
exercise its redemption right only if there is an effective registration
statement covering the shares of HealthWatch common stock underlying the
warrants and there is no lockup in effect with respect to their sale or
transfer. With respect to the Offering Warrants only, in the event that the
market price of HealthWatch"s common stock is at least 300% of the exercise
price (subject to adjustment) for a period of 20 consecutive trading days at
any time prior to December 21, 2000 when there is not an effective registration
statement covering the warrant shares, HealthWatch may elect (and Commonwealth
Associates or a committee representing 20% of the outstanding Series D
Preferred can require) to redeem the Offering Warrants for $.05 per warrant on
written notice setting forth the redemption date, prior to which the Offering
Warrants may be exercised in whole or part by the holder. In the event a holder
utilized the cashless exercise procedure in this case, and stockholder approval
has been received as described below, the exercise price used would equal 10%
of the current market value of HealthWatch common stock. No reduction in the
exercise price will be made unless HealthWatch's stockholders approve the anti-
dilution terms of the Offering Warrants or it is not determined to be in
violation of listing criteria of Nasdaq. The Line of Credit Warrants do not
contain any redemption provisions.
Agent Warrants. Commonwealth Associates has received 529,491 warrants (the
"Agent Warrants") in connection with the recent private placement of the Series
D Preferred and Offering Warrants. The terms governing the Offering Warrants,
including the anti-dilution provisions referenced below, are also applicable to
the Agent Warrants.
Proposals 3.A through 3.E
Anti-Dilution Protection of the Series C Preferred and Series D
Preferred. If stockholder approval is received, and if at anytime during the
Lock-Up Period HealthWatch issues shares of HealthWatch common stock or
securities convertible or exchangeable for HealthWatch common stock having a
sale, conversion or exercise price less than the conversion price for the
Series C Preferred or Series D Preferred then in effect, the conversion prices
for the Series C Preferred and Series D Preferred will be reset to such lower
price. The Series C Preferred and Series D Preferred will also be protected
against dilution on a weighted average basis in the event HealthWatch issues
shares of HealthWatch common stock or securities convertible into HealthWatch
common stock (other than in connection with transactions specifically excluded
in their respective Certificates of Designation) at a price less than the then
current market price. Issuances that will not trigger an adjustment include:
. certain option grants pursuant to employee benefit plans,
. public offerings,
. private placements through Commonwealth Associates or which are otherwise
at least 90% of the current market price; and
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. issuances in connection with acquisitions of businesses or technologies.
Further, no adjustment for below market issuances will be required if (i)
the current market price is at least 300% of the then conversion price
and either a registration statement covering the resale of the conversion
shares remains in effect for the 90 days after such below market issuance
or Rule 144(k) under the Securities Act is available for resale of all of
the conversion shares or (ii) at the time of the issuance HealthWatch has
less than $100,000 in cash and cash equivalents.
If approval is not received, these provisions of the Series C Preferred and
Series D Preferred will have no effect, but the Series C and Series D Preferred
will remain outstanding containing all other terms described above.
Anti-Dilution Protection of the Warrants. Each of the Bridge Warrants,
Offering Warrants and Line of Credit Warrants contain anti-dilution provisions
substantially the same as those applicable to the Series C Preferred and Series
D Preferred. The inclusion of these provisions in the various warrants is also
subject to stockholder approval. In addition, in the case of the Offering
Warrants and Line of Credit Warrants(but only 239,327 of the Agent Warrants),
if the stockholders do not approve the anti-dilution provisions of those
warrants and the provisions are determined to be in violation of listing
criteria of Nasdaq such that no anti-dilution protection will be available, the
number of Offering Warrants and Line of Credit Warrants outstanding will be
automatically doubled. Currently, if the number of Offering Warrants, Line of
Credit Warrants and certain of the Agent Warrants were doubled under these
circumstances, the holders would have the right to purchase a total of
3,537,654 shares of HealthWatch common stock upon exercise of these warrants.
Nasdaq Stockholder Approval Requirements
Stockholder ratification and approval of the anti-dilution provisions
contained in the Series C Preferred, the Series D Preferred, the Bridge
Warrants, the Offering Warrants and the Line of Credit Warrants is not required
under Minnesota law or HealthWatch's Articles of Incorporation or by-laws.
Stockholder ratification and approval are also currently not required under the
Marketplace Rules of the Nasdaq Stock Market SmallCap Market System ("Nasdaq"),
through which HealthWatch common stock is traded. However, in order to qualify
for continued inclusion in Nasdaq, it is necessary to satisfy financial and
other criteria set forth in the Marketplace Rules and to follow certain
corporate governance procedures, including obtaining stockholder approval in
connection with certain corporate transactions. For example, Rule
4310(c)(25)(G)(i) requires stockholder approval if the listed company issues
common stock or securities exercisable or convertible into common stock
representing 20% or more of the listed company's outstanding shares of common
stock or voting power at a price that is below the greater of book value or
market value per share (the "20% Rule").
The 20% Rule is not implicated by the provisions governing the conversion or
exercise of the Series C Preferred and Bridge Warrants (since the $1.875
conversion and/or exercise price for these securities was equal to or greater
than the market price of HealthWatch common stock on their respective dates of
issuance) or by the provisions governing the conversion or exercise of the
Series D Preferred, Offering Warrants or Line of Credit Warrants (since the
$3.50 conversion and/or exercise price for these securities was equal to or
greater than the market price of HealthWatch common stock on the date the
agreement relating to the Unit Offering and line of credit was approved and
executed). However, the anti-dilution provisions contained in each of these
various securities provide for a potential lowering of the conversion and
exercise prices currently in place in the event HealthWatch takes certain
actions with respect to future security issuances. As a result, the shares of
HealthWatch common stock issued upon conversion of the Series C or Series D
Preferred or the various warrants described in this proposal could be issued
for less than the greater of book value or market value of such shares if the
anti-dilution provisions were allowed to take effect, which could, in the
future, implicate the 20% Rule.
Whether or not the 20% Rule is implicated by the anti-dilution provisions
contained in these various securities will depend on the price of HealthWatch
common stock at the time HealthWatch issues securities in the future. It is
possible that the 20% Rule will never be implicated. However, if the market
price of
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HealthWatch common stock declined and did not recover for a significant period
of time, the 20% Rule could be implicated. Although stockholder approval is not
currently required to satisfy the listing requirements under the Marketplace
Rules for the continued inclusion of HealthWatch in Nasdaq, it is possible that
stockholder approval may be required in the future. Therefore, the board of
directors agreed with the holders of these securities to seek stockholder
approval at this time rather than possibly being required to call a special
meeting of stockholders if the 20% Rule is implicated.
Impact of the Preferred Stock and Warrant Issuances
Stockholders are being asked to consider proposals to approve the anti-
dilution provisions contained is some of the securities which have previously
been issued by HealthWatch. A vote "Against" these proposals will not change
the fact that the securities are issued and outstanding, but will simply
eliminate the anti-dilution provisions. Assuming the conversion of all the
shares of Series C and Series D Preferred, and the exercise of all Bridge
Warrants, Offering Warrants and Line of Credit Warrants, the holders of these
securities (or persons having a right to purchase these securities) would
currently be entitled to receive an aggregate of approximately 5 million shares
of HealthWatch common stock. These shares, in addition to the indeterminable
number of shares of HealthWatch common stock which could be used to satisfy the
dividend payment requirements of the Series C and Series D Preferred, will,
upon issuance, result in an increase in the number of shares of HealthWatch
common stock outstanding, which will result in a dilution of the percentage
ownership of other stockholders. If the anti-dilution provisions are allowed to
take effect and are subsequently triggered, these securities could become
convertible into an even larger number of shares of HealthWatch common stock,
the exact amount of which is currently not determinable.
Impact of a Vote Against Issuance
HealthWatch has agreed to seek stockholder approval of the anti-dilution
provisions contained in the various securities described in this Proposal.
Further, under the terms of the Line of Credit Warrants and the Offering
Warrants, if the stockholders do not approve the anti-dilution provisions of
those warrants and the provisions are determined to be in violation of listing
criteria of Nasdaq such that no anti-dilution protection will be available, the
number of Offering Warrants outstanding would automatically increase from
529,500 warrants to 1,059,000 warrants and Line of Credit Warrants outstanding
would automatically increase from 1,000,000 warrants to 2,000,000 warrants. In
that case, HealthWatch would be required to issue additional shares of
HealthWatch common stock upon exercise and the dilution of the percentage
ownership of other stockholders would be even greater.
Potential Conflicts of Interest; Interests of Certain Persons
John Gruber, a HealthWatch director, is associated with Placement Agent, an
affiliate of which owns the 1,000,000 Line of Credit Warrants. John R. Prufeta,
a HealthWatch director, owns 250 shares of the Series D Preferred and 1,786 of
the Offering Warrants. The security purchase made by Mr. Prufeta, however,
occurred prior to his becoming members of the HealthWatch board of directors.
The board of directors was aware of these relationships and considered them,
among other factors, in making its recommendation to the stockholders that the
stockholders ratify and approve the anti-dilution provisions contained in the
various securities described in this Proposal.
Required Vote and Related Matters
The affirmative vote of a majority of the HealthWatch common stock present
or represented by proxy at the HealthWatch Special Meeting and entitled to vote
thereon is required to ratify and approve the anti-dilution provisions
contained in the Series C Preferred, the Series D Preferred, the Bridge
Warrants, the Offering Warrants and the Line of Credit Warrants.
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THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE FOLLOWING PROPOSALS:
PROPOSAL NO. 3.A--SERIES C PREFERRED
PROPOSAL NO. 3.B--SERIES D PREFERRED
PROPOSAL NO. 3.C--BRIDGE WARRANTS
PROPOSAL NO. 3.D--OFFERING WARRANTS
PROPOSAL NO. 3.E--LINE OF CREDIT WARRANTS
Proposal No. 4
Matters Relating to the Series P Preferred Stock
The following is a summary of certain matters relating to HealthWatch's
outstanding Series P Preferred Stock (the "Series P Preferred"). The following
summary is not complete and is qualified in its entirety by reference to the
Certificate of Designation, Preferences and Rights of the Series P Preferred,
as amended (the "Certificate of Designation"), a copy of which is being filed
as Appendix I to this joint proxy statement/prospectus.
Background of Series P Preferred
On October 2, 1998, HealthWatch acquired PHE. In the acquisition, the
stockholders of PHE received, among other things, in the aggregate 66,886
shares (which reflects the reverse stock split by HealthWatch in December 1999)
of the Series P Preferred. The acquisition of PHE allowed HealthWatch (i) to
acquire the MERAD technology in order for it to focus its business strategy on
being a premier information technology company, (ii) to acquire a significant
interest in Halis which is the first vertical implementation of the MERAD
technology and (iii) to come into compliance with Nasdaq's $2,000,000 minimum
net tangible assets requirement (by reflecting the value of the Halis stock and
MERAD technology on its balance sheet). Without the acquisition, HealthWatch
common stock was likely to be delisted by Nasdaq.
As was discussed on page 124, under the Nasdaq Marketplace Rules applicable
to HealthWatch, HealthWatch may not issues shares of HealthWatch common stock
or securities convertible into shares of its common stock without stockholder
approval if the shares to be issued either at that time or upon conversion
would equal 20% or more of the outstanding HealthWatch common stock prior to
the transaction. Further, the Nasdaq Marketplace Rules require stockholder
approval of an acquisition if any director, officer or substantial stockholder
of the company has a 5% or greater interest in the company to be acquired and
the common stock to be issued in the acquisition or the common stock issuable
upon conversion of the securities to be issued in the acquisition could result
in an increase in outstanding common stock of 5% or more. Under either of these
rules, given Paul W. Harrison's interest in PHE, if the Series P Preferred to
be issued in the PHE acquisition were then convertible into HealthWatch common
stock, stockholder approval would have been required to maintain listing on
Nasdaq.
At that time, HealthWatch was already subject to potential delisting from
Nasdaq because it did not meet the $2,000,000 minimum net tangible assets
requirements of the continued listing criteria. Recognizing the possibility of
delisting, the HealthWatch board of directors determined that the delay that
would be caused by seeking a stockholder vote would be materially detrimental
to HealthWatch. With advise from counsel, they structured the Series P
Preferred so that it would only become convertible into HealthWatch common
stock if stockholder approval of its conversion was received at a later date.
In this manner, the parties were able to quickly close the PHE transaction.
Because stockholder approval was necessary to give conversion rights to the PHE
stockholders with respect to the Series P Preferred, the board of directors
agreed to bring the issue of approving the conversion feature set forth in the
Certificate of Designation to the HealthWatch stockholders at the next
appropriate meeting. Consequently, the board of directors has included this
Proposal to be considered and approved by HealthWatch's stockholders at this
special meeting.
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Terms of the Series P Preferred
Dividends. The Certificate of Designation originally provided for dividends
to be paid at a rate of 12% per annum from the date of issuance through January
31, 1999. If the holders of the Series P Preferred were not granted the right
to convert their shares into shares of HealthWatch common stock prior to
February 1, 1999, the dividends were to accrue at the rate of 18% per annum
from February 1 through August 1, 1999. If the holders of the Series P
Preferred were not granted the right to convert their shares into shares of
HealthWatch common stock prior to August 1, 1999, the dividends were to accrue
at the rate of 24% per annum from August 1, 1999 thereafter. In connection with
the Series D Preferred offering describe in proposal 3, the holders of the
Series P Preferred agreed to make amendments to the terms of the Series P
Preferred including a change in the dividend rate. Therefore, the Certificate
of Designation has been amended to reflect a dividend rate of 8% per annum
retroactive to the effective date of issuance and provides that HealthWatch may
pay this dividend in cash or in shares of HealthWatch common stock at
HealthWatch's option. The dividends are paid semi-annually, on June 30 and
December 31 of each year, and are cumulative.
Liquidation Value. The Series P Preferred has a liquidation value of $50.00
per share, plus any accrued and unpaid dividends. The shares of Series P
Preferred have preference over the HealthWatch common stock in the event of
liquidation, dissolution or winding up of HealthWatch, but are junior to the
Series A, Series C and Series D Preferred Stock described in Proposal No. 3.
Conversion. If approved by the stockholders of HealthWatch at the
HealthWatch special meeting, each share of the Series P Preferred shall be
convertible, at the option of each holder, into ten (10) shares of HealthWatch
common stock.
Voting Rights. Except to the extent otherwise required by law, the holders
of the Series P Preferred generally have no voting rights. However, if any
dividends on the Series P Preferred have not been paid for a period of one year
or more, the holders of the Series P Preferred will, until such dividends have
been paid, be entitled, with the holders of HealthWatch common stock voting as
a class, to vote for the election of directors, with the number of votes per
share of the Series P Preferred in such election to be equal to the vote of 10
shares of HealthWatch common stock.
As explained above, the Series P Preferred was issued in October 1998 in
connection with HealthWatch's acquisition of PHE. This Proposal No. 4 relates
to the approval of the terms upon which the Series P Preferred would become
convertible into common stock of HealthWatch. The HealthWatch board of
directors is not asking the stockholders to approve any other terms of the
Series P Preferred. If the stockholders vote "Against" this Proposal No. 4, the
Series P Preferred will remaining outstanding, but the holders of the Series P
Preferred will not have the right to convert any shares of Series P Preferred
into HealthWatch common stock. If this Proposal 4 is not approved by the
stockholders, HealthWatch reserves the right to bring the same proposal before
the stockholders at a subsequent meeting.
Potential Conflicts of Interest; Reasons for Board Approval of Proposal No. 4.
Paul W. Harrison, Chairman, President and Chief Executive Officer of
HealthWatch, owns 25,080 shares of the Series P Preferred and David M. Engert,
Chief Operating Officer of HealthWatch, owns 3,177 shares of the Series P
Preferred. If the proposal is approved, Mr. Harrison will be entitled to
convert his shares of Series P Preferred into 250,080 shares of HealthWatch
common stock and Mr. Engert will be entitled to convert his shares of Series P
Preferred into 31,770 shares of HealthWatch common stock. Assuming all 66,886
shares of Series P Preferred are converted into 668,860 shares of common stock,
Messrs. Harrison's and Engert's beneficial ownership would increase from 11.46%
to 14.59% and 3.03% to 3.25%, respectively. These numbers do not include any
shares of HealthWatch common stock that would be received in connection with
the merger.
Other holders of Series P Preferred may also be deemed affiliates of
HealthWatch because of their family relationship with Mr. Harrison or their
employment by HealthWatch. If all Series P Preferred held by all
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possible HealthWatch affiliates were converted as of December 31, 2000, such
possible affiliates would beneficially hold 1,039,890 shares of HealthWatch
common stock, or 34% of the outstanding HealthWatch common stock, including
shares they currently hold and options and warrants exercisable within 60 days.
This number does not include any shares of HealthWatch common stock that would
be received in connection with the merger.
The board of directors was aware of these relationships and considered them,
among other factors, in making its recommendation to the stockholders that the
stockholders approve the conversion of the Series P Preferred into HealthWatch
common stock.
In approving this Proposal No. 4 and recommending its approval to the
HealthWatch stockholders, the board of directors of HealthWatch considered,
among others, the following factors:
. In negotiating the PHE acquisition in 1998, the independent directors of
the HealthWatch board of directors at that time approved the inclusion of
this feature. Therefore, in making recommendations to the stockholders,
the current board of directors felt it important that HealthWatch comply
with the terms of that previously negotiated deal.
. The conversion of all of the Series P Preferred into HealthWatch common
stock would provide HealthWatch cash savings of approximately $250,000 a
year by halting the accrual of dividends on such preferred. Therefore,
while it is not clear all the Series P Preferred will be converted
immediately given that the decision to convert is in the Series P
stockholder hands, it is assumed that some number of shares would be
converted each year resulting in cash shavings.
. The conversion of the Series P Preferred would provide additional public
float for trading of HealthWatch's common stock. The HealthWatch board of
directors believes that the addition of these shares would improve
trading volumes, therefore, providing additional liquidity to the current
stockholders.
. The conversion of the Series P Preferred would also simplify and
strengthen the capital structure of HealthWatch.
No particular weight was assigned to the above factors.
Required Vote and Related Matters
The affirmative vote of a majority of the voting power present or
represented by proxy at the HealthWatch special meeting and entitled to vote
thereon is required to approve the conversion of the Series P Preferred into
HealthWatch common stock.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 4.
LEGAL MATTERS
Gambrell & Stolz, L.L.P., counsel to HealthWatch, will issue an opinion
about the validity of the shares of HealthWatch common stock to be issued by
HealthWatch pursuant to the merger. Certain tax matters will be passed upon by
Gambrell & Stolz, L.L.P. and Gomel & Davis, L.L.P.
STOCKHOLDER PROPOSALS
Pursuant to Rule 14a-8 under the Exchange Act, stockholders may present
proper proposals for inclusion in a company's proxy statement and for
consideration at the next annual meeting of its stockholders by submitting
their proposals to the company in a timely manner.
HealthWatch. Stockholder proposals for inclusion in the proxy statement of
HealthWatch to be issued in connection with the 2001 Annual Meeting of
HealthWatch stockholders must be mailed to HealthWatch, Inc., 1100 Johnson
Ferry Road, Suite 670, Atlanta, Georgia 30342, Attn: Corporate Secretary and
must be received by the Corporate Secretary on or before April 30, 2001.
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Halis. Stockholder proposals for inclusion in the proxy statement of Halis
to be issued in connection with the 2001 Annual Meeting of Halis stockholders
must be mailed to Halis, Inc., 1100 Johnson Ferry Road, Suite 670, Atlanta,
Georgia 30342, Attn: Corporate Secretary, and must be received by Halis on or
before April 15, 2001. In the event the merger is consummated, there will not
be a 2001 Annual Meeting of Halis stockholders.
DISCLOSURE OF COMMISSION'S POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling
HealthWatch pursuant to the provision set forth in the HealthWatch Articles of
Incorporation, HealthWatch has been informed that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act of 1933 and is therefore
unenforceable.
WHERE YOU CAN FIND MORE INFORMATION
HealthWatch and Halis file annual, quarterly and current reports, proxy
statements and other information with the Securities and Exchange Commission.
You may read and copy any reports, statements or other information filed by
either company at the Securities and Exchange Commission's public reference
rooms at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the following regional offices of the Securities and Exchange Commission:
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661;
and 7 World Trade Center, Suite 1300, New York, New York 10048. Please call the
Securities and Exchange Commission at 1-800-SEC-0330 for further information on
the public reference rooms. The companies' filings are also available to the
public from commercial document retrieval services and at the Internet web site
maintained by the Securities and Exchange Commission at http://www.sec.gov.
HealthWatch filed a registration statement on Form S-4 to register with the
Securities and Exchange Commission the HealthWatch common stock to be issued to
Halis stockholders in the merger. This joint proxy statement/prospectus is a
part of that registration statement and constitutes a prospectus of HealthWatch
in addition to being a proxy statement for HealthWatch and Halis for their
special meetings of stockholders. This joint proxy statement/prospectus
summarizes some of the documents that are attached to this registration
statement, and you should refer to the exhibits attached hereto for a more
complete understanding of the matters covered by those documents.
HEALTHWATCH SECURITIES AND EXCHANGE COMMISSION FILINGS (FILE NO. 000-11476)
1. Annual Report on Form 10-KSB for the fiscal year ended June 30, 2000;
2. Quarterly Reports on Form 10-QSB for the quarters ended March 31, 2000,
September 30, 2000 and December 31, 2000;
3. Current Reports on Form 8-K dated January 3, 2000 and June 25, 1999; and
4. Definitive Proxy Statement on Schedule 14A filed as of June 20, 2000 with
regard to the description of Management, Executive Compensation and Certain
Relationships and Related Transactions.
HALIS SECURITIES AND EXCHANGE COMMISSION FILINGS (FILE NO. 000-16288)
1. Annual Report on Form 10-KSB for the fiscal year ended December 31, 1999;
2. Quarterly Reports on Form 10-QSB for the quarters ended March 31, 2000,
June 30, 2000 and September 30, 2000; and
3. Current Reports on Form 8-K filed February 11, 1999, January 12, 1999,
January 13, 1999 and January 15, 1999.
HealthWatch has supplied all information contained in this joint proxy
statement/prospectus relating to HealthWatch and Halis has supplied all such
information relating to Halis.
129
INDEX TO FINANCIAL STATEMENTS
HealthWatch, Inc. and Subsidiaries
Report of Independent Auditors............................................ F-2
Consolidated Balance Sheet as of June 30, 2000............................ F-3
Consolidated Statements of Operations for the Years Ended June 30, 2000
and 1999................................................................. F-4
Consolidated Statements of Cash Flows for the Years Ended June 30, 2000
and 1999................................................................. F-5
Consolidated Statements of Shareholders' Equity for the Years Ended June
30, 2000 and 1999........................................................ F-7
Notes to Consolidated Financial Statements for the Years Ended June 30,
2000 and 1999............................................................ F-8
Unaudited Consolidated Balance Sheet as of December 31, 2000.............. F2-2
Unaudited Consolidated Statements of Operations for the Three Months Ended
December 31, 2000 and 1999............................................... F2-3
Unaudited Consolidated Statements of Operations for the Six Months Ended
December 31,
2000 and 1999............................................................ F2-4
Unaudited Consolidated Statements of Cash Flows for the Six Months Ended
December 31, 2000 and 1999............................................... F2-5
Unaudited Notes to Consolidated Financial Statements for the Six Months
Ended December 31, 2000.................................................. F2-6
Halis, Inc. and Subsidiaries
Report of Independent Auditors............................................ F3-2
Consolidated Balance Sheet as of December 31, 2000........................ F3-3
Consolidated Statements of Operations for the Years Ended December 31,
2000 and 1999............................................................ F3-4
Consolidated Statements of Cash Flows for the Years Ended December 31,
2000 and 1999............................................................ F3-5
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 2000 and 1999............................................... F3-6
Notes to Consolidated Financial Statements for the Years Ended December
31, 2000 and 1999........................................................ F3-7
130
HEALTHWATCH, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS
TABLE OF CONTENTS
Page
----
Independent Auditors' Report............................................... F-2
Consolidated Balance Sheet................................................. F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statements of Cash Flows...................................... F-5
Consolidated Statements of Shareholders' Equity............................ F-7
Notes to Consolidated Financial Statements................................. F-8
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
HealthWatch, Inc.
We have audited the accompanying consolidated balance sheet of HealthWatch,
Inc. and subsidiaries as of June 30, 2000, and the related consolidated
statements of operations, shareholders' equity, and cash flows for the years
ended June 30, 2000 and 1999. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
HealthWatch, Inc. and subsidiaries as of June 30, 2000, and the results of
their operations and their cash flows for the years ended June 30, 2000 and
1999 in conformity with generally accepted accounting principles.
As described in Note O to the financial statements, the effects of
beneficial conversion features relating to the Series D and Series P preferred
stock, interest costs associated with short-term financing, and amortization
expense related to a reduction in the life of an intangible asset were not
recorded in the financial statements. Adjustments have been made to interest
expense, amortization expense, intangible assets, additional paid-in capital,
accumulated deficit, and related per share amounts to correct the errors.
/s/ Tauber & Balser, P.C.
Atlanta, Georgia
September 26, 2000 (except
as to Note O, which date is
as of April 5, 2001)
F-2
HEALTHWATCH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, 2000
ASSETS
------
CURRENT ASSETS
Cash........................................................... $ 16,264
Accounts receivable, net of allowance for doubtful accounts of
$17,698....................................................... 34,539
Marketable securities.......................................... 3,935,500
Inventory...................................................... 35,477
Other current assets........................................... 266,293
------------
TOTAL CURRENT ASSETS......................................... 4,288,073
------------
OTHER ASSETS
Property and equipment, net.................................... 15,054
Investment in and advances to HALIS, Inc....................... 2,211,487
Intangible assets, net......................................... 886,772
Other assets................................................... 38,560
------------
TOTAL OTHER ASSETS........................................... 3,151,873
------------
TOTAL ASSETS............................................... $ 7,439,946
============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable............................................... $ 277,365
Accrued expenses............................................... 229,679
Deferred revenue............................................... 8,490
Debentures payable............................................. 25,000
------------
TOTAL LIABILITIES (ALL CURRENT).............................. 540,534
------------
SHAREHOLDERS' EQUITY
Cumulative preferred stock, 1,000,000 shares authorized, $.05
par value: $11,182,300 liquidation preference:
Series A, 5,000 shares issued and outstanding................. 250
Series P, 66,886 shares issued and outstanding................ 3,344
Series C, 4,000 shares issued and outstanding................. 200
Series D, 74,130 shares issued and outstanding................ 3,707
Common stock, $.05 par value; 10,000,000 shares authorized;
2,142,751 shares issued and outstanding....................... 107,137
Additional paid-in capital..................................... 32,650,261
Accumulated deficit............................................ (25,752,087)
Accumulated other comprehensive loss, net unrealized investment
losses........................................................ (113,400)
------------
TOTAL SHAREHOLDERS' EQUITY................................... 6,899,412
------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................. $ 7,439,946
============
(The accompanying notes are an integral part of these consolidated financial
statements)
F-3
HEALTHWATCH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended June 30, 2000 and 1999
2000 1999
----------- -----------
SALES................................................ $ 551,682 $ 1,220,803
COST OF SALES........................................ 193,952 940,950
----------- -----------
GROSS PROFIT....................................... 357,730 279,853
----------- -----------
OPERATING COSTS AND EXPENSES
Selling, general and administrative................ 1,964,127 1,320,500
Depreciation and amortization...................... 442,795 400,910
Research and development........................... 136,780 286,921
----------- -----------
2,543,702 2,008,331
----------- -----------
OPERATING LOSS....................................... (2,185,972) (1,728,478)
----------- -----------
OTHER INCOME (EXPENSE)
Loss from investment in HALIS, Inc................. (523,450) (23,702)
Other-than-temporary decline in value of investment
in HALIS, Inc..................................... (472,810) --
Loss from impairment of intangible assets.......... (213,286) --
Interest income.................................... 110,606 --
Interest expense................................... (455,875) (67,659)
----------- -----------
(1,554,815) (91,361)
----------- -----------
LOSS BEFORE INCOME TAXES AND EXTRAORDINARY ITEM...... (3,740,787) (1,819,839)
INCOME TAX BENEFIT................................... 66,000 --
----------- -----------
LOSS BEFORE EXTRAORDINARY ITEM....................... (3,674,787) (1,819,839)
EXTRAORDINARY ITEM - GAIN ON EXTINGUISHMENT OF DEBT
(NET OF INCOME TAX OF $66,000)...................... 99,405 --
----------- -----------
NET LOSS............................................. $(3,575,382) $(1,819,839)
=========== ===========
BASIC AND DILUTED NET LOSS PER COMMON SHARE
Loss before extraordinary item..................... $(3,674,787) $(1,819,839)
Less preferred stock dividends (undeclared)........ 425,304 269,358
Less amortization of beneficial conversion option
on Series D and Series P preferred stock.......... 1,884,700 234,770
----------- -----------
Loss available to common shareholders.............. (5,984,791) (2,323,967)
Extraordinary item................................. 99,405 --
----------- -----------
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS............ $(5,885,386) $(2,323,967)
=========== ===========
NET LOSS PER COMMON SHARE, BASIC AND DILUTED
Loss before extraordinary item..................... $ (3.89) $ (4.32)
Extraordinary item ................................ .07 --
----------- -----------
Net loss........................................... $ (3.82) $ (4.32)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING......................................... 1,538,924 537,972
=========== ===========
(The accompanying notes are an integral part of these consolidated financial
statements)
F-4
HEALTHWATCH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30, 2000 and 1999
2000 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss............................................ $(3,575,382) $(1,819,839)
----------- -----------
Adjustments:
Depreciation....................................... 18,163 19,196
Amortization....................................... 424,632 381,714
Loss on disposal of equipment...................... 4,757 --
Loss from investment in HALIS, Inc................. 523,450 23,702
Decline in value of investment in HALIS, Inc....... 472,810 --
Loss from impairment of intangible assets.......... 213,286 --
Common stock issued for services................... 474,987 --
Interest expense from issuance of warrants in
connection with short-term financing.............. 419,551 --
Gain on extinguishment of debt..................... (165,405) --
Changes in:
Accounts receivable............................... 63,369 86,507
Inventory......................................... 48,387 288,409
Other current assets.............................. (256,362) 13,782
Other assets...................................... (4,550) (24,759)
Accounts payable.................................. 91,741 (179,043)
Accrued expenses.................................. (257,190) 144,224
Deferred revenue.................................. (20,040) (8,434)
----------- -----------
Total adjustments................................ 1,950,450 674,390
----------- -----------
Net cash used in operating activities.......... (1,523,796) (1,074,541)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment.................. (15,178) (11,198)
Purchase of HALIS, Inc. stock....................... (1,000,000) (157,741)
Purchase of marketable securities................... (4,000,000) --
Increase in due from HALIS, Inc..................... (287,712) (150,364)
Purchase of intangible assets, capitalized MERAD
Technology costs................................... (217,496) --
----------- -----------
Net cash used in investing activities.......... (5,520,386) (319,303)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of debentures payable..................... -- (100,000)
Proceeds from issuance of preferred stock, net of
stock issue costs of $842,353...................... 6,962,522 --
Proceeds from issuance of common stock.............. 50,000 661,300
Proceeds from exercise of warrants.................. 26,178 --
----------- -----------
Net cash provided by financing activities...... 7,038,700 561,300
----------- -----------
NET DECREASE IN CASH................................. (5,482) (832,544)
CASH, BEGINNING OF YEAR.............................. 21,746 854,290
----------- -----------
CASH, END OF YEAR.................................... $ 16,264 $ 21,746
=========== ===========
(The accompanying notes are an integral part of these consolidated financial
statements)
F-5
HEALTHWATCH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
For the Years Ended June 30, 2000 and 1999
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest........................................ $20,725 $25,601
======= =======
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the year ended June 30, 2000:
The debenture holders converted debt of $455,000 and interest of $139,356
into 316,990 shares of common stock of the Company.
The Company issued 28,417 shares of common stock valued at $53,283 for
payment of additional consideration due to PHE shareholders which was
accrued at June 30, 1999.
The Company issued 97,334 shares of common stock valued at $182,500 to
Paul W. Harrison, HealthWatch's Chairman and CEO, for payment of
$117,500 of current services performed by Mr. Harrison and a $65,000
loan due to Mr. Harrison.
The Company borrowed $48,900 from a financial institution in connection
with its marketable securities acquisition, and this margin loan is
included in accounts payable as of June 30, 2000.
The Company accrued liabilities of $20,420 and increased its carrying
value of the MERAD Technology for additional consideration associated
with the acquisition of MERAD Software, Inc.
The Company issued 229,000 shares of its common stock through the
cashless exercise of warrants, of which 177,200 shares were returned to
the Company to facilitate the transaction.
During the year ended June 30, 1999:
The Company issued 97,680 shares of common stock valued at $448,436 to
MERAD Software, Inc. (formerly Paul Harrison Enterprises, Inc.) prior to
its acquisition by the Company in exchange for 1,400,000 shares of
HALIS, Inc. common stock.
The Company issued 66,886 shares of Series P preferred stock valued at
$2,560,000 for 6,177,010 shares of HALIS, Inc. common stock valued at
$868,488, 177,680 shares of its own common stock valued at $710,720
which was retired, other assets valued at $80,628, and the MERAD
Technology valued at $900,164 in connection with the acquisition of
MERAD Software, Inc. (formerly Paul Harrison Enterprises, Inc.).
The Company accrued liabilities of $94,437 and increased its carrying
value of the MERAD Technology for additional consideration associated
with the acquisition of MERAD Software, Inc.
The Company received 1,824,645 shares of HALIS, Inc. common stock valued
at $157,741 in exchange for a note receivable from HALIS, Inc.
(The accompanying notes are an integral part of these consolidated financial
statements)
F-6
HEALTHWATCH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended June 30, 2000 and 1999
Accumulated
Preferred Stock Common Stock Additional Other Total
------------------- -------------------- Paid-in Accumulated Comprehensive Shareholders'
Shares Amount Shares Amount Capital Deficit Loss Equity
--------- -------- ---------- -------- ----------- ------------ ------------- -------------
Balance at June 30,
1998 as previously
reported............... 1,145,000 $ 11,450 2,420,721 $ 24,207 $18,895,757 $(18,237,396) $ -- $ 694,018
One-for-five reverse
stock split............ (916,000) -- (1,936,577) -- -- -- -- --
--------- -------- ---------- -------- ----------- ------------ --------- -----------
Balance at June 30,
1998 as adjusted....... 229,000 11,450 484,144 24,207 18,895,757 (18,237,396) -- 694,018
Net loss............... -- -- -- -- -- (1,819,839) -- (1,819,839)
Series P preferred
stock issued in private
offering............... 66,886 3,344 -- -- 2,556,656 -- -- 2,560,000
Common stock purchased
and retired............ -- -- (177,680) (8,884) (701,836) -- -- (710,720)
Common stock issued.... -- -- 241,991 12,100 612,900 -- -- 625,000
Common stock issued in
stock exchange......... -- -- 97,680 4,884 443,552 -- -- 448,436
Common stock options
exercised.............. -- -- 11,000 550 35,750 -- -- 36,300
Amortization of
discount related to
beneficial conversion
option on Series P
preferred stock........ -- -- -- -- 234,770 (234,770) -- --
--------- -------- ---------- -------- ----------- ------------ --------- -----------
Restated balance at
June 30, 1999.......... 295,886 14,794 657,135 32,857 22,077,549 (20,292,005) -- 1,833,195
Comprehensive Loss:
Net loss.............. -- -- -- -- -- (3,575,382) -- (3,575,382)
Unrealized holding
loss on marketable
securities............ -- -- -- -- -- -- (113,400) (113,400)
-----------
Total Comprehensive
Loss................... (3,688,782)
-----------
Conversion of
substantially all
Series A preferred
stock.................. (224,000) (11,200) 734,908 36,745 (25,545) -- -- --
Common stock issued.... -- -- 367,957 18,398 733,994 -- -- 752,392
Conversion of
debentures and related
interest payable....... -- -- 316,990 15,849 578,507 -- -- 594,356
Common stock warrants
issued in connection
with short-term
financing.............. -- -- -- -- 419,551 -- -- 419,551
Common stock warrants
exercised.............. -- -- 242,961 12,148 14,030 -- -- 26,178
Common stock retired in
cashless exercise of
warrants............... -- -- (177,200) (8,860) 8,860 -- -- --
Series C preferred
stock issued in private
offering............... 4,000 200 -- -- 374,800 -- -- 375,000
Series D preferred
stock issued in private
offering............... 74,130 3,707 -- -- 6,583,815 -- -- 6,587,522
Amortization of
discount related to
beneficial conversion
option on Series D and
Series P preferred
stock.................. -- -- -- -- 1,884,700 (1,884,700) -- --
--------- -------- ---------- -------- ----------- ------------ --------- -----------
Balance at June 30,
2000................... 150,016 $ 7,501 2,142,751 $107,137 $32,650,261 $(25,752,087) $(113,400) $ 6,899,412
========= ======== ========== ======== =========== ============ ========= ===========
(The accompanying notes are an integral part of these consolidated financial
statements)
F-7
HEALTHWATCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 and 1999
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Business
HealthWatch, Inc. was founded in 1983 and has evolved from a supplier of
noninvasive vascular diagnostic medical instruments including a proprietary
device used to monitor and control intravenous ("IV") drug infusion to
hospitals and medical clinics throughout the United States into primarily a
software information technology ("IT") company. The Company's virtual software
application utility (the "MERAD Technology") utilizes an advanced multi-media
object and relational database which creates knowledge objects that can be used
and reused in virtually unlimited number of combinations to provide efficient
applications that can be accessed in both an Internet and Intranet environment.
Headquartered in Atlanta, Georgia, HealthWatch has research and development,
marketing, sales and support capabilities in the healthcare IT sector.
During fiscal 2000, the Company raised additional capital through private
placements to begin the implementation of its business plan. The Company's
objective is to become a leading provider of web-based applications to process
and manage transactions for physician offices, hospitals, outpatient clinics,
and other healthcare providers. As part of this plan, the Company will offer
and market an enterprise software solution, known as the Healthcare Enterprise
System (the "HES System"), which is owned by HALIS, Inc. ("HALIS"), an
affiliated information technology company that is approximately 25% owned by
HealthWatch (see Note B). The HES System uses proprietary technology to
distribute, in a compressed digital format, one system that includes over 50
integrated applications for the management of a healthcare enterprise's
resources, patient data, clinical data, and finances. The HES System was
designed and built using the Company's software application utility, the "MERAD
Technology." As provided in a Business Collaboration Agreement between
HealthWatch and HALIS, HealthWatch has granted HALIS a non-exclusive license
for the use of the MERAD Technology, while HALIS has granted HealthWatch a non-
exclusive license to market the HES System. Revenue sharing provisions from the
sale of the HES System are specified in the agreement. Through June 30, 2000,
no significant revenues have been realized by the Company through the sale of
the HES System as the Company has refocused its efforts to upgrading the
enterprise software solution to market and facilitate a web based enterprise
solution in an Internet environment. The Company has recently completed the
upgrade of the HES System and plans to introduce the new Internet version into
the market in the second quarter of fiscal 2001.
Principles of Consolidation and Accounting for Investee
The consolidated financial statements include the accounts of HealthWatch,
Inc. and the Company's wholly owned subsidiaries MERAD Software, Inc. and
HealthWatch Technologies, Inc. and their wholly owned subsidiaries,
respectively. HealthWatch's investment in a company in which it has the ability
to exercise significant influence over operating and financial policies is
accounted for under the equity method. Accordingly, HealthWatch's share of the
net losses of this company is included in consolidated net loss. Beginning
January 29, 1999, HealthWatch's investment in HALIS was accounted for under the
equity method. Prior to this date, the Company accounted for its available-for-
sale investment in HALIS, Inc. at its fair value. All significant intercompany
balances and transactions have been eliminated in consolidation.
Marketable Securities
The Company's investments in debt securities, which principally mature in
two to five years, consist of corporate debt securities that are classified as
available-for-sale. The aggregate fair value at June 30, 2000 was $3,935,500.
Unrealized holding losses on these securities were $113,400 at June 30, 2000
and were recorded as a separate component of shareholders' equity.
F-8
HEALTHWATCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company evaluates its marketable securities to determine whether a
decline in market value below cost as of the balance sheet date of an
individual security is other than temporary. If the decline is judged to be
other than temporary, the cost basis of the individual security is written down
to a new cost basis and the amount of the write-down is accounted for as a
realized loss. Various factors are considered by the Company in evaluating
declines in market values, including general market conditions and specific
information pertaining to an industry or an individual company. Examples of
these factors are a) the length of time and the extent to which the market
value has been less than cost, b) the financial condition and near-term
prospects of the issuer, including specific events that may influence the
operations of the issuer, and c) the intent and ability of the Company to
retain its investment in the issuer for a period of time sufficient to allow
for any anticipated recovery in market value.
Inventory
Inventory is recorded at the lower of cost (determined on a first-in, first-
out basis) or market. During fiscal 2000 and 1999, approximately $35,000 and
$188,000 of inventory, respectively, was charged to operations--cost of sales
as the products were determined to be obsolete.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets.
Expenditures for additions and improvements are capitalized, while repairs and
maintenance are expensed as incurred.
Long-Lived Assets
HealthWatch evaluates the carrying value of long-lived assets, including
intangibles, whenever events or changes in circumstances indicate that the
carrying value of the asset may be impaired. An impairment loss is recognized
when estimated undiscounted future cash flows expected to result from the use
of the asset, including disposition, is less than the carrying value of the
asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying value exceeds the
fair value of the assets, as measured by discounted cash flows over the
remaining life of the assets.
Capitalization of MERAD Technology Costs
The Company has capitalized direct costs incurred in the modification of its
MERAD Technology, giving it Internet application ability. In accordance with
SFAS No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased,
or Otherwise Marketed", these costs have been capitalized beginning at the
point that technological feasibility of the modification was established
through the period to when the product is available for general release to
customers. These costs will be amortized over a period of five years on a
straight-line basis, and amortization will commence when the related software
product is available for market release.
Stock-Based Compensation
The Company records compensation expense in conjunction with the issuance of
its common stock and stock warrants for various consulting services in
accordance with SFAS No. 123, "Accounting for Stock-Based Compensation." Under
SFAS No. 123, stock-based compensation for non-employees is recorded at the
fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable.
F-9
HEALTHWATCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Net Loss Per Share
The Company has adopted SFAS No. 128, "Earnings Per Share," which requires
basic and dilutive earnings per share presentation. Basic loss per share is
computed as net loss available to common shareholders divided by the weighted
average number of common shares outstanding for the period. Diluted earnings
per share reflects the potential dilution that could occur from common shares
issuable through stock options, stock warrants, and convertible debt and stock.
As the Company's stock options, stock warrants, and convertible debt and stock
are antidilutive for all periods presented, dilutive loss per share is the same
as basic loss per share.
At June 30, 2000 and 1999, outstanding stock options, stock warrants, and
convertible debt and stock to purchase 9,620,800 and 4,555,353 shares,
respectively, of the Company's common stock were not included in the
computation of diluted loss per share as their effect would be antidilutive.
Revenue Recognition
HealthWatch recognizes revenue from product sales at the time ownership
transfers to the customer, principally, at shipment. Revenues from service
contracts are generally recognized on the straight-line basis over the life of
the contracts, which are principally 12 months. Deferred revenue represents
amounts received on service contracts but not yet earned.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
will require that all derivative financial instruments be recognized as either
assets or liabilities on the balance sheet. In June 1999, the FASB issued SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities--
Deferral of the Effective Date of SFAS No. 133," which deferred the
implementation of SFAS No. 133. SFAS No. 133 will be effective for the
Company's first quarter of fiscal 2001. Management does not anticipate that the
implementation of SFAS No. 133 will have a material effect on the Company's
financial statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101") which provides guidelines in
applying generally accepted accounting principles to certain revenue
recognition issues. Subsequently, the SEC has issued related guidance which has
extended the implementation date of SAB 101 until the fourth quarter of 2000.
The Company does not expect this statement to have a significant impact on its
financial position, earnings or cash flows.
In March 2000, the Emerging Issues Task Force ("EITF") reached a consensus
on Issue 99-19, "Reporting Revenue Gross as a Principal Verses Net as an
Agent," which provides clarification on whether a company should report revenue
based on (a) the gross amount billed to a customer because it has earned
revenue from the sale of the goods or services or (b) the net amount retained
(that is, the amount billed to the customer less the amount paid to a supplier)
because it has earned a commission or fee. The Company does not expect this
issue to have a significant impact on the Company's financial position,
earnings or cash flows.
Reclassifications
Certain reclassifications have been made to the 1999 consolidated financial
statements to conform to the 2000 consolidated financial statement
presentation.
F-10
HEALTHWATCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE B--INVESTMENT IN AND ADVANCES TO HALIS, INC.
At June 30, 2000, the Company owned 15,763,655 shares of HALIS, for an
approximate 25% ownership interest. HALIS is engaged in the business of
providing information technology applications and services to the healthcare
industry. The Company has accounted for its investment in HALIS under the
equity method. At June 30, 2000, the HALIS stock was trading on the NASDAQ OTC
Bulletin Board at a price per share of $.0625, for an aggregate value of
$985,228. Management evaluated the carrying value of the Company's investment
in HALIS at June 30, 2000 and determined that there was an other than temporary
decline in value of $472,810. The fair value of each Halis common share was
estimated to be approximately $.11. This value was computed by dividing the
trading price of HealthWatch's common stock at the commitment date of the
merger by the number of HALIS shares exchanged for one share of HealthWatch
common stock. As a result, a loss in value of $472,810 has been recognized as a
separate component in the consolidated statements of operations. The
investment's carrying value at June 30, 2000 was $1,773,411.
The carrying value of the investment in HALIS under the equity method
exceeded the 25% equity in the underlying net assets of HALIS at June 30, 2000
by $1,773,411. This excess of the investment over the 25% equity in the
underlying net assets of HALIS is being amortized on the straight-line method
over a period of ten years.
In October 1997, HealthWatch and HALIS entered into a Business Collaboration
Agreement. Under the Business Collaboration Agreement, HealthWatch has granted
HALIS a non-exclusive license to HealthWatch's information technology software
in exchange for a ten percent (10%) commission on sales of products or services
incorporating such software. Additionally, HALIS has granted HealthWatch a non-
exclusive license to market the HES System or other HALIS products in exchange
for a ten percent (10%) commission on all revenues received from sales or
services relating to such products. The Company recognizes commission revenue
or commission expense at the time a product is sold or a service is performed
that is covered under the agreement. For the years ended June 30, 2000 and
1999, the Company earned $21,936 and $66,087, respectively, in commission
income from HALIS under this agreement. As of June 30, 2000, no commission
expense had been incurred under this agreement.
The agreement provides for the sharing of certain operating expenses, among
other things. During fiscal 1999 and 2000, HealthWatch and HALIS shared office
space and had a cost sharing arrangement relating to key personnel that
required HealthWatch to pay HALIS a calculated amount each month based upon a
reasonable cost basis of services provided. Pursuant to this arrangement,
through December 1999, HALIS maintained a principal office in Atlanta, Georgia
and HealthWatch shared those facilities. Throughout that period, HealthWatch
made payments to HALIS for rent and other related operating expenses based on a
percent of the facilities used by HealthWatch to the total facilities used by
both companies. Included in these payments was also a nominal amount for shared
personnel expenses. Beginning January 1, 2000, HealthWatch is now the primary
lessor of the principal office facilities in Atlanta. HALIS is now sharing
these facilities under a similar agreement. To date, no monthly payment amount
has been determined; however, the parties intend to negotiate a payment by
HALIS to HealthWatch that will be designed to reflect the relative usage of
each party of the facilities and personnel. During fiscal 2000 and 1999, the
Company expensed and paid HALIS approximately $50,000 and $180,000,
respectively, for expense reimbursements under this agreement.
In September 2000, the Business Collaboration Agreement was amended to
provide, among other things, for revenue sharing based on a 60/40 split (i.e.
the selling company would received 60% of the sales price and the company that
owns the technology would received 40% of the sales price). Furthermore,
HealthWatch is obligated to pay HALIS a collaboration fee of $50,000 per month
which shall be applied as a credit against any revenue sharing amount that is
due to HALIS. HALIS is obligated to provide support to HealthWatch for the
HALIS software products, provide reasonable product enhancement as part of
product release updates and
F-11
HEALTHWATCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
cooperate with HealthWatch with regard to product enhancement requests.
HealthWatch may terminate the $50,000 monthly collaboration fee payable to
HALIS on or after October 1, 2001, under certain terms and conditions.
Due from HALIS represents amounts due from HALIS for its portion of shared
operating expenses, amounts owed to the Company for unpaid royalties due on the
MERAD Technology, and amounts advanced to HALIS for working capital purposes.
At June 30, 2000, the amount due from HALIS was $438,076. The Company is unable
to determine the fair value of these advances because of the financial
condition of HALIS as discussed above.
At June 30, 2000, the components of investment in and advances to HALIS,
Inc. was as follows:
Investment in HALIS, Inc. ..................................... $1,773,411
Advances to HALIS, Inc. ....................................... 438,076
----------
Total........................................................ $2,211,487
==========
NOTE C--SUBSEQUENT MERGER OF HEALTHWATCH, INC. AND HALIS, INC.
On June 29, 2000, the Company entered into an Agreement and Plan of Merger
with HALIS, by which the Company will issue approximately 2,300,000 registered
shares of its common stock in exchange for all of the outstanding shares of
HALIS (an exchange ratio of one share of HealthWatch common stock for twenty
shares of HALIS common stock). With the completion of this transaction, HALIS
will become a wholly-owned subsidiary of the Company. The total consideration
has been valued at $5,247,607 as of June 30, 2000, which is comprised of the
fair value of the HealthWatch shares issued in the transaction, or $3,036,120
(2,265,761 shares at the trading price at June 30, 2000 of $1.34 per share),
plus the book value of HealthWatch's investment in and advances to HALIS at
June 30, 2000, or $2,211,487. A pro forma balance sheet (unaudited) has been
included herein as if the transaction occurred on June 30, 2000. A pro forma
statement of operations (unaudited) has been included herein as if the
transaction occurred at the beginning of the year, or July 1, 1999. The pro
forma information shows the elimination of all intercompany accounts and a
resulting intangible asset of $5,597,379 (total consideration less the fair
market value of the net tangible assets received in the merger). HealthWatch is
currently the single largest shareholder of HALIS, owning approximately 25% of
HALIS' issued and outstanding common stock, and has an option that expires on
September 29, 2000 to purchase up to an additional 25,000,000 shares of HALIS
at $.20 per share.
Under the Agreement and Plan of Merger, the holders of other convertible
securities (i.e., warrants and options) of HALIS will receive convertible
securities of the Company having similar terms and conditions. The transaction
is subject to shareholder approval and other customary conditions.
If either company terminates or withdraws from the merger agreement without
the consent of the other party, they may be liable to the non-terminating
party, under certain conditions, for $500,000 in liquidated damages.
The Company anticipates accounting for the acquisition under the purchase
method of accounting. In accordance with Staff Accounting Bulletin No. 97 ("SAB
97"), HealthWatch has been identified as the accounting acquirer since its
shareholders will hold the majority of the voting rights (approximately 66%) in
the combined company. The total voting rights include the voting rights of the
common shareholders and the Series C and Series D preferred shareholders (see
Note J).
F-12
HEALTHWATCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Under the purchase method of accounting, the assets and liabilities of HALIS
are recorded at their fair market value as of the date of the acquisition. The
excess purchase price over the fair market value of the net tangible assets
acquired has been identified as an intangible asset related to the HES
Technology and will be amortized over a five year period.
Summarized below is the unaudited condensed and pro forma consolidated
balance sheet and statement of operations. The balance sheet is prepared as if
the acquisition took place on June 30, 2000, and the statement of operations is
prepared as if the acquisition took place on July 1, 1999. The historical
financial statements of HALIS for the fiscal year ended June 30, 2000 have been
compiled from the 10-QSB's filed by HALIS for the appropriate periods. These
historical numbers are unaudited.
Pro Forma Condensed Consolidated Balance Sheet (Unaudited)
--------------------------------------------------------------------------------
Pro Forma Pro Forma
HealthWatch, Inc. HALIS, Inc. Acquisition Consolidating HealthWatch, Inc.
Consolidated Consolidated Adjustment Entries Consolidated
----------------- ------------ ----------- ------------- -----------------
Current assets.......... $4,288,073 $1,021,002 $ -- $ -- $ 5,309,075
Marketable equity
securities--related
party.................. 1,773,411 22,395 -- (1,795,806)(2) --
Property and equipment
net.................... 15,054 327,959 -- -- 343,013
Due from related party.. 438,076 -- -- (438,076)(3) --
Intangible assets, net.. 886,772 663,747 4,933,632(1) -- 6,484,151
Other assets............ 38,560 180,785 -- -- 219,345
---------- ---------- ---------- ----------- -----------
Total assets........... $7,439,946 $2,215,888 $4,933,632 $(2,233,882) $12,355,584
========== ========== ========== =========== ===========
Pro Forma Condensed Consolidated Balance Sheet (Unaudited)
--------------------------------------------------------------------------------
Pro Forma Pro Forma
HealthWatch, Inc. HALIS, Inc. Acquisition Consolidating HealthWatch, Inc.
Consolidated Consolidated Adjustment Entries Consolidated
----------------- ------------ ----------- ------------- -----------------
Current liabilities..... $ 540,534 $2,141,860 $ -- $ (438,076)(3) $ 2,244,318
Long-term obligations
under capital leases... -- 175,734 -- -- 175,734
---------- ---------- ---------- ----------- -----------
Total liabilities...... 540,534 2,317,594 -- (438,076) 2,420,052
Shareholders' equity.... 6,899,412 (101,706) 4,933,632(1) (1,795,806) 9,935,532
---------- ---------- ---------- ----------- -----------
Total liabilities and
equity................ $7,439,946 $2,215,888 $4,933,632 $(2,233,882)(2) $12,355,584
========== ========== ========== =========== ===========
--------
(1) To reflect the acquisition of HALIS as if the acquisition had occurred on
June 30, 2000 by recording an intangible asset for the excess of the
purchase price over the fair value of the net tangible assets acquired
($5,597,379) and eliminating HALIS' goodwill ($663,747). The total value of
the consideration is based on the trading value of the Company's stock as
of the measurement date of the transaction. The intangible asset recorded
in conjunction with the merger represents the total consideration
(2,265,761 shares of HealthWatch's common stock issued to HALIS
shareholders valued at the trading price at June 30, 2000 of $1.34 per
share, or $3,036,120, plus HealthWatch's investment in and advances to
HALIS at June 30, 2000 of $2,211,487), or $5,247,607, over the fair market
value of the net tangible assets acquired from HALIS (at June 30, 2000,
HALIS' liabilities exceeded the fair market value of its net tangible
assets by $349,772). The excess purchase price over the fair market value
of the net tangible assets acquired has been identified as the HES
Technology and will be amortized over a five year period.
(2) To eliminate HealthWatch's investment in HALIS carried on the equity method
($1,773,411) and HALIS' investment in HealthWatch ($22,395).
(3) To eliminate intercompany balances as of June 30, 2000.
F-13
HEALTHWATCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pro Forma Condensed Consolidated Statement of Operations
(Unaudited)
-------------------------------------------------------------
HealthWatch, Pro Forma Pro Forma
Inc. HALIS, Inc. Consolidating HealthWatch, Inc.
Consolidated Consolidated Entries Consolidated
------------ ------------ ------------- -----------------
Sales................... $ 551,682 $ 4,326,750 $ (21,936)(3) $ 4,856,496
Cost of sales........... 193,952 188,941 (21,936)(3) 360,957
----------- ----------- --------- -----------
Gross profit........... 357,730 4,137,809 -- 4,495,539
Operating expenses...... 2,543,702 5,125,048 716,592(2) 8,385,342
----------- ----------- --------- -----------
Loss from operations... (2,185,972) (987,239) (716,592) (3,889,803)
Other income (expense).. (1,554,815) (639,983) 996,260(1) (1,198,538)
----------- ----------- --------- -----------
Loss from continuing
operations............ $(3,740,787) $(1,627,222) $ 279,668 $(5,088,341)
=========== =========== ========= ===========
Net loss per common
share, basic and
diluted................ $ (3.93) $ (1.95)
=========== ===========
Weighted average number
of common shares
outstanding............ 1,538,924 3,788,019
=========== ===========
--------
(1) To eliminate equity loss from investment in HALIS ($523,450) and other-
than-temporary decline in value ($472,810).
(2) To record amortization of intangible asset recorded as a result of the
HealthWatch/HALIS merger ($1,119,475) over a five year period and to
reverse the amortization recorded for the HALIS goodwill which was
eliminated in the merger ($402,883).
(3) To eliminate MERAD royalties on HES sales.
NOTE D--ACQUISITION OF MERAD SOFTWARE, INC. (FORMERLY PAUL HARRISON
ENTERPRISES, INC.) ("PHE")
On October 1, 1998, the Company completed the acquisition of MERAD Software,
Inc. (formerly Paul Harrison Enterprises, Inc.) and subsidiaries. The Company
issued 66,886 shares of Series P preferred stock in exchange for all of the
issued and outstanding common stock of PHE (held by 55 shareholders, including
Paul W. Harrison). Mr. Harrison, Chairman, Chief Executive Officer, and
President of HealthWatch received 25,080 shares of the Series P preferred stock
in his capacity as a shareholder of PHE. David M. Engert, Chief Operating
Officer and a director of HealthWatch, received 3,177 shares of the Series P
preferred in his capacity as a shareholder of PHE. Certain PHE shareholders
also received options for approximately 125,000 shares of HealthWatch common
stock in exchange for previously outstanding options of PHE. Of the outstanding
options issued in the PHE acquisition, 116,667 were issued to Mr. Harrison.
These options were granted with exercise prices equal to the fair market value
of HealthWatch common stock at that time. Additionally, under the terms of the
contract, the Company agreed to pay to the former shareholders of PHE
additional consideration based on gross revenues generated in connection with
the MERAD Technology. This additional consideration, at the time it becomes
determinable, is recorded as an additional cost of the acquisition allocated to
the intangible asset, and is amortized over the remaining life of the asset.
The additional consideration was payable for a period of ten years or until the
Company had paid an aggregate $7,000,000 in additional consideration. Effective
April 25, 2000, Mr. Harrison and Mr. Engert, who were both PHE shareholders,
waived any and all future payments of additional consideration. The remaining
PHE shareholders have been asked to agree to the following amendments to their
respective Additional Consideration Agreements: Firstly, the additional
consideration is to be calculated based on a fixed percentage (3%) of gross
revenues each fiscal year from sales of the MERAD technology. Secondly,
HealthWatch has the option to pay the additional consideration in cash or in a
combination comprised of one-half cash and one-half shares of HealthWatch
common stock. Although the maximum aggregate payment to be made under the
Additional Consideration Agreements is still $7,000,000, the payout period has
been extended from ten years to fifteen years. As of June 30, 2000, all but
three of the PHE shareholders have agreed to these amendments.
F-14
HEALTHWATCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has accounted for the acquisition under the purchase method of
accounting whereby the assets and liabilities of PHE are recorded at their fair
market value as of the date of the acquisition. The excess purchase price over
the fair market value of the net tangible assets acquired has been identified
as the MERAD Technology and is being amortized over a five year period.
Summarized below is the unaudited condensed and pro forma consolidated
statement of operations as if the acquisition had taken place at the beginning
of the year ended June 30, 1999.
Pro Forma Condensed Consolidated Statement of Operations
(Unaudited)
---------------------------------------------------------------------
Paul Harrison Pro Forma Pro Forma
HealthWatch, Inc. Enterprises, Inc. Consolidating HealthWatch, Inc.
Consolidated Consolidated Entries Consolidated
----------------- ----------------- ------------- -----------------
Sales................... $ 1,220,803 $157,024 $(117,024)(2) $ 1,260,803
Cost of sales........... 940,950 -- -- 940,950
----------- -------- --------- -----------
Gross profit........... 279,853 157,024 (117,024) 319,853
Operating expenses...... 2,008,331 80,737 114,839(1) 2,203,907
----------- -------- --------- -----------
Loss from operations... (1,728,478) 76,287 (231,863) (1,884,054)
Other income (expense).. (91,361) -- -- (91,361)
----------- -------- --------- -----------
Net income (loss)...... $(1,819,839) $ 76,287 $(231,863) $(1,975,415)
=========== ======== ========= ===========
Net loss per common
share.................. $ (4.32) $ (4.61)
=========== ===========
Weighted average number
of common shares
outstanding............ 537,972 537,972
=========== ===========
--------
(1) To record amortization of MERAD Technology.
(2) To eliminate intercompany sales.
NOTE E--PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at June 30, 2000:
Furniture and equipment........................................... $ 318,620
Accumulated depreciation.......................................... (303,566)
---------
Property and equipment, net..................................... $ 15,054
=========
NOTE F--INTANGIBLE ASSETS
Intangible assets arising from the acquisition of MERAD Software, Inc.
(formerly Paul Harrison Enterprises, Inc.) and subsidiaries consists of
technology known as the MERAD Technology and are being amortized over five
years on the straight-line method. MERAD Technology consists of the following
as of June 30, 2000:
MERAD Technology................................................. $1,232,517
Accumulated amortization......................................... (345,745)
----------
MERAD Technology, net.......................................... $ 886,772
==========
MERAD Technology includes the technology and virtual software application
utility. During fiscal 2000, the Company capitalized direct costs of $217,496
incurred in modifying the MERAD Technology, giving it Internet application
ability.
F-15
HEALTHWATCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In June 2000, due to a change in the business focus and the expiration of
major customer contracts of the Company's HealthWatch Technologies, Inc.
subsidiary, the Company reviewed the recoverability of goodwill related to the
subsidiary. The Company determined that the unamortized technology of $213,286
was not recoverable and should be written off.
NOTE G--DEBENTURES PAYABLE
During fiscal 2000, $455,000 of the debentures payable, along with $139,356
of accrued interest, were converted into 316,990 shares of common stock of the
Company. As of June 30, 2000, $25,000 of debentures, along with accrued
interest of $7,918, remained unpaid. As an inducement for the debenture holders
to convert their debentures into HealthWatch common stock, debenture holders
received warrants to purchase 77,495 shares of the Company's common stock,
valued at $7,741. This amount has been included in selling, general and
administrative expenses in the Company's statement of operations for the fiscal
year ended June 30, 2000. The warrants were valued using the Black-Scholes
option-pricing method under the following assumptions: no dividend yield;
expected volatility of 162.50%; risk free interest of 5.55%; and average
expected warrant life of one year.
The remaining debentures accrue interest at an annual rate of 10%, payable
quarterly and are secured by substantially all assets of the Company. The
remaining debentures matured March 1, 1998 and are presently in default. As of
June 30, 2000, the remaining debentures had not been extended and the Company
was in default under the debenture agreements. The debentures are convertible
into common stock, at the option of the holder.
NOTE H--COMMITMENT
Operating Leases
The Company has entered into an operating lease for office and warehouse
space, which began on January 1, 1999 and is for a period of three years. The
lease agreement calls for total annual rent of $49,200, with a 4% increase each
year. Prior to the execution of this lease, the Company leased its office and
warehouse space on a month-to-month basis.
Rent expense for 2000 and 1999 was $72,003 and $59,055, respectively.
NOTE I--REVERSE STOCK SPLIT
On November 17, 1999, the Board of Directors authorized a one-for-five
reverse stock split of the Company's common stock and its Series A and Series P
preferred stock. The reverse stock split became effective on December 22, 1999,
thereby reducing the number of common and preferred shares outstanding by 80%
and increasing the par value of all classes of stock to $.05. All references in
the accompanying consolidated financial statements to the number of common and
preferred shares, number and exercise price of stock options and stock
warrants, and per share amounts for periods prior to the reverse stock split
have been restated to reflect the reverse stock split.
NOTE J--PREFERRED STOCK
Series A Preferred Stock
The Company has outstanding Series A 6% cumulative, non-voting preferred
stock which has a stated value of $5 per share. Shareholders have the option to
convert each of the Series A preferred stock into fully-paid and non-assessable
shares of common stock at a conversion rate equal to the lesser of $2.60 per
share or 70% of the market value of the common stock at the time of conversion.
Dividends are payable semi-annually,
F-16
HEALTHWATCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
if declared. No dividends have been declared to date. At June 30, 2000, the
amount of dividends in arrears was $3,000. The Series A preferred stock has
dividend and liquidation preferences over common stock and is on an equal
liquidation and dividend basis with the Series P preferred stock and is
subordinate to both the Series C and Series D preferred stock. The stated
liquidation preference value was $25,000 at June 30, 2000.
Series P Preferred Stock
The Company has outstanding Series P cumulative, non-voting preferred stock,
which has a stated value of $50 per share. Shareholders have the option to
convert each of the Series P preferred stock into ten shares of fully-paid and
non-assessable shares of common stock, provided the conversion feature is
approved by the vote of the Company's shareholders. The Series P preferred
stock originally contained a cumulative dividend feature of 12% which adjusted
to a maximum of 24% if the shares are not granted the right to convert by
certain target dates. In connection with the private placement of the Company's
Series D preferred Stock during March 2000, the holders of Series P preferred
stock agreed to amend the Certificate of Designation, Rights and Limitations of
the Series P preferred stock. The amendments included a retroactive adjustment
to the cumulative dividend from the graduated dividend to an 8% cumulative
dividend from the date of issuance until the shares are converted into common
stock. The holders of Series P preferred stock also agreed to allow the Company
to pay the dividends in cash or stock, at the Company's option. Dividends are
payable semi-annually, if declared. No dividends have been declared to date. At
June 30, 2000, the amount of dividends in arrears was $468,202. The Series P
preferred stock has dividend and liquidation preferences over all common stock
and is on an equal liquidation and dividend basis with the Series A preferred
stock and is subordinate to both the Series C and Series D preferred stock. The
stated liquidation preference value was $3,344,300 at June 30, 2000.
The issuance of the Series P preferred stock included a beneficial
conversion feature in the total amount of $782,566, which represents the
aggregate fair value at the issue date of the HealthWatch common stock into
which the preferred stock is convertible over the proceeds received in the
issuance of the preferred shares. This amount has been included in additional
paid-in capital and will be amortized as a return to the preferred shareholders
over the period through the date of earliest conversion using the effective
yield method. For fiscal 2000 and 1999, $313,026 and $234,770, respectively, of
the beneficial conversion feature has been amortized and $234,770 and $547,796
remains unamortized at June 30, 2000 and 1999, respectively.
Series C Preferred Stock
The Company has outstanding Series C 8% cumulative preferred stock, which
has a stated value of $100 per share. Subject to anti-dilution provisions,
shareholders have the option to convert each of the Series C preferred stock
into fully-paid and non-assessable shares of common stock at a conversion rate
equal to the stated value divided by a conversion price of $1.88 per share.
Dividends are payable, at the Company's option, either in cash or in shares of
Series C preferred stock. No dividends have been declared to date. At June 30,
2000, the amount of dividends in arrears was $8,000. Series C preferred
shareholders have voting rights on all matters as to which holders of common
stock are entitled to vote. Holders of Series C preferred stock are entitled
the same number of votes as if the Series C preferred stock had been converted.
The Series C preferred stock has dividend and liquidation preferences over
Series A and Series P preferred stock and common stock, and is on an equal
liquidation and dividend basis with the Series D preferred stock. The stated
liquidation preference value was $400,000 at June 30, 2000.
Series D Preferred Stock
The Company has outstanding Series D 8% cumulative preferred stock, which
has a stated value of $100 per share. Subject to anti-dilution provisions,
shareholders have the option to convert each of the Series D preferred stock
into fully-paid and non-assessable shares of common stock at a conversion rate
equal to the
F-17
HEALTHWATCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
stated value divided by a conversion price of $3.50 per share. Dividends are
payable, at the Company's option, either in cash or in shares of Series D
preferred stock. No dividends have been declared to date. At June 30, 2000, the
amount of dividends in arrears was $148,260. Series D preferred shareholders
have voting rights on all matters as to which holders of common stock are
entitled to vote. Holders of Series D preferred stock are entitled to the same
number of votes as if the Series D preferred stock had been converted to common
stock. The Series D preferred stock has dividend and liquidation preferences
over Series A and Series P preferred stock and common stock, and is on an equal
liquidation and dividend basis with the Series C preferred stock. The stated
liquidation preference value was $7,413,000 at June 30, 2000.
The issuance of the Series D preferred stock included a beneficial
conversion feature in the total amount of $7,413,000, which represents the
aggregate fair value at the issue date of the HealthWatch common stock into
which the preferred stock is convertible over the proceeds received in the
issuance of the preferred shares. This amount has been included in additional
paid-in capital and will be amortized as a return to the preferred shareholders
over the period through the date of earliest conversion using the effective
yield method. For fiscal 2000, $1,571,674 of the beneficial conversion feature
has been amortized and $5,841,326 remains unamortized at June 30, 2000.
NOTE K--SHAREHOLDERS' EQUITY
Private Placement of Common Stock
During fiscal 2000, the Company offered and issued 28,572 shares of common
stock at $1.75 per share. The offering netted the Company proceeds of $50,000.
During fiscal 1999, the Company offered and issued 241,991 shares of common
stock at various prices per share in private offerings. Net proceeds to the
Company aggregated $625,000.
During fiscal 1999, the Company issued 11,000 shares of common stock at
$3.30 per share as a result of options being exercised by former employees.
Stock Options
The Company has in place a 1995 Stock Option Plan. Pursuant to the plan, the
Board of Directors may grant options to key individuals at its discretion.
Option prices for incentive stock options may not be less than the fair market
value on the date the option is granted, whereas, non-statutory stock option
prices may not be less than 85% of the fair market value on the date the option
is granted. The options vest over a period of up to three years. At June 30,
2000, there were no shares reserved for issuance under the 1995 Stock Option
Plan.
F-18
HEALTHWATCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of the status of the Company's stock options plans as of June 30,
2000 and 1999 and changes during the years ending on those dates is presented
below:
2000 1999
----------------------- -----------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
------- -------------- ------- --------------
Outstanding at beginning of
year.......................... 252,569 $ 4.50 171,939 $ 6.45
Granted...................... 583,333 $ 3.19 125,200 $ 4.80
Exercised.................... -- $ -- (11,000) $ 3.30
Expired...................... (286) $66.50 (1,310) $76.50
Cancelled.................... (11,473) $11.43 (32,260) $ 9.55
------- ------ ------- ------
Outstanding at end of year..... 824,143 $ 3.45 252,569 $ 4.50
======= ====== ======= ======
Options exercisable at end of
year.......................... 824,143 $ 3.45 238,902 $ 4.55
======= ====== ======= ======
Weighted-average fair value of
options granted during the
year.......................... $ .45 $ .35
====== ======
The following table summarizes information about stock options outstanding
at June 30, 2000:
Options Outstanding Options Exercisable
----------------------------------------------------------------------------
Number Weighted-Average Number
Outstanding Remaining Weighted-Average Outstanding Weighted-Average
at 6/30/00 Contractual Life Exercise Price at 6/30/00 Exercise Price
----------- ---------------- ---------------- ----------- ----------------
3,333 9.61 years $8.95 3,333 $8.95
124,667 3.29 years $4.80 124,667 $4.80
440,000 9.61 years $3.50 440,000 $3.50
116,143 2.54 years $3.30 116,143 $3.30
80,000 9.56 years $2.25 80,000 $2.25
60,000 9.44 years $1.88 60,000 $1.88
------- -------
824,143 824,143
======= =======
Various officers and directors have been granted a total of 648,000 options
under the Company's Stock Options Plans which are included in the above table
(see Note L).
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). In accordance with APB
25, since the exercise price of the underlying stock options equaled the fair
market value on the date of grant, no compensation expense was recognized.
SFAS 123 requires the Company to provide pro forma information regarding net
loss and loss per share as if compensation cost for the Company's stock option
plans had been determined in accordance with the fair value based method
prescribed in SFAS 123. The Company estimates the fair value of each stock
option at the grant date by using the Black-Scholes option-pricing model with
the following weighted average assumptions used for grants in 2000 and 1999: no
dividend yield for each year; expected volatility of 162.50% and 136.25%,
respectively; weighted-average risk-free interest rates of 6.66% and 4.72%,
respectively, and weighted-average expected option lives of three years.
F-19
HEALTHWATCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2000 1999
----------- -----------
Net loss available to common shareholders:
As reported..................................... $(5,885,386) $(2,323,967)
Pro forma....................................... $(6,177,156) $(2,424,404)
Net loss per common share:
As reported..................................... $ (3.82) $ (4.32)
Pro forma....................................... $ (4.01) $ (4.51)
In May 2000, the Company adopted its 2000 Stock Option Plan. This plan
provides that 2,000,000 shares of the Company's common stock be reserved for
issuance subject to annual adjustment. The 2000 Stock Option Plan provides for
the grant of options that are intended to qualify as incentive stock options to
any employee of the Company or its subsidiaries, and the grant of options that
are considered non-qualified due to certain conditions as to issuance.
The Company has issued stock warrants in conjunction with the issuance of
preferred and common stock and the conversion of debentures payable to common
stock. Also, during fiscal 2000, the Company issued 1,000,000 stock warrants,
valued at $419,551, as debt costs associated with short term financing. This
amount has been included in interest expense in the Company's statements of
operations. The warrants were valued using the Black-Scholes option-pricing
method under the following assumptions: no dividend yield; expected volatility
of 162.5%; risk free interest of 5.55%; and expected warrant life of three
years. Activity related to stock warrants was as follows:
Weighted Average
Warrants Exercise Price
--------- ----------------
Outstanding at June 30, 1998..................... 299,583 $14.90
Granted........................................ 234,161 $ 3.15
Expired........................................ (60,583) $49.55
--------- ------
Outstanding at June 30, 1999..................... 473,161 $ 4.65
Granted........................................ 2,849,284 $ 3.05
Exercised...................................... (242,961) $ 5.76
--------- ------
Outstanding at June 30, 2000..................... 3,079,484 $ 3.08
========= ======
At June 30, 2000, the Company had stock warrants outstanding as follows:
Common Shares Exercise Price
Under Warrant Per Share Expiration Date
------------- -------------- ------------------------------
10,000 $8.60 January 2003
20,000 $7.97 April 2001
37,736 $4.31 March 2001
2,058,977 $3.50 March 2005
133,334 $2.44 January 2001
29,091 $2.24 January 2001
790,346 $1.88 February 2001 to December 2004
---------
3,079,484
=========
F-20
HEALTHWATCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE L--RELATED PARTY TRANSACTIONS
Officer and Director Options
At June 30, 2000, the Company had outstanding the following qualified and
nonqualified stock options granted to officers and directors:
Common Shares Exercise Price
Under Option Per Share Expiration Date
------------- -------------- ------------------------
3,333 $8.95 January 2003
124,667 $4.80 October 2003
400,000 $3.50 February 2010
50,000 $3.30 October 2002 to May 2003
50,000 $2.25 January 2010
20,000 $1.88 December 2009
-------
648,000
=======
All options granted to officers and directors as shown above are exercisable
at June 30, 2000.
Officer and Director Warrants
At June 30, 2000, the Company had outstanding to officers and directors
stock warrants to purchase 171,198 shares of common stock at prices ranging
from $1.88 per share to $8.60 per share. These warrants expire at various dates
from January 2001 through March 2005.
Consulting Agreements
Creative Business Strategies, Inc. (CBS), a company owned by a former
director/shareholder of the Company, provides the Company with business
development consulting services in exchange for a fee. During 2000 and 1999,
the Company had incurred $46,203 and $29,674, respectively, of fees to CBS, of
which $10,000 and $15,326, respectively, remained unpaid at June 30, 2000 and
1999 and are included in accrued expenses.
Effective October 10, 1997, PHE and Paul W. Harrison entered into a
consulting agreement with HealthWatch which expired on December 31, 1998. The
agreement provided for, among other things, the payment to PHE commencing
January 1, 1998 of $5,000 per month, Mr. Harrison's continued service on the
board of directors of HealthWatch as Chairman of the Board, the granting of a
five-year non-statutory stock option to Mr. Harrison representing the right to
acquire up to 50,000 shares (adjusted for all stock splits occurring after the
date of the agreement) of HealthWatch's common stock at its then fair market
value, and to loan Mr. Harrison up to $200,000 payable in four equal
installments, with interest to accrue at 7% per annum, to cover tax liabilities
arising from the stock swaps with PHE. As of the time the consulting agreement
expired, $0 had been borrowed pursuant to the loan commitment. In May 1998, the
exercise price for the stock options were repriced to $.66 per share (adjusted
to $3.30 per share as a result of the December 1999 reverse stock split). To
date, none of the options have been exercised. In February 1999, the consulting
agreement was modified to remove PHE as a party and to provide for the payment
of $12,500 to Paul W. Harrison on a monthly basis to manage HealthWatch,
effective January 1, 1999. During fiscal 1999, $12,500 was paid to Mr. Harrison
under the revised consulting agreement.
During fiscal 2000, 40,000 shares of the Company's common stock, valued at
$75,000, were issued to two of the Company's directors for consulting services.
F-21
HEALTHWATCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Business Collaboration Agreement
In October 1997, HealthWatch and HALIS entered into a Business
Collaboration Agreement. Under this agreement, HealthWatch has granted HALIS a
non-exclusive license to HealthWatch's information technology in exchange for
a 10% commission on sales of products or services incorporating such software.
Additionally, HALIS has granted HealthWatch a non-exclusive license to market
the HES System or other HALIS products in exchange for a 10% commission on all
revenues received from sales or services relating to such products (see Note
B). The agreement also provides for the sharing of certain operating expenses,
among other things (see Note B).
NOTE M--INCOME TAXES
The effective tax rate varies from the maximum federal statutory rate as a
result of the following items:
2000 1999
----- -----
Tax benefit computed at the maximum federal statutory
rate...................................................... (34.0)% (34.0)%
Decrease in tax benefit resulting from:
Amortization of intangible assets........................ 4.0 6.0
Loss to be carried forward............................... 30.0 28.0
----- -----
Income tax provision................................... 0.0 % 0.0 %
===== =====
Deferred income tax assets and the related valuation allowances result
principally from the potential tax benefits of tax carryforwards and also from
the unrealized loss on marketable securities.
The Company has recorded a valuation allowance to reflect the uncertainty
of the ultimate utilization of the deferred tax assets as follows:
2000 1999
----------- -----------
Deferred tax assets................................ $ 5,123,000 $ 3,916,000
Less valuation allowance........................... (5,123,000) (3,916,000)
----------- -----------
Net deferred tax assets.......................... $ -- $ --
=========== ===========
For financial statement purposes, no tax benefit has been reported in 2000
and 1999 as the Company has had significant losses in recent years and
realization of the tax benefits is uncertain. Accordingly, a valuation
allowance has been established for the full amount of the deferred tax asset.
The net change in the deferred tax valuation allowance was an increase of
$1,207,000 and $687,000 for the years ended June 30, 2000 and 1999,
respectively.
F-22
HEALTHWATCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At June 30, 2000, the Company had the following net operating loss
carryforwards and investment tax credit carryforwards:
Carryforward Net Operating Investment
Expires Loss Tax Credits
June 30 Carryforwards Carryforwards
------------ ------------- -------------
2002 $ -- $ 3,798
2003 627,889 14,560
2004 11,744 --
2005 122,457 --
2006 1,371 --
2007 235,901 --
2008 1,461,790 --
2009 281,054 --
2010 1,644,839 --
2011 1,666,725 --
2012 1,815,490 --
2013 1,881,569 --
2019 1,972,759 --
2020 3,151,136 --
----------- -------
$14,874,724 $18,358
=========== =======
The utilization of the carryforwards is dependent upon the ability to
generate sufficient taxable income during the carryforward period. In addition,
the availability of these net operating loss carryforwards to offset future
taxable income may be significantly limited due to ownership changes as defined
in the Internal Revenue Code.
NOTE N--INFORMATION CONCERNING BUSINESS SEGMENTS
The Company's two reportable segments are strategic business units that
offer different products and services principally to United States customers.
These segments are MERAD Software, Inc. ("MERAD") and HealthWatch Technologies,
Inc. ("Tech"). MERAD is a healthcare information technology company that has
developed and is in the initial stages of marketing software capable of
processing and tracking information for a variety of healthcare enterprises.
Tech is a supplier of noninvasive vascular diagnostic medical instruments and
related supplies. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies.
Segment information for fiscal 2000 and fiscal 1999 is as follows:
Corporate
MERAD Tech Unallocated Total
-------- -------- ----------- -----------
2000
Revenues from external
customers.................. $ 21,935 $529,747 $ -- $ 551,682
Segment loss................ (189,398) (287,359) (3,098,625) (3,575,382)
Interest expense............ -- 6,584 449,291 455,875
Total assets................ 886,772 93,560 6,459,614 7,439,946
Capital expenditures........ -- -- 15,178 15,178
Depreciation and
amortization............... 210,534 230,996 1,265 442,795
F-23
Corporate
MERAD Tech Unallocated Total
------- ---------- ----------- ----------
1999
Revenues from external
customers................... 91,087 1,129,716 -- 1,220,803
Segment profit (loss)........ (27,952) (717,763) (1,074,124) (1,819,839)
Interest expense............. -- -- 67,659 67,659
Total assets................. 930,242 668,237 1,878,585 3,477,064
Capital expenditures......... 9,608 1,590 -- 11,198
Depreciation and
amortization................ 144,805 256,105 -- 400,910
NOTE O--RESTATEMENTS
The June 30, 2000 financial statements have been restated to reflect
interest expense of $419,551 from the issuance of warrants in connection with
short-term financing. The effect of the adjustment increased the loss before
extraordinary item and the loss available to common shareholders by $419,551,
and increased the loss per common share before extraordinary item and the net
loss per common share by $.27.
The June 30, 2000 financial statements have been restated to reflect the
beneficial conversion feature related to the Series D preferred stock. The
beneficial conversion feature was determined to be $7,413,000, which has been
included in additional paid-in capital and is being amortized as a return to
the preferred shareholders over the period through the date of earliest
conversion using the effective yield method. The amount of amortization for
fiscal year 2000 was $1,571,674. The effect of the adjustment increased the
loss available to common shareholders by $1,571,674 and increased the loss per
common share before extraordinary item and the net loss per common share by
$1.02.
The June 30, 2000 and 1999 financial statements have been restated to
reflect the effects of the beneficial conversion feature related to the Series
P preferred stock. The beneficial conversion feature was determined to be
$782,566, which has been included in additional paid-in-capital and is being
amortized as a return to the preferred shareholders over the period through the
date of earliest conversion using the effective yield method. The amortization
for fiscal 2000 and fiscal 1999 was $313,026 and $234,770, respectively. The
effect of the adjustments increased the loss available to common shareholders
by $313,026 and $234,770 in fiscal 2000 and fiscal 1999, respectively, and
increased the loss per common share before extraordinary item and the net loss
per common share by $.20 and $.44 in fiscal 2000 and fiscal 1999, respectively.
The June 30, 2000 and 1999 financial statements have been restated to
reflect the effects of a change in the amortization life of the Company's
intangible asset identified as the Merad Technology from ten years to five
years. The effect of the adjustment increased the loss before extraordinary
item and the loss available to common shareholders by $101,136 and $70,908 in
fiscal 2000 and fiscal 1999, respectively, and increased the loss per common
share before extraordinary item and the net loss per common share by $.06 and
$.13 in fiscal 2000 and fiscal 1999, respectively.
NOTE P--FOURTH QUARTER ADJUSTMENTS
Significant adjustments made in the fourth quarter of fiscal 2000 are as
follows:
Record other-than-temporary decline in value of investment in
HALIS, Inc....................................................... $472,810
Record loss from impairment of intangible assets.................. $213,286
F-24
HEALTHWATCH, INC. AND SUBSIDIARIES
UNAUDITED FINANCIAL STATEMENTS FOR THE
SIX MONTHS ENDED DECEMBER 31, 2000 AND 1999
TABLE OF CONTENTS
Page
----
Unaudited Consolidated Balance Sheet as of December 31, 2000.............. F2-2
Unaudited Consolidated Statements of Operations for the Three Months Ended
December 31, 2000 and 1999............................................... F2-3
Unaudited Consolidated Statements of Operations for the Six Months Ended
December 31, 2000 and 1999............................................... F2-4
Unaudited Consolidated Statements of Cash Flows for the Six Months Ended
December 31, 2000 and 1999............................................... F2-5
Unaudited Notes to Consolidated Financial Statements for the Six Months
Ended December 31, 2000 and 1999......................................... F2-6
F2-1
HEALTHWATCH, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
December 31, 2000
December
31, 2000
-----------
ASSETS
------
Current assets:
Cash............................................................ $ 52,084
Accounts receivable, net of allowance of $17,653................ 48,427
Marketable securities........................................... 1,848,406
Inventory....................................................... 25,449
Other current assets............................................ 339,694
-----------
Total current assets.......................................... 2,314,060
-----------
Investment in Halis, Inc........................................ 1,645,701
Due from Halis, Inc............................................. 541,976
Property and equipment, net of accumulated depreciation of
$138,224....................................................... 127,320
Intangible assets, net of accumulated amortization of $233,272.. 1,014,570
Other assets.................................................... 56,370
-----------
Total other assets............................................ 3,385,937
-----------
Total assets................................................ $ 5,699,997
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable and accrued expenses........................... $ 661,701
Deferred revenue................................................ 6,501
Debentures payable.............................................. 25,000
-----------
Total liabilities (all current)............................... 693,202
-----------
Shareholders' equity:
Cumulative preferred stock; 1,000,000 shares authorized; par
value $.05 per share:
Series A, 5,000 shares issued and outstanding................. 250
Series P, 66,886 shares issued and outstanding................ 3,344
Series C, 4,000 shares issued and outstanding................. 200
Series D, 74,130 shares issued and outstanding................ 3,707
Common stock, $.05 par value; 10,000,000 shares authorized,
2,142,751 issued and outstanding............................... 107,137
Additional paid-in capital...................................... 35,641,951
Accumulated deficit............................................. (30,743,303)
Accumulated other comprehensive loss, net unrealized
investment losses.............................................. (6,491)
-----------
Total shareholders' equity.................................... 5,006,795
-----------
Total liabilities and shareholders' equity.................. $ 5,699,997
===========
(The accompanying notes are an integral part of these statements)
F2-2
HEALTHWATCH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended December 31, 2000 and 1999
(Unaudited)
Three Months Ended
December 31,
-----------------------
2000 1999
----------- ----------
Sales................................................... $ 79,356 $ 170,762
Cost of sales........................................... 15,312 37,911
----------- ----------
Gross profit.......................................... 64,044 132,851
----------- ----------
Operating costs and expenses
Selling, general and administrative................... 958,340 529,702
Depreciation and amortization......................... 70,202 110,545
Research and development.............................. 59,554 29,613
----------- ----------
Total operating costs and expenses...................... 1,088,096 669,860
----------- ----------
Operating loss.......................................... (1,024,052) (537,009)
----------- ----------
Other income (expense)
Loss from investment in Halis, Inc.................... (9,050) (134,701)
Realized loss on sale of marketable securities........ (4,010) --
Interest income....................................... 37,845 --
Interest expense...................................... (6,401) (1,147)
----------- ----------
Total other income (expense).......................... 18,384 (135,848)
----------- ----------
Loss before income taxes and extraordinary item....... (1,005,668) (672,857)
Income tax benefit.................................... -- 66,000
----------- ----------
Loss before extraordinary item........................ (1,005,668) (606,857)
Extraordinary item--Gain on extinguishment of debt,
net of income tax of $66,000......................... -- 99,405
----------- ----------
Net loss................................................ $(1,005,668) $ (507,452)
=========== ==========
Basic and diluted net loss per common share:
Loss before extraordinary item........................ $(1,005,668) $ (606,857)
Less preferred stock dividends (undeclared)........... 223,521 67,261
Less amortization of beneficial conversion option on
Series D and Series P preferred stock................ 1,495,845 78,257
----------- ----------
Loss available to common shareholders................. (2,725,034) (752,375)
Extraordinary item.................................... -- 99,405
----------- ----------
Net loss available to common shareholders............. $(2,725,034) $ (652,970)
=========== ==========
Net loss per common share, basic and diluted:
Loss before extraordinary item........................ $ (1.27) $ (0.61)
Extraordinary item.................................... -- 0.08
----------- ----------
Net loss.............................................. $ (1.27) $ (0.53)
=========== ==========
Weighted average number of common
shares outstanding..................................... 2,142,751 1,236,535
=========== ==========
(The accompanying notes are an integral part of these statements)
F2-3
HEALTHWATCH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Six Months Ended December 31, 2000 and 1999
(Unaudited)
Six Months Ended
December 31,
------------------------
2000 1999
----------- -----------
Sales................................................ $ 183,622 $ 322,465
Cost of sales........................................ 37,888 120,462
----------- -----------
Gross profit....................................... 145,734 202,003
----------- -----------
Operating costs and expenses
Selling, general and administrative................ 1,873,679 793,292
Depreciation and amortization...................... 127,911 221,039
Research and development........................... 98,034 66,804
----------- -----------
Total operating costs and expenses................... 2,099,624 1,081,135
----------- -----------
Operating loss....................................... (1,953,890) (879,132)
----------- -----------
Other income (expense)
Loss from investment in Halis, Inc................. (127,710) (230,803)
Realized loss on sale of marketable securities..... (3,860) --
Interest income.................................... 95,949 --
Interest expense................................... (10,015) (17,605)
----------- -----------
Total other income (expense)..................... (45,636) (248,408)
----------- -----------
Loss before income taxes and extraordinary item.... (1,999,526) (1,127,540)
Income tax benefit................................. -- 66,000
----------- -----------
Loss before extraordinary item..................... (1,999,526) (1,061,540)
Extraordinary item--Gain on extinguishment of debt,
net of income tax of $66,000...................... -- 99,405
----------- -----------
Net loss............................................. $(1,999,526) $ (962,135)
=========== ===========
Basic and diluted net loss per common share:
Loss before extraordinary item..................... $(1,999,526) $(1,061,540)
Less preferred stock dividends (undeclared)........ 447,042 134,522
Less amortization of beneficial conversion option
on Series D preferred stock....................... 2,991,690 156,514
----------- -----------
Loss available to common shareholders.............. (5,438,258) (1,352,576)
Extraordinary item................................. -- 99,405
----------- -----------
Net loss available to common shareholders.......... $(5,438,258) $(1,253,171)
=========== ===========
Net loss per common share, basic and diluted:
Loss before extraordinary item..................... $ (2.54) $ (1.31)
Extraordinary item................................. -- 0.10
----------- -----------
Net loss........................................... $ (2.54) $ (1.21)
=========== ===========
Weighted average number of common
shares outstanding.................................. 2,142,751 1,036,263
=========== ===========
(The accompanying notes are an integral part of these statements)
F2-4
HEALTHWATCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended December 31, 2000 and 1999
(Unaudited)
Six Months Ended
December 31,
----------------------
2000 1999
----------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................. $(1,999,526) $(962,135)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization...................... 127,911 221,039
Loss from Investment in Halis, Inc................. 127,710 230,803
Provision for bad debts............................ -- (6,465)
Common stock issued for services................... -- 161,624
Loss on sale of marketable securities.............. -- 3,860
Gain on extinguishment of debt..................... -- (165,405)
Decrease (increase) in assets:
Accounts receivable................................ (13,888) 75,088
Inventory.......................................... 10,028 20,114
Other current assets............................... (73,401) 2,101
Other assets....................................... (13,157) 3,400
Increase (decrease) in liabilities:
Accounts payable and accrued expenses.............. 154,657 132,818
Deferred revenue .................................... (1,989) (1,047)
----------- ---------
Net cash used in operating activities.............. (1,677,795) (288,064)
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment................... -- (119,378)
Proceeds from sale of marketable securities.......... -- 2,190,143
Purchase of intangible assets, capitalized Merad
Technology costs.................................... -- (248,597)
Net (increase) decrease in due from Halis, Inc....... (108,553) 89,620
----------- ---------
Net cash provided by investing activities.......... 1,713,615 89,620
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock........... -- 50,000
Net proceeds from issuance of preferred stock........ -- 350,000
Net cash provided by financing activities.......... -- 400,000
----------- ---------
Net increase in cash................................... 35,820 201,556
Cash--beginning of period.............................. 16,264 21,746
----------- ---------
Cash--end of period.................................... $ 52,084 $ 223,302
=========== =========
(The accompanying notes are an integral part of these statements)
F2-5
HEALTHWATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended December 31, 2000 and 1999
(Unaudited)
PRINCIPLES OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) necessary
for a fair presentation of the Company's financial position as of December 31,
2000, and its results of operations and cash flows for the six months then
ended have been included. However, operating results for the interim periods
noted are not necessarily indicative of the results that may be expected for
the year ending June 30, 2001. This report should be read in conjunction with
the Company's financial statements and notes thereto contained in the Company's
annual report on Form 10-KSB for the year ended June 30, 2000.
MANAGEMENT'S OPERATING PLANS
HealthWatch has been in business for over a decade, but its information
technology business is still relatively new. Prior to fiscal year 1998,
HealthWatch was primarily in the business of manufacturing and selling medical
devices and related supplies. In 1997, management decided to phase out the
medical device business and focus its energies on developing an information
technology business. The Company still provides maintenance support to a number
of customers who purchased medical devices in the past.
On October 1, 1998, as part of its transformation to an information
technology business, the Company acquired Paul Harrison Enterprises, Inc.
("PHE"). PHE owned the Merad Technology, a sophisticated virtual software
application utility that utilizes an advanced multi-media object and relational
database. This technology creates knowledge objects that can be used and reused
in a virtually unlimited number of combinations to provide efficient
applications that can be accessed and processed in both an Internet and
Intranet environment (the "Merad Technology"). The acquisition of PHE, which
was a significant shareholder of Halis, Inc. ("Halis"), also increased the
Company's ownership of the common stock of Halis, a healthcare IT company, to
approximately 19% of Halis' outstanding shares of common stock. On January 29,
1999, the Company acquired an additional 1,824,645 shares of Halis' common
stock by converting $157,741 owed by Halis to the Company pursuant to a
debenture, bringing its ownership interest in Halis to approximately 22% and
allowed it to account for its investment in Halis under the equity method of
accounting.
Halis, based in Atlanta, Georgia, supplies information technology and
services focused on the healthcare industry. Utilizing advanced healthcare
models and information technology, Halis has developed the HES System, which
incorporates the Merad Technology, a single system which integrates all of the
major functions needed by clinics, hospitals, healthcare practices, payors,
long-term care facilities, laboratories, pharmacies and home healthcare
facilities.
As part of the Company's business plan, management is in the process of
identifying strategic business partners and acquisition candidates in the
systems integration and support area that will enhance the Company's ability to
develop its information management business. The first such candidate is Halis.
On June 29, 2000, the Company and Halis executed a definitive merger agreement
pursuant to which Halis will merge with and into a wholly owned subsidiary of
the Company. Management anticipates that the merger will close in March 2001.
The merger with Halis is especially attractive to the Company because of the
HES System and the long term operating relationship and common management
between the two companies (Paul W. Harrison is President, Chief Executive
Officer and Chairman of the Board of both companies). HealthWatch and Halis
have operated under a Business Collaboration Agreement (the "Collaboration
Agreement") since October 1997. The
F2-6
HEALTHWATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Collaboration Agreement provides, among other things, for revenue sharing from
sales of each company's products based on a 60/40 split (i.e., the selling
company would receive 60% of the sales price received and the company that owns
the technology would receive 40% of the sales price received). Furthermore,
HealthWatch is obligated to pay Halis a collaboration fee of $50,000 per month,
which is applied as a credit against any revenue sharing amount that is due to
Halis. Halis is obligated to provide support to HealthWatch for the Halis
software products, provide reasonable product enhancement as part of product
release updates and cooperate with HealthWatch in regard to product enhancement
requests. HealthWatch may terminate the $50,000 monthly collaboration fee
payable to Halis on or after October 1, 2001, under certain terms and
conditions. The Collaboration Agreement terminates on September 20, 2005 and
provides for automatic one-year extensions unless terminated with a ninety-day
notice by either party. HealthWatch and Halis also share office space in
Atlanta, Georgia and administrative support under a cost sharing arrangement.
The Halis merger agreement provides for the issuance of shares of
HealthWatch common stock to Halis shareholders in exchange for all outstanding
stock of Halis. The holder of each share of Halis common stock will be entitled
to receive .050 shares of HealthWatch's common stock (i.e., an exchange ratio
of one share of HealthWatch common stock for twenty shares of Halis common
stock). Under the terms of the merger agreement, the Company will issue
approximately 2,300,000 shares of its common stock to Halis stockholders,
excluding HealthWatch. Completion of the merger is conditioned upon certain
events such as approval by both companies' shareholders, obtaining any required
governmental and regulatory approvals, and the absence of any material adverse
changes in Halis' business or operations.
NET LOSS PER SHARE
Basic loss per share is calculated as net loss available to common
shareholders divided by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur from common shares issuable through stock options,
stock warrants and convertible debt and stock. As the Company's stock options,
stock warrants and convertible debt and stock are antidilutive for all periods
presented, dilutive loss per share is the same as basic loss per share.
DEBENTURES PAYABLE
As of December 31, 2000, the Company had outstanding debentures with
principal totaling $25,000. The debentures accrue interest at an annual rate of
10%, payable quarterly. The debentures matured on March 1, 1998, and are
currently in default as to the payment of principal and past due interest. The
debentures, including unpaid accrued interest, could be converted, at the
option of the holder, into shares of the Company's common stock. As of December
31, 2000, $13,327 in accrued but unpaid interest was outstanding on the
debentures. The Company is attempting to reach an agreement with the remaining
debenture holder in an effort to resolve the amounts outstanding or otherwise
bring the debentures out of their default status.
INVESTMENT IN HALIS COMMON STOCK
As of December 31, 2000, the Company held 15,763,655 shares of the common
stock of Halis, representing approximately 25.8% of the total outstanding
shares. The Company holds the Halis shares for long-term investment purposes
rather than for trading purposes. Thus, as required by generally accepted
accounting principles, the Company accounts for its investment in Halis under
the equity method of accounting, thereby reflecting its portion of Halis'
earnings or losses in the Company's statement of operations with a corollary
adjustment to its investment account. The Company's share of Halis' net loss
for the three and six months ended December 31, 2000 was $9,050 and $127,710,
respectively.
F2-7
HEALTHWATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 2000, the carrying value of the Company's investment in
Halis exceeded the aggregate value, based on the quoted market price, by
$1,399,788. In management's opinion, the decline is temporary in nature, and
therefore, no adjustment was made to reduce the carrying value of the Halis
investment. Additionally, the carrying value of the Halis investment under the
equity method exceeded the equity in the underlying assets of Halis at the date
of conversion to the equity method by $1,845,329. This excess is being
amortized on the straight-line method over 10 years, or $184,533 per year.
Restatements
The December 31, 2000 financial statements have been restated to reflect an
adjustment to the June 30, 2000 financial statements for interest expense of
$419,551 from the issuance of warrants in connection with short-term financing.
The effect of the adjustment increased additional paid-in capital and increased
accumulated deficit by $419,551 at December 31, 2000.
The December 31, 2000 financial statements have been restated to reflect an
adjustment to the June 30, 2000 and 1999 financial statements to reflect the
beneficial conversion feature related to the Series P preferred stock. The
effect of the adjustment increased additional paid-in capital and increased
accumulated deficit by $547,796 at December 31, 2000. In addition, additional
paid-in capital and accumulated deficit increased by $156,514 as a result of
the amortization of the beneficial conversion feature for the six months ended
December 31, 2000. The effect of the adjustments increased the loss available
to common shareholders by $156,514 for the six months ended December 31, 2000
and 1999, and increased the loss per common share by $.07 and $.15 for the six
months ended December 31, 2000 and 1999, respectively.
The December 31, 2000 and 1999 financial statements have been restated to
reflect the effects of a change in the amortization life of the Company's
intangible asset identified as the Merad Technology from ten years to five
years. The effect of the adjustment decreased intangible assets by $233,272 at
December 31, 2000, increased the loss before extraordinary item and the loss
available to common shareholders by $61,228 and $50,568 for the six months
ended December 31, 2000 and 1999, respectively, and increased the loss per
common share before extraordinary item and the net loss per common share by
$.03 and $.05 for the six months ended December 31, 2000 and 1999,
respectively.
F2-8
HALIS, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS
TABLE OF CONTENTS
Page
----
Independent Auditors' Report............................................... F3-2
Consolidated Balance Sheet................................................. F3-3
Consolidated Statements of Operations...................................... F3-4
Consolidated Statements of Cash Flows...................................... F3-5
Consolidated Statements of Stockholders' Deficit........................... F3-6
Notes to Consolidated Financial Statements................................. F3-7
F3-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Halis, Inc.
We have audited the accompanying consolidated balance sheet of Halis, Inc.
and Subsidiaries as of December 31, 2000, and the related consolidated
statements of operations, stockholders' deficit, and cash flows for the years
ended December 31, 2000 and 1999. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Halis, Inc.
and Subsidiaries as of December 31, 2000, and the results of their operations
and their cash flows for the years ended December 31, 2000 and 1999 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.
/s/ Tauber & Balser, P.C.
Atlanta, Georgia
March 1, 2001
F3-2
HALIS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 2000
ASSETS
CURRENT ASSETS
Cash........................................................... $ 327,968
Restricted cash................................................ 36,308
Accounts receivable............................................ 242,397
Other current assets........................................... 102,487
------------
TOTAL CURRENT ASSETS......................................... 709,160
------------
PROPERTY AND EQUIPMENT
Computers and software......................................... 477,522
Vehicle........................................................ 36,588
Office furniture and equipment................................. 75,844
Leasehold improvements......................................... 29,770
------------
619,724
Less accumulated depreciation.................................. 328,618
------------
PROPERTY AND EQUIPMENT, NET.................................. 291,106
------------
OTHER ASSETS
Deposits....................................................... 102,840
Goodwill, net of accumulated amortization of $1,547,105........ 467,308
Capitalized software development costs......................... 58,150
Investment..................................................... 9,375
------------
TOTAL OTHER ASSETS........................................... 637,673
------------
TOTAL ASSETS............................................... $ 1,637,939
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses.......................... $ 777,130
Deferred revenue and customer deposits......................... 52,508
Accrued payroll and payroll taxes.............................. 67,549
Due to related party........................................... 291,976
Note payable to a bank......................................... 248,379
Note payable--related party.................................... 250,000
Obligations under capital leases--current portion.............. 66,121
------------
TOTAL CURRENT LIABILITIES.................................. 1,753,663
------------
LONG-TERM DEBT
Obligations under capital leases, net of current portion....... 142,511
------------
STOCKHOLDERS' DEFICIT
Preferred stock, $.10 par value; 5,000,000 shares authorized;
none issued................................................... --
Common stock, $.01 par value; 100,000,000 shares authorized;
61,132,037 shares issued and outstanding...................... 611,320
Additional paid-in capital..................................... 38,085,036
Accumulated other comprehensive loss, unrealized loss on
investment.................................................... (115,625)
Accumulated deficit............................................ (38,838,966)
------------
TOTAL STOCKHOLDERS' DEFICIT.................................. (258,235)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT................ $ 1,637,939
============
(The accompanying notes are an integral part of these consolidated financial
statements)
F3-3
HALIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2000 and 1999
2000 1999
----------- -----------
REVENUES............................................. $ 4,051,434 $ 5,082,493
----------- -----------
COST AND EXPENSES
Cost of goods sold................................. 12,280 848,173
Selling, general and administrative................ 3,960,447 4,056,539
Depreciation and amortization...................... 597,700 620,137
Research and development........................... 184,562 287,254
Write down of intangibles ......................... -- 63,996
----------- -----------
TOTAL COST AND EXPENSES ......................... 4,754,989 5,876,099
----------- -----------
OPERATING LOSS ...................................... (703,555) (793,606)
----------- -----------
OTHER INCOME (EXPENSE)
Provision for losses on notes receivable--related
party............................................. -- (623,377)
Gain on sale of property and equipment............. 35,000 --
Interest expense................................... (337,832) (63,119)
Interest income.................................... -- 27,131
Other income....................................... -- 8,144
----------- -----------
(302,832) (651,221)
----------- -----------
LOSS BEFORE INCOME TAXES AND EXTRAORDINARY ITEM...... (1,006,387) (1,444,827)
INCOME TAX BENEFIT................................... 92,000 --
----------- -----------
LOSS BEFORE EXTRAORDINARY ITEM....................... (914,387) (1,444,827)
EXTRAORDINARY ITEM--GAIN ON EXTINGUISHMENT OF
ACCOUNTS PAYABLE (NET OF INCOME TAXES OF $92,000)... 137,424 --
----------- -----------
NET LOSS............................................. $ (776,963) $(1,444,827)
=========== ===========
BASIC AND DILUTED NET LOSS PER COMMON SHARE
Loss before extraordinary item..................... $ (.01) $ (.03)
Extraordinary item................................. -- --
----------- -----------
Net loss........................................... $ (.01) $ (.03)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING. 59,147,006 51,266,751
=========== ===========
(The accompanying notes are an integral part of these consolidated financial
statements)
F3-4
HALIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2000 and 1999
2000 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss............................................ $ (776,963) $(1,444,827)
----------- -----------
Adjustments:
Depreciation and amortization:
Property and equipment............................ 145,329 115,772
Goodwill.......................................... 402,883 402,883
Other............................................. 49,488 101,482
Gain on sale of property and equipment............. (35,000) --
Gain on extinguishment of accounts payable......... (229,424) --
Write down of intangibles.......................... -- 63,996
Interest related to beneficial conversion feature
on convertible debt............................... 250,000 --
Interest accrued on note receivable--related party. -- (27,085)
Provision for losses on note receivable............ -- 623,377
Issuance of common stock for services.............. 26,000 15,400
Changes in:
Restricted cash................................... 594,570 (180,648)
Accounts receivable............................... 14,991 105,543
Other current assets.............................. (28,329) (3,287)
Deposits.......................................... (3,590) 70,137
Accounts payable and accrued expenses............. (1,190,687) 58,556
Accrued payroll and payroll taxes................. (195,049) (1,736)
Deferred revenue and customer deposits............ 16,214 (120,752)
----------- -----------
Total adjustments................................ (182,604) 1,223,638
----------- -----------
Net cash used by operating activities.......... (959,567) (221,189)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property and equipment........ 35,000 --
Purchase of property and equipment.................. (63,185) (76,162)
Purchase of capitalized software development costs.. (58,150) --
Purchase of capitalized license fees................ (48,271) --
----------- -----------
Net cash used by investing activities.......... (134,606) (76,162)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock.............. 1,070,000 250,000
Principal payments on obligations under capital
leases............................................. (60,139) (42,216)
Net increase in due to related party................ 219,289 47,722
Principal payments on note payable to a bank........ (70,512) (56,635)
Net proceeds from notes payable--related parties ... 250,000 59,500
----------- -----------
Net cash provided by financing activities...... 1,408,638 258,371
----------- -----------
NET INCREASE (DECREASE) IN CASH...................... 314,465 (38,980)
CASH, BEGINNING OF YEAR.............................. 13,503 52,483
----------- -----------
CASH, END OF YEAR.................................... $ 327,968 $ 13,503
=========== ===========
(The accompanying notes are an integral part of these consolidated financial
statements)
F3-5
HALIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
For the Years Ended December 31, 2000 and 1999
Accumulated
Common Stock Additional Other Total
------------------- Common Stock Paid-In Comprehensive Accumulated Stockholders'
Shares Amount to be Issued Capital Loss Deficit Deficit
---------- -------- ------------ ----------- ------------- ------------ -------------
Balances, December 31,
1998................... 46,259,763 $462,597 $ -- $36,066,439 $ (88,542) $(36,617,176) $ (176,682)
Comprehensive loss:
Net loss............... -- -- -- -- -- (1,444,827) (1,444,827)
Change in unrealized
loss on investment.... -- -- -- -- 12,500 -- 12,500
-----------
Total comprehensive
loss................... (1,432,327)
-----------
Issuance of common
stock.................. 2,066,667 20,667 -- 189,333 -- -- 210,000
Common stock issued to
consultants............ 1,059,055 10,591 -- 97,457 -- -- 108,048
Common stock issued for
conversion of
convertible debt to
equity................. 1,824,645 18,246 -- 139,494 -- -- 157,740
Common stock issued to
an employee in lieu of
accrued compensation... 1,500,000 15,000 -- 195,000 -- -- 210,000
Common stock to be
issued................. -- -- 40,000 -- -- -- 40,000
---------- -------- -------- ----------- --------- ------------ -----------
Balances, December 31,
1999................... 52,710,130 527,101 40,000 36,687,723 (76,042) (38,062,003) (883,221)
Comprehensive loss:
Net loss............... -- -- -- -- -- (776,963) (776,963)
Change in unrealized
loss on investment.... -- -- -- -- (39,583) -- (39,583)
-----------
Total comprehensive
loss................... (816,546)
-----------
Issuance of common
stock.................. 6,834,407 68,344 (40,000) 1,042,188 -- -- 1,070,532
Common stock issued to
consultants and a
director............... 400,000 4,000 -- 22,000 -- -- 26,000
Common stock issued to
an employee in lieu of
accrued compensation
and for repayment of
note payable........... 1,187,500 11,875 -- 83,125 -- -- 95,000
Beneficial conversion
feature related to
convertible debt to
related party.......... -- -- -- 250,000 -- -- 250,000
---------- -------- -------- ----------- --------- ------------ -----------
Balances, December 31,
2000................... 61,132,037 $611,320 $ -- $38,085,036 $(115,625) $(38,838,966) $ (258,235)
========== ======== ======== =========== ========= ============ ===========
(The accompanying notes are an integral part of these consolidated financial
statements)
F3-6
HALIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description and Basis of Presentation
Halis, Inc. ("Halis") and Subsidiaries (collectively, the "Company")
develops and supplies healthcare software systems and provides claims
processing services to managed healthcare markets, medical practices, and
related point of service markets to customers located throughout the United
States. 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 third party claims processing fees, consulting
services, software licensing fees, sales of related computer hardware, and post
contract customer support and maintenance. For 2000 and 1999, third party
claims processing fees accounted for approximately 96% and 66%, respectively,
of the Company's sales. Revenues are recognized as follows:
Claims Processing Monthly as services are performed. Fees are
computed based on a percent of premium or a
fee per participant.
Consulting Services When services are performed.
Installation When installation is complete.
Training and Education Upon completion of training or education
session.
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.
Restricted Cash
The Company, through its third party claims administration subsidiary,
received prepayments for the payment of premiums and claims to be paid on
behalf of its customers. As of December 31, 2000, the Company had $36,308 of
such prepayments, and related deferred revenue and customer deposits of
$36,308.
Cash--Agency Accounts
The Company, through its third party claims administration subsidiary,
maintains custody of cash funds on behalf of some of its customers for the
payment of insurance premiums to carriers and medical claims for covered
individuals. The Company has custody of the funds but no legal right to them.
Therefore, the cash balances and related liabilities are not reflected in the
Company's balance sheet. At December 31, 2000, the Company maintained custody
of approximately $1.1 million of customer funds.
F3-7
HALIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000 and 1999
Property and Equipment
Property and equipment are stated 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.
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.
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. In December 1999, due to the Company's plan to no longer sell its
existing "windows" based software product and to convert to an "internet"
driven software product in 2000, the Company reviewed the recoverability of
software development costs and determined that the remaining unamortized
software development costs of $63,996 was not recoverable and should be written
off. During 2000, the Company capitalized development costs incurred in the
development of its Internet software product. Amortization of these costs will
commence in 2001 when the product is available for market release.
Other Intangible
Other intangible consisted of license fees in the amount of $118,771 paid to
a non-related company for the right to use its software technology in the
development of the Company's software product and was amortized over a period
of two years on the straight-line basis. At December 31, 2000 and 1999,
accumulated amortization was $118,771 and $69,283, respectively.
Investment
The investment is in a marketable equity security of a related company,
HealthWatch, Inc., which is classified as available-for-sale, and is carried at
market value (see Note I). The purchase cost and fair value of the investment
at December 31, 2000 was $125,000 and $9,375, respectively. The related
unrealized holding loss of $115,625 is reported as a separate component of
stockholders' deficit at December 31, 2000.
Income Taxes
Deferred income tax assets and liabilities are recognized for the estimated
tax effects of temporary differences between the financial reporting and tax
reporting bases of assets and liabilities and for loss carryforwards based on
enacted tax laws and rates. A valuation allowance is used to eliminate deferred
income tax assets to the amount that is more likely than not to be utilized.
F3-8
HALIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000 and 1999
Net Loss Per Share
The Company has adopted SFAS No. 128, "Earnings Per Share," which requires
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 26,233,347 and 13,488,067
in 2000 and 1999, respectively.
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 useful lives of certain
assets, 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.
Fair Value of Financial Instruments
The carrying amounts reflected in the consolidated balance sheet for cash
and accounts receivable approximate their fair values due to the short
maturities of those instruments. Available-for-sale marketable securities are
recorded at fair value in the consolidated balance sheet. Management believes
it is not practicable to estimate the fair value of its liability financial
instruments because of the uncertainty related to its ability to continue as a
going concern and its current liquidity difficulties.
Reclassifications
Certain reclassifications have been made to the 1999 consolidated financial
statements to conform to the 2000 consolidated financial statement
presentation.
NOTE B--REALIZATION OF ASSETS AND SATISFACTION OF LIABILITIES
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate the continuation of
the Company as a going concern. However, the Company incurred a net loss of
$776,963 and $1,444,827 for the years ended December 31, 2000 and 1999,
respectively, and had a working capital deficiency of $1,044,503 and an equity
deficiency of $258,235 at December 31, 2000. The Company has sustained
continuous losses from operations. The Company has used, rather than provided,
cash in its operating activities during the years ended December 31, 2000 and
1999 and has deferred payment of certain accounts payable and accrued expenses.
Given these results, additional capital and improved operations will be needed
to sustain the Company's operations.
Management's plans in this regard include merging with HealthWatch, Inc.
("HealthWatch"), a related company which owns approximately 25% of Halis (see
Note I). The Company expects the merger to improve its liquidity by having
access to HealthWatch's cash reserves and increasing the Company's ability to
raise additional growth capital. In addition, the Company is upgrading its HES
software product to an Internet version. This upgrade will restructure the
software into several healthcare software products under a common
F3-9
HALIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000 and 1999
architecture, which the Company believes will improve market acceptance. The
Company also plans to expand its business model to include e-commerce services
that will supplement its software sales and value-added business services. The
e-commerce business will focus on technology-based transactions that are paid
for on a monthly or per-transaction basis. This revenue model is expected to
generate recurring, more predictable revenues that can be leveraged to work
towards a positive cash flow. Additionally, the Company will continue its
efforts to raise the additional capital required to fund planned 2001
activities.
In view of the matters described, there is substantial 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. There can be no assurance that management will be successful in
implementing its plans. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
NOTE C--NOTE PAYABLE TO A BANK
The Company has a 10.5% note payable to a bank in the amount of $248,379 as
of December 31, 2000. The note is payable in monthly installments of $8,045,
including interest, with a balloon payment of all unpaid principal and interest
due on October 27, 2001. The note was assumed in connection with the disposal
of a subsidiary of the Company. Certain assets of the former subsidiary act as
collateral for the loan. The Company has guaranteed payment of the loan.
NOTE D--RELATED PARTY NOTES AND ADVANCES
The Company has an unsecured note receivable due from a stockholder of
$623,377. 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. In December 1999, the Company reviewed the collectability of this note
and determined that its collection was doubtful. The entire amount of the note
was reserved at December 31, 1999 and the Company ceased accruing interest on
the note.
At December 31, 1999, the Company had an unsecured note payable to a
stockholder and director of the Company in the amount of $15,000. This note was
non-interest bearing and due on demand. The note was paid in full in February
2000 with the issuance of 187,500 shares of the Company's common stock.
In Octo ber 2000, the Company borrowed $250,000 from HealthWatch under an
unsecured note payable. The note accrues interest at 10% and is due on demand.
The note is convertible, at the option of HealthWatch, into 12,500,000 shares
of the Company's common stock, or $.02 per share. This convertible note
includes a beneficial conversion feature of $250,000, which represents the
aggregate fair value at the issue date of the Halis common stock into which the
note is convertible over the proceeds received from the issuance of the note
payable. This beneficial conversion feature has been included in interest
expense and additional paid-in capital in 2000 since the note was convertible
at the date of issue.
At December 31, 2000, the Company owed HealthWatch a total of $291,976,
which consisted of license fees related to a proprietary technology asset owned
by MERAD Software, Inc. (see Note I) and net advances received by the Company
for working capital purposes. These advances are payable on demand and are non-
interest bearing.
F3-10
HALIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000 and 1999
NOTE E--COMMITMENTS AND CONTINGENCIES
Leases
The Company leases office space under several operating lease agreements
expiring in 2005. Rent expense for the office space and equipment classified as
operating leases totaled $666,864 and $536,547 for the years ended December 31,
2000 and 1999, respectively. At December 31, 2000, future minimum lease
payments under non-cancelable operating leases having remaining terms in excess
of one year are as follows:
2001.............................................................. $ 599,410
2002.............................................................. 607,994
2003.............................................................. 492,134
2004.............................................................. 27,657
2005.............................................................. 15,270
----------
$1,742,465
==========
Beginning January 2000, the Company subleased one of its office facilities
under a four-year operating lease expiring December 2003. Rental income from
this sublease in 2000 was $193,392. Minimum future subrental income anticipated
under this agreement is as follows:
2001................................................................ $222,372
2002................................................................ 226,630
2003................................................................ 231,104
--------
$680,106
========
During 1998, the Company acquired equipment totaling $44,650 under a five-
year capital lease. During 1999, the Company acquired computers and software
and a vehicle totaling $266,943 under capital leases ranging from three to five
years. Amortization of these capital leases included in depreciation expense
totaled $94,156 and $78,200 for the years ended December 31, 2000 and 1999,
respectively. Accumulated depreciation amounted to $174,589 and $80,436 as of
December 31, 2000 and 1999, respectively.
Future payments under these leases at December 31, 2000 are as follows:
2001............................................................... $ 82,635
2002............................................................... 78,775
2003............................................................... 71,572
2004............................................................... 10,341
--------
Total minimum lease payments....................................... 243,323
Amount representing interest....................................... (34,691)
--------
Present value of minimum lease payments............................ $208,632
========
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 complaint alleges,
among other things, breach of contract in connection with the termination by
the Company of its merger agreement with
F3-11
HALIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000 and 1999
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 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 Surmans 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 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
Georgia Court of Appeals has affirmed the trial court's granting of summary
judgment in favor of the Company on seven of the nine counts in the complaint
and affirming the denial of the Company's cross appeal denying summary judgment
on the two surviving counts. The plaintiffs filed a petition for certiorari to
the Georgia Supreme Court regarding the decision of the Georgia Court of
Appeals. The Georgia Supreme Court, on September 8, 2000, denied that petition.
There can be no assurance, however, that the Company will be successful in its
defense 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.
On July 18, 1997, the Company was sued by Penelope Sellers in an action
seeking actual damages against the Company in the amount of $480,535,
unspecified attorneys fees, and punitive damages of not less than $1,000,000.
Ms. Sellers contends that a Finder's Fee Agreement between her and the Company
in August 1995, 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 to 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 million. Finally, Ms.
Sellers has made a claim for 10% of the value of AUBIS and Halis Systems, Inc.
Discovery has been completed. The defendants filed a motion for partial summary
judgment, which was granted, effectively eliminating Larry Fisher and Paul
Harrison on claims asserted against them for tortuous interference with
contractual relations. The Company continues to vigorously defend this lawsuit.
There can be no assurance, however, that the Company will be
F3-12
HALIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000 and 1999
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 April 1, 2000, the Company was served a complaint by Carrera-Maximus,
Inc. (previously known as Carrera Consulting Group). The complaint alleges
breach of contract in connection with certain professional service fees,
product support fees, and license fees paid to the Company under a contract
between the two parties. Carrera-Maximus, Inc. is seeking the return of fees in
the total amount of approximately $538,000. The Company denies the allegations
of liability in the complaint and intends to vigorously defend this case. The
Company has filed an answer asserting various defenses and denying liability
and has asserted a counterclaim for breach of contract for unpaid fees and
unreimbursed expenses. This suit is currently in the discovery phase. 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 September 8, 2000, a subsidiary of the Company was served a complaint by
Motivational Marketing, Inc. The complaint alleges breach of contract for
failure to pay commissions and the plaintiff is seeking an amount in excess of
$138,000 for commissions, and damages for fraud in the inducement in an amount
of not less than $100,000, plus unspecified punitive damages and attorney fees.
The contract referenced in the complaint was an agreement between the plaintiff
and TG Marketing, Inc. ("TGM"), a company acquired by Halis in May 1997, for
telemarketing services whereby the plaintiff was supposed to receive
commissions from TGM in consideration for referrals of clients to TGM. The
Company denies the allegations of the complaint and intends to vigorously
defend this case. This suit is in the discovery phase. There can be no
assurance, however, that the Company will be successful in its defense of the
complaint or that the final resolution of this matter will not have a material
adverse effect on the Company's financial condition or results of operations.
The Company 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.
NOTE F--INCOME TAXES
Significant components of the Company's deferred income tax assets as of
December 31, 2000 are as follows:
Deferred tax assets:
Net operating loss carryforwards.............................. $ 6,752,511
Other, net.................................................... 378,379
-----------
Net deferred tax asset.......................................... 7,130,890
Valuation allowance............................................. (7,130,890)
-----------
Net deferred tax asset reported................................. $ --
===========
The valuation allowance at December 31, 1999 amounted to $6,877,994.
The reconciliation of the effective income tax rate to the Federal statutory
rate is as follows:
2000 1999
----- -----
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%
===== =====
F3-13
HALIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000 and 1999
At December 31, 2000, the Company had available for carryforward a net
operating loss of approximately $17.8 million. Approximately $9 million of the
net operating loss relates to losses prior to 1997, 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. The net operating losses expire between the
years 2001 and 2020. Future recognition of these carryforwards will be
reflected when it is more likely than not that they will be utilized.
Net operating loss carryforwards expiring in the next five years are
approximately as follows:
2001.............................................................. $ 246,000
2002.............................................................. 1,225,000
2003.............................................................. 1,571,000
2004.............................................................. 782,000
2005.............................................................. --
NOTE G--STOCK OPTION PLANS
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 the date of grant. Incentive stock options issued to persons who directly
or indirectly own more than ten percent of the outstanding stock of the Company
shall have an exercise price of 110 percent of the average market price on the
date of grant and are exercisable up to five years from the date of grant.
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:
1986 & Weighted 1996 Weighted Outside of Weighted
1988 Plans: Average Plan: Average Plans: Average
Number of Exercise Number of Exercise Number of Exercise
Options Price Options Price Options Price
----------- -------- --------- -------- ---------- --------
Outstanding at December
31, 1998............... 71,940 $ 0.28 1,751,250 $0.25 8,645,090 $0.20
Granted............... -- -- -- -- 2,378,700 $0.08
Expired............... (220) $11.88 -- -- -- --
Cancelled............. -- -- (385,250) $0.13 (717,000) $0.13
------ --------- ----------
Outstanding at December
31, 1999............... 71,720 $ 0.24 1,366,000 $0.20 10,306,790 $0.16
Expired............... (220) $10.63 -- -- -- --
Cancelled............. -- -- (94,000) $0.13 -- --
------ --------- ----------
Outstanding at December
31, 2000............... 71,500 $ 0.21 1,272,000 $0.20 10,306,790 $0.16
====== ========= ==========
Options exercisable at
December 31, 2000...... 71,500 $ 0.21 974,975 $0.22 10,248,290 $0.16
====== ========= ==========
F3-14
HALIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000 and 1999
Exercise prices for options outstanding as of December 31, 2000 under the
1986 and 1988 Plans range from $0.13 to $3.44 per share. The weighted average
remaining life of these options was approximately two years.
Exercise prices for options outstanding as of December 31, 2000 granted
under the 1996 Plan ranged from $0.13 to $2.00 per share. The weighted average
remaining life of these options was approximately seven years.
Exercise prices for options outstanding as of December 31, 2000 granted
outside of the Plans ranged from $0.05 to $2.12 per share. The weighted average
remaining life of these options was approximately seven 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). In accordance with APB
25, since the exercise price of the underlying stock options equaled the fair
market value on the date of grant, no compensation expense was recognized.
Pro forma information regarding net loss and loss 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. During
2000, no options were granted by the Company. The fair value of options granted
in 1999 was estimated at the date of grant using the Black-Scholes option
pricing model with the following weighted-average assumptions:
Risk-free interest rate........................................... 4.55-5.67%
Dividend yield.................................................... 0.0%
Expected volatility............................................... 147.60%
Weighted average expected life.................................... 4 years
Forfeiture rate................................................... 5.0%
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:
2000 1999
--------- -----------
Net loss--as reported............................... $(776,963) $(1,444,827)
Net loss--pro forma................................. $(878,851) $(1,472,727)
Reported loss per share--basic & diluted............ $ (.01) $ (.03)
Pro forma loss per share--basic & diluted........... $ (.01) $ (.03)
Weighted average fair value of options granted
during the year.................................... n/a $ .01
NOTE H--STOCK WARRANTS
The Company has issued stock warrants in conjunction with the issuance of
common stock. Activity related to stock warrants was as follows:
Weighted
Average
Exercise
Warrants Price
--------- --------
Outstanding at December 31, 1998.......................... 1,276,760 $1.73
Granted................................................. 1,161,822 $0.29
---------
Outstanding at December 31, 1999 and 2000................. 2,438,582 $1.05
=========
F3-15
HALIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000 and 1999
At December 31, 2000 the Company had warrants outstanding as follows:
Common Shares Exercise Price
Under Warrant Per Share Range of Expiration Dates
------------- -------------- -------------------------
437,500 $ .05 December 2004
535,000 $ .11 June 2004
237,982 $1.35 September 2002 - December 2002
1,228,100 $1.75 November 2001 - September 2002
---------
2,438,582
=========
NOTE I--RELATED PARTY TRANSACTIONS
On November 18, 1996, the Company entered into a license agreement for a
proprietary technology asset ("MERAD") from Paul Harrison Enterprises, Inc.
("PHE"), which was controlled by the Chairman and Chief Executive Officer of
the Company. Mr. Harrison served 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.). During 2000 and 1999, $1,080 and $62,518,
respectively, of license fees were incurred under this agreement. At December
31, 2000 and 1999, $88,563 and $87,483, respectively, was payable to MERAD
Software, Inc. under this agreement and was included in due to related party.
During 2000, 1,187,500 shares of the Company's common stock were issued to
an officer of the Company for payment of accrued compensation of $80,000 and a
note payable of $15,000.
During 2000, 200,000 shares of the Company's common stock valued at $10,000
was issued to a director for consulting services.
At December 31, 1999 and 2000, the Company had outstanding the following
qualified and nonqualified stock options granted to officers and directors:
Common Shares Exercise Price Range of Expiration
Under Option Per Share Dates
------------- -------------- -------------------
740,000 $.05 December 2009
5,666,500 $.13 June 2006--December 2009
---------
6,406,500
=========
Of the total outstanding options granted to officers and directors as
discussed above, options to acquire up to an aggregate of 6,293,250 shares of
common stock are exercisable at December 31, 2000.
During 1999, the Company granted options to an officer/director of the
Company to purchase 540,000 shares of the Company's common stock at a price of
$.05 per share. These options expire December 2009.
During 1999, the Company granted options to a director of the Company to
purchase 100,000 shares of the Company's common stock at a price of $.05 per
share. These options expire December 2009.
During 1999, the Company granted options to a relative of an
officer/director of the Company to purchase 100,000 shares of the Company's
common stock at a price of $.05 per share. These options expire December 2009.
F3-16
HALIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000 and 1999
During 1999, 1,500,000 shares of the Company's common stock were issued to
an officer of the Company for payment of accrued compensation of $210,000.
During 1999, an outstanding 6% convertible debenture to HealthWatch in the
amount of $157,741 was converted into 1,824,645 shares of the Company's common
stock.
At December 31, 2000 and 1999, the Company owned 16,667 shares of
HealthWatch common stock.
Paul W. Harrison, the Chairman and Chief Executive Officer of the Company,
is also the Chairman and Chief Executive Officer of HealthWatch. Mr. Harrison
is also a shareholder of both companies.
During 2000 and 1999, the Company and HealthWatch operated under a Business
Collaboration Agreement which allowed HealthWatch to act as a reseller of the
Company's software product and provided for the sharing of certain operating
expenses. The Company received from HealthWatch approximately $89,000 and
$105,000 in 2000 and 1999, respectively, under this agreement, for the sharing
of operating expenses, which is included as selling, general and administrative
expenses in the Company's statements of operations.
In September 2000, the Business Collaboration Agreement was amended to
provide, among other things, for revenue sharing based on a 60/40 split (i.e.,
the selling company would receive 60% of the sales price and the company that
owns the technology would receive 40% of the sales price). Furthermore,
HealthWatch is obligated to pay Halis a collaboration fee of $50,000 per month
beginning in October 2000, which shall be applied as a credit against any
revenue sharing amount that is due to Halis. The Company is obligated to
provide support to HealthWatch for the Halis software products, provide
reasonable product enhancement as part of product release updates, and
cooperate with HealthWatch in regard to product enhancement requests.
HealthWatch may terminate the $50,000 monthly collaboration fee payable to
Halis on or after October 1, 2001, under certain terms and conditions. The
Company received $150,000 from HealthWatch during 2000 under this agreement.
This amount is included in revenues in the Company's statement of operations.
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. However, due to the market volatility of the two
companies' stock and accounting issues that would be caused as a result of the
merger that may have an adverse effect on HealthWatch, the companies agreed to
delay the consummation of the merger.
In March 2000, the Company and HealthWatch signed a binding letter of intent
to merge. In the merger, each share of common stock of the Company outstanding
immediately prior to the effective time of the merger would be converted into
the right to receive one-twentieth (.05) of a share of HealthWatch common stock
(the "Merger Consideration"). In addition, outstanding stock options and stock
warrants of the Company would be converted into options and warrants to
purchase HealthWatch common stock in accordance with the same conversion ratio.
The Letter of Intent also contains binding provisions providing HealthWatch
with an unconditional right to purchase prior to the closing of the merger, up
to $1,000,000 of the Company's common stock at $.20 per share, and upon any
such financing, HealthWatch shall have a three month option to purchase up to
an additional $5,000,000 of the Company's common stock at $.20 per share. In
May 2000, HealthWatch purchased 5,000,000 shares of the Company's common stock
at $.20 per share.
On June 29, 2000, the Company and HealthWatch signed a definitive merger
agreement. The proposed merger is expected to close in the first quarter of
2001. The merger is subject to, among other conditions, the approval of the
shareholders of both companies. No assurance can be given that the parties will
be able to satisfy the conditions to the consummation of the merger.
F3-17
HALIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000 and 1999
NOTE J--SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Details of non-cash transactions are as follows:
2000 1999
------- --------
Capital lease obligations incurred for the acquisition of
property and equipment................................... $ -- $266,943
======= ========
Debt converted to equity:
Accrued employee compensation........................... $80,000 $210,000
Note payable, related party............................. 15,000 --
6% convertible promissory note, related party........... -- 157,741
Accounts payable, consultants........................... -- 92,648
------- --------
$95,000 $460,389
======= ========
Capitalized license fees recorded by increasing accounts
payable.................................................. $ -- $118,771
======= ========
Cash paid for interest.................................... $84,166 $ 61,050
======= ========
NOTE K--INFORMATION CONCERNING BUSINESS SEGMENTS
The Company's three reportable segments are strategic business units that
offer different products and services to customers located throughout the
United States. These segments are American Benefit Administrative Services
("ABAS"), Healthcare Enterprise System ("HES"), and Halis Consulting Services
("HCS"). ABAS provides third party claims processing services for healthcare
plans of varying size companies. HES supplies healthcare software systems to
various segments of the medical industry. HCS performs software consulting
services and support to companies in varying industries. The accounting
policies of the segments are the same as those described in the summary of
significant accounting policies.
Segment information for 2000 and 1999 is as follows:
Corporate
ABAS HES HCS Unallocated Totals
---------- --------- -------- ----------- -----------
2000
Revenues from external
customers.............. $3,862,105 $ 25,309 $ 14,020 $ 150,000 $ 4,051,434
Segment income (loss)... (111,863) (302,092) 649 (363,657) (776,963)
Interest income
(expense), net......... (26,525) -- (292) (311,015) (337,832)
Total assets............ 1,277,121 73,593 58,328 228,897 1,637,939
Capital expenditures.... 39,402 14,333 -- 9,450 63,185
Depreciation and
amortization........... 518,199 3,996 1,800 73,705 597,700
Gain on extinguishment
of
accounts payable....... -- -- -- 229,424 229,424
1999
Revenues from external
customers.............. 3,371,496 798,077 912,920 -- 5,082,493
Segment income (loss)... (934,117) 415,615 189,809 (1,116,134) (1,444,827)
Interest income
(expense), net......... (1,867) -- -- (34,121) (35,988)
Total assets............ 1,402,261 45,787 67,101 271,037 1,786,186
Capital expenditures.... 335,450 -- -- 7,655 343,105
Depreciation and
amortization........... 497,939 936 1,780 119,482 620,137
Provision for losses on
note
receivable--related
party.................. (623,377) -- -- -- (623,377)
F3-18
HALIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000 and 1999
NOTE L--FOURTH QUARTER ADJUSTMENTS
Significant adjustments made in the fourth quarter of 2000 are as follows:
Record interest expense related to beneficial conversion
feature on convertible debt...................................... $250,000
========
F3-19
ANNEX A
Agreement and Plan of Merger,
dated as of June 29, 2000
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
HALIS, INC.,
HEALTHWATCH MERGER SUB, INC.
AND
HEALTHWATCH, INC.
DATED AS OF JUNE 29, 2000
TABLE OF CONTENTS
ARTICLE I
THE MERGER................................................................................................. F-2
SECTION 1.1 THE MERGER..................................................................................... F-2
SECTION 1.2 CLOSING........................................................................................ F-2
SECTION 1.3 EFFECTIVE TIME................................................................................. F-2
SECTION 1.4 EFFECTS OF THE MERGER.......................................................................... F-2
SECTION 1.5 CERTIFICATE OF INCORPORATION AND BY-LAWS OF THE SURVIVING CORPORATION AND HEALTHWATCH.......... F-2
SECTION 1.6 DIRECTORS AND OFFICERS......................................................................... F-2
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES........ F-2
SECTION 2.1 EFFECT ON CAPITAL STOCK........................................................................ F-2
(a) CANCELLATION OF TREASURY STOCK AND HEALTHWATCH-OWNED STOCK........................................ F-2
(b) CONVERSION OF HALIS COMMON STOCK.................................................................. F-3
(c) MERGER SUB COMMON STOCK........................................................................... F-3
(d) HEALTHWATCH COMMON STOCK.......................................................................... F-3
(e) OPTIONS........................................................................................... F-3
SECTION 2.2 EXCHANGE OF CERTIFICATES....................................................................... F-4
(a) EXCHANGE AGENT.................................................................................... F-4
(b) EXCHANGE PROCEDURES............................................................................... F-4
(c) DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES.................................................. F-4
(d) NO FURTHER OWNERSHIP RIGHTS IN HALIS COMMON STOCK................................................. F-5
(e) NO FRACTIONAL SHARES.............................................................................. F-5
(f) TERMINATION OF EXCHANGE FUND...................................................................... F-5
(g) NO LIABILITY...................................................................................... F-5
(h) INVESTMENT OF EXCHANGE FUND....................................................................... F-5
(i) LOST CERTIFICATES................................................................................. F-6
(j) HALIS DISSENTING SHARES........................................................................... F-6
SECTION 2.3 CERTAIN ADJUSTMENTS............................................................................ F-6
ARTICLE III
REPRESENTATIONS AND WARRANTIES............................................................................. F-6
SECTION 3.1 REPRESENTATIONS AND WARRANTIES OF HEALTHWATCH AND MERGER SUB
(a) ORGANIZATION, STANDING AND CORPORATE POWER........................................................ F-6
(b) SUBSIDIARIES...................................................................................... F-7
(c) CAPITAL STRUCTURE................................................................................. F-7
(d) AUTHORITY; NONCONTRAVENTION....................................................................... F-8
(e) SEC DOCUMENTS; UNDISCLOSED LIABILITIES............................................................ F-9
(f) INFORMATION SUPPLIED.............................................................................. F-10
(g) ABSENCE OF CERTAIN CHANGES OR EVENTS.............................................................. F-10
(h) COMPLIANCE WITH APPLICABLE LAWS; LITIGATION....................................................... F-11
(i) ABSENCE OF CHANGES IN BENEFIT PLANS............................................................... F-11
(j) BENEFIT PLANS..................................................................................... F-11
(k) TAXES............................................................................................. F-12
i
(l) VOTING REQUIREMENTS............................................................................... F-13
(m) STATE TAKEOVER STATUTES........................................................................... F-13
(n) BROKERS........................................................................................... F-14
(o) INTELLECTUAL PROPERTY............................................................................. F-14
(p) CERTAIN CONTRACTS................................................................................. F-15
(q) ENVIRONMENTAL LIABILITY........................................................................... F-16
(r) INSURANCE......................................................................................... F-16
(s) TRANSACTIONS WITH AFFILIATES...................................................................... F-16
(t) FULL DISCLOSURE................................................................................... F-16
SECTION 3.2 REPRESENTATIONS AND WARRANTIES OF HALIS........................................................ F-16
(a) ORGANIZATION, STANDING AND CORPORATE POWER........................................................ F-16
(b) SUBSIDIARIES...................................................................................... F-17
(c) CAPITAL STRUCTURE................................................................................. F-17
(d) AUTHORITY; NONCONTRAVENTION....................................................................... F-18
(e) SEC DOCUMENTS; UNDISCLOSED LIABILITIES............................................................ F-19
(f) INFORMATION SUPPLIED.............................................................................. F-19
(g) ABSENCE OF CERTAIN CHANGES OR EVENTS.............................................................. F-19
(h) COMPLIANCE WITH APPLICABLE LAWS; LITIGATION....................................................... F-20
(i) ABSENCE OF CHANGES IN BENEFIT PLANS............................................................... F-20
(j) BENEFIT PLANS..................................................................................... F-21
(k) TAXES............................................................................................. F-22
(l) VOTING REQUIREMENTS............................................................................... F-22
(m) STATE TAKEOVER STATUTES........................................................................... F-22
(n) BROKERS........................................................................................... F-23
(o) INTELLECTUAL PROPERTY............................................................................. F-23
(p) CERTAIN CONTRACTS................................................................................. F-24
(q) ENVIRONMENTAL LIABILITY........................................................................... F-25
(r) INSURANCE......................................................................................... F-25
(s) TRANSACTIONS WITH AFFILIATES...................................................................... F-25
(t) FULL DISCLOSURE................................................................................... F-25
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS.................................................................. F-25
SECTION 4.F-1 CONDUCT OF BUSINESS.......................................................................... F-25
(a) CONDUCT OF BUSINESS BY HEALTHWATCH................................................................ F-25
(b) CONDUCT OF BUSINESS BY HALIS...................................................................... F-25
(c) OTHER ACTIONS..................................................................................... F-26
(d) ADVISE OF CHANGES................................................................................. F-26
SECTION 4.2 NO SOLICITATION BY HALIS...................................................................... F-26
SECTION 4.3 HEALTHWATCH PRIVATE PLACEMENT.................................................................. F-28
ARTICLE V
ADDITIONAL AGREEMENTS...................................................................................... F-28
SECTION 5.1 PREPARATION OF THE FORM S-4 AND THE JOINT PROXY STATEMENT; STOCKHOLDERS' MEETINGS.............. F-28
SECTION 5.2 LETTERS OF HEALTHWATCH'S ACCOUNTANTS........................................................... F-29
SECTION 5.3 LETTERS OF HALIS' ACCOUNTANTS.................................................................. F-29
SECTION 5.4 ACCESS TO INFORMATION; CONFIDENTIALITY......................................................... F-29
SECTION 5.5 COMMERCIALLY REASONABLE EFFORTS................................................................ F-30
SECTION 5.6 INDEMNIFICATION, EXCULPATION AND INSURANCE..................................................... F-30
SECTION 5.7 FEES AND EXPENSES.............................................................................. F-31
ii
SECTION 5.8 PUBLIC ANNOUNCEMENTS........................................................................... F-31
SECTION 5.9 AFFILIATES..................................................................................... F-31
SECTION 5.10 NASDAQ....................................................................................... F-31
SECTION 5.11 TAX TREATMENT................................................................................. F-31
SECTION 5.12 EMPLOYEE BENEFITS............................................................................. F-31
SECTION 5.13 LOCK-UP....................................................................................... F-32
ARTICLE VI
CONDITIONS PRECEDENT....................................................................................... F-32
SECTION 6.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER..................................... F-32
(a) STOCKHOLDER APPROVALS............................................................................. F-32
(b) GOVERNMENTAL, REGULATORY AND OTHER APPROVALS...................................................... F-32
(c) NO INJUNCTIONS OR RESTRAINTS...................................................................... F-32
(d) FORM S-4.......................................................................................... F-32
(e) NASDAQ LISTINGS................................................................................... F-32
(f) TAX OPINIONS...................................................................................... F-32
(g) OPINION OF FINANCIAL ADVISORS..................................................................... F-33
(h) OPINION OF FINANCIAL ADVISORS..................................................................... F-33
(i) LOCKUP AGREEMENTS................................................................................. F-33
SECTION 6.2 CONDITIONS TO OBLIGATIONS OF HALIS............................................................. F-33
(a) REPRESENTATIONS AND WARRANTIES.................................................................... F-33
(b) PERFORMANCE OF OBLIGATIONS OF HEALTHWATCH......................................................... F-33
(c) NO MATERIAL ADVERSE CHANGE........................................................................ F-33
SECTION 6.3 CONDITIONS TO OBLIGATIONS OF HEALTHWATCH....................................................... F-33
(a) REPRESENTATIONS AND WARRANTIES.................................................................... F-33
(b) PERFORMANCE OF OBLIGATIONS OF HALIS............................................................... F-33
(c) NO MATERIAL ADVERSE CHANGE........................................................................ F-34
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER.......................................................................... F-34
SECTION 7.1 TERMINATION.................................................................................... F-34
SECTION 7.2 EFFECT OF TERMINATION.......................................................................... F-35
SECTION 7.3 AMENDMENT...................................................................................... F-36
SECTION 7.4 EXTENSION; WAIVER.............................................................................. F-36
ARTICLE VIII
GENERAL PROVISIONS......................................................................................... F-36
SECTION 8.1 NONSURVIVAL OF REPRESENTATIONS AND WARRANTIES.................................................. F-36
SECTION 8.2 NOTICES........................................................................................ F-36
SECTION 8.3 DEFINITIONS.................................................................................... F-37
SECTION 8.4 INTERPRETATION................................................................................. F-37
SECTION 8.5 COUNTERPARTS................................................................................... F-38
SECTION 8.6 ENTIRE AGREEMENT; NO THIRD-PARTY BENEFICIARIES................................................. F-38
SECTION 8.7 GOVERNING LAW.................................................................................. F-38
SECTION 8.8 ASSIGNMENT..................................................................................... F-38
SECTION 8.9 CONSENT TO JURISDICTION........................................................................ F-38
SECTION 8.10 HEADINGS, ETC................................................................................. F-38
SECTION 8.11 SEVERABILITY.................................................................................. F-38
SECTION 8.12 DISCLOSURE SCHEDULES.......................................................................... F-39
iii
EXHIBITS
EXHIBIT A HealthWatch Stock Plans
EXHIBIT B Halis Stock Plans
EXHIBIT C Form of Rule 145 Letter
iv
AGREEMENT AND PLAN OF MERGER dated as of June 29, 2000 among HEALTHWATCH,
INC., a Minnesota corporation ("HealthWatch"), HALIS, INC., a Georgia
corporation ("Halis") and HEALTHWATCH MERGER SUB, INC. ("Merger Sub"), a Georgia
corporation and a wholly-owned subsidiary of HEALTHWATCH.
WITNESSETH:
WHEREAS, the respective Boards of Directors of Halis, Merger Sub and
HealthWatch have each approved the merger of Halis with and into Merger Sub (the
"Merger"), upon the terms and subject to the conditions set forth in this
Agreement, whereby each issued and outstanding share of common stock, par value
$.01 per share, of Halis ("Halis Common Stock"), other than shares owned by
Halis or HealthWatch, will be converted into the right to receive the Merger
Consideration (as defined in Section 2.1(b)); and
WHEREAS, the respective Boards of Directors of Halis and HealthWatch,
having carefully considered the long-term prospects and interests of Halis and
HealthWatch and their respective stockholders and having determined that the
Merger and the other transactions contemplated hereby are consistent with, and
in furtherance of, their respective business strategies and goals and are
advisable and in the best interests of their respective stockholders, have each
approved the transactions contemplated by this Agreement and have each resolved
to recommend to each party's stockholders the approval and adoption of this
Agreement and the Merger and the consummation of the transactions contemplated
hereby and thereby upon the terms and subject to the conditions set forth
herein; and
WHEREAS, for federal income tax purposes, it is intended that the Merger
will qualify as a reorganization under the provisions of Section 368(a) of the
Internal Revenue Code of 1986, as amended, and the rules and regulations
promulgated thereunder (the "Code"), and this Agreement is intended to be and is
adopted as a plan of reorganization within the meaning of Section 368 of the
Code; and
WHEREAS, Halis and HealthWatch desire to make certain representations,
warranties, covenants and agreements in connection with the Merger and also to
prescribe various conditions to the Merger.
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements set forth herein, the parties agree as follows:
ARTICLE I
THE MERGER
SECTION 1.1 THE MERGER. Upon the terms and subject to the conditions set
forth in this Agreement, Halis shall be merged with and into Merger Sub at the
Effective Time (as defined in Section 1.3). Following the Effective Time, the
separate corporate existence of Halis shall cease and Merger Sub shall be the
surviving corporation (the "Surviving Corporation") and shall succeed to and
assume all the rights and obligations of Halis.
SECTION 1.2 CLOSING. The closing of the Merger (the "Closing") will take
place on a date to be specified by the parties (the "Closing Date"), which shall
be no later than the second business day after satisfaction or waiver of the
conditions set forth in Article VI, unless another time or date is agreed to by
the parties hereto. The Closing will be held at the offices of Gambrell & Stolz,
L.L.P., Suntrust Plaza, Suite 4300, 303 Peachtree Street, N.E. Atlanta, Georgia
30308.
SECTION 1.3 EFFECTIVE TIME. Subject to the provisions of this Agreement, on
the Closing Date, the parties shall cause the Merger to be consummated by filing
a certificate of merger or other appropriate documents (in any such case, the
"Certificate of Merger") executed in accordance with the relevant provisions of
Georgia law and shall make all other filings or recordings required.. The Merger
shall become effective at such time as the Certificate of Merger is duly filed
with the Secretary of State of the State of Georgia, or at such subsequent date
or time as Halis, Merger Sub and HealthWatch shall agree and specify in the
Certificate of Merger (the time the Merger becomes effective being hereinafter
referred to as the "Effective Time").
SECTION 1.4 EFFECTS OF THE MERGER. At the Effective Time of the Merger, the
separate existence of Halis shall cease and Halis shall be merged with and into
Merger Sub. The Merger shall have the effects set forth in Section 14-2-1106 et
seq. of the Official Code of Georgia Annotated. In addition, the Surviving
Corporation may, at any time after the Effective Time, take any actions
(including executing and delivering any document) in the name and on behalf of
either HealthWatch or Halis in order to carry out and effectuate the
transactions contemplated by this Agreement.
SECTION 1.5 ARTICLES OF INCORPORATION AND BY-LAWS OF THE SURVIVING
CORPORATION AND HEALTHWATCH. At the Effective Time, the Articles of
Incorporation and the by-laws of Merger Sub, as in effect immediately prior to
the Effective Time, shall be the Articles of Incorporation and by-laws of the
Surviving Corporation, in each case until thereafter amended in accordance with
applicable law.
SECTION 1.6 DIRECTORS AND OFFICERS. The directors of Merger Sub and the
officers of Merger Sub shall retain their respective positions and terms of
office in the Surviving Corporation, and will hold office in accordance with the
Articles of Incorporation and By-Laws of the Surviving Corporation.
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK
OF THE CONSTITUENT CORPORATIONS;
EXCHANGE OF CERTIFICATES
SECTION 2.1 EFFECT ON CAPITAL STOCK. As of the Effective Time, by virtue of
the Merger and without any action on the part of HealthWatch, Merger Sub, Halis
or the holder of any shares of the following securities:
(a) CANCELLATION OF TREASURY STOCK AND HEALTHWATCH-OWNED STOCK . Each share
of Halis Common Stock that is owned by HealthWatch, or is held by Halis as
treasury stock, shall automatically be canceled and retired and shall cease to
exist, and no consideration shall be delivered in exchange therefor.
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(b) CONVERSION OF HALIS COMMON STOCK. Subject to Section 2.2(e), each
issued and outstanding share of Halis Common Stock (other than shares to be
canceled in accordance with Section 2.1(a)) shall be converted into the right to
receive one twentieth (.050) of a share of the fully paid and nonassessable
common stock, $.05 par value, of HealthWatch ("HealthWatch Common
Stock")("Merger Consideration"; the "Exchange Ratio" shall be one share of
HealthWatch Common Stock for twenty shares of Halis Common Stock, or .050). As
of the Effective Time, all such shares of Halis Common Stock shall no longer be
outstanding and shall automatically be canceled and retired and shall cease to
exist, and each holder of a certificate representing any such shares of Halis
Common Stock shall cease to have any rights with respect thereto, except the
right to receive the Merger Consideration and any cash in lieu of fractional
shares of HealthWatch Common Stock to be issued or paid in consideration thereof
upon surrender of each such certificate in accordance with Section 2.2(e).
(c) MERGER SUB COMMON STOCK. At and after the Effective Time, each share of
common stock, no par value, of Merger Sub ("Merger Sub Common Stock") shall
remain an issued and outstanding share of common stock of Merger Sub and shall
not be affected by the Merger (Merger Sub shall continue to be wholly-owned by
HealthWatch).
(d) HEALTHWATCH COMMON STOCK. At and after the Effective Time, each share
of HealthWatch Common Stock issued and outstanding immediately prior to the
Closing Date shall remain an issued and outstanding share of common stock of
HealthWatch and shall not be affected by the Merger.
(e) OPTIONS.
(i) Halis and HealthWatch shall take all action necessary such that,
at the Effective Time, each option or warrant granted by Halis to purchase
shares of Halis Common Stock which is outstanding immediately prior thereto
shall cease to represent a right to acquire shares of Halis Common Stock and
shall be converted into an option to purchase shares of HealthWatch Common Stock
in an amount and at an exercise price determined as provided below (and
otherwise, in the case of options, subject to the terms of the Halis Stock Plans
(as defined in Section 3.2(c)) and the agreements evidencing grants thereunder)
(the "Assumed Options"):
(1) The number of shares of HealthWatch Common Stock to be
subject to the new option or warrant shall be equal to the product of the number
of shares of Halis Common Stock subject to the original option and the Exchange
Ratio, provided that any fractional shares of HealthWatch Common Stock resulting
from such multiplication shall be rounded up or down to the nearest whole share;
and
(2) The exercise price per share of HealthWatch Common Stock
under the new option shall be equal to the exercise price per share of Halis
Common Stock under the original option divided by the Exchange Ratio, provided
that such exercise price shall be rounded up or down to the nearest whole cent.
(ii) The duration and other terms of the new options shall be the
same as the original options except that all references to Halis shall be deemed
to be references to HealthWatch.
(iii) As soon as practicable following the Effective Time, HealthWatch
shall deliver, upon due surrender of the Assumed Options to HealthWatch,
appropriate option agreements representing the right to acquire HealthWatch
Common Stock on the same terms and conditions as contained in the Assumed
Options (except as otherwise set forth in this Section 2.1(e)). Except as
expressly contemplated herein, HealthWatch shall comply with the terms of the
Halis Stock Plans as they apply to the Assumed Options. HealthWatch shall take
all corporate action necessary to reserve for issuance a sufficient number of
shares of HealthWatch Common Stock for delivery upon exercise of the Assumed
Options in accordance with this Section 2.1(e). HealthWatch shall file a
registration statement on Form S-8 (or any successor form) or on another
appropriate form, and use commercially reasonable efforts to have such
registration statement declared effective reasonably promptly following the
Effective Time,
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with respect to HealthWatch Common Stock subject to the Assumed Options, and
shall use commercially reasonable efforts to maintain the effectiveness of such
registration statement or registration statements (and maintain the current
status of the prospectus or prospectuses contained therein) for so long as the
Assumed Options remain outstanding and exercisable.
(iv) HealthWatch acknowledges and agrees that the consummation of the
Merger will have certain effects in respect of the Assumed Options as reflected
in Section 3.2(c) of the Halis Disclosure Schedule, and HealthWatch agrees to
act in accordance therewith and give full effect to same.
SECTION 2.2 EXCHANGE OF CERTIFICATES.
(a) EXCHANGE AGENT. As of the Effective Time, HealthWatch shall enter into
an agreement with such bank or trust company as may be designated by HealthWatch
(the "Exchange Agent") which shall provide that HealthWatch shall provide
HealthWatch Common Stock (such shares of HealthWatch Common Stock, together with
any dividends or distributions with respect thereto with a record date after the
Effective Time, and any cash payable in lieu of any fractional shares of
HealthWatch Common Stock being hereinafter referred to as the "Exchange Fund")
issuable pursuant to Section 2.1 in exchange for outstanding shares of Halis
Common Stock.
(b) EXCHANGE PROCEDURES. As soon as reasonably practicable after the
Effective Time, the Exchange Agent shall mail to each holder of record of a
certificate or certificates which immediately prior to the Effective Time
represented outstanding shares of Halis Common Stock (the "Certificates") whose
shares were converted into the right to receive the Merger Consideration
pursuant to Section 2.1, (i) a letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to the Certificates shall
pass, only upon delivery of the Certificates to the Exchange Agent, and shall
otherwise be in customary form) and (ii) instructions for use in surrendering
the Certificates in exchange for the Merger Consideration. Upon surrender of a
Certificate for cancellation to the Exchange Agent, together with such letter of
transmittal, duly executed, and such other documents as may reasonably be
required by the Exchange Agent, the holder of such Certificate shall be entitled
to receive in exchange therefor a certificate representing that number of whole
shares of HealthWatch Common Stock which such holder has the right to receive
pursuant to the provisions of this Article II, certain dividends or other
distributions in accordance with Section 2.2(c) and cash in lieu of any
fractional share of HealthWatch Common Stock in accordance with Section 2.2(e),
and the Certificate so surrendered shall forthwith be canceled. In the event of
a surrender of a Certificate representing shares of Halis Common Stock which are
not registered in the transfer records of Halis under the name of the person
surrendering such Certificate, a certificate representing the proper number of
shares of HealthWatch Common Stock may be issued to a person other than the
person in whose name the Certificate so surrendered is registered if such
Certificate shall be properly endorsed or otherwise be in proper form for
transfer and the person requesting such issuance shall pay any transfer or other
taxes required by reason of the issuance of shares of HealthWatch Common Stock
to a person other than the registered holder of such Certificate or establish to
the satisfaction of HealthWatch that such tax has been paid or is not
applicable. Until surrendered as contemplated by this Section 2.2, each
Certificate shall be deemed at any time after the Effective Time to represent
only the right to receive upon such surrender the Merger Consideration which the
holder thereof has the right to receive in respect of such Certificate pursuant
to the provisions of this Article II, certain dividends or other distributions
in accordance with Section 2.2(c) and cash in lieu of any fractional share of
HealthWatch Common Stock in accordance with Section 2.2(e). No interest shall be
paid or will accrue on any cash payable to holders of Certificates pursuant to
the provisions of this Article II.
(c) DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES. No dividends or other
distributions with respect to HealthWatch Common Stock with a record date after
the Effective Time shall be paid to the holder of any unsurrendered Certificate
with respect to the shares of HealthWatch Common Stock represented thereby, and,
in the case of Certificates representing Halis Common Stock, no cash payment in
lieu of fractional shares shall be paid to any such holder pursuant to Section
2.2(e), and all such dividends, other distributions and cash in lieu of
fractional shares of HealthWatch Common Stock shall be paid by HealthWatch to
the Exchange
A-4
Agent and shall be included in the Exchange Fund, in each case until the
surrender of such Certificate in accordance with this Article II. Subject to the
effect of applicable escheat or similar laws, following surrender of any such
Certificate there shall be paid to the holder of the certificate representing
whole shares of HealthWatch Common Stock issued in exchange therefor, without
interest, (i) at the time of such surrender, the amount of dividends or other
distributions with a record date after the Effective Time theretofore paid with
respect to such whole shares of HealthWatch Common Stock and, in the case of
Certificates representing Halis Common Stock, the amount of any cash payable in
lieu of a fractional share of HealthWatch Common Stock to which such holder is
entitled pursuant to Section 2.2(e) and (ii) at the appropriate payment date,
the amount of dividends or other distributions with a record date after the
Effective Time and with a payment date subsequent to such surrender payable with
respect to such whole shares of HealthWatch Common Stock.
(d) NO FURTHER OWNERSHIP RIGHTS IN HALIS COMMON STOCK. All shares of
HealthWatch Common Stock issued upon the surrender for exchange of Certificates
in accordance with the terms of this Article II (including any cash paid
pursuant to this Article II) shall be deemed to have been issued (and paid) in
full satisfaction of all rights pertaining to the shares of Halis Common Stock
theretofore represented by such Certificates, and there shall be no further
registration of transfers on the stock transfer books of the Surviving
Corporation or HealthWatch of the shares of Halis Common Stock which were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, Certificates are presented to HealthWatch, the Surviving Corporation or
the Exchange Agent for any reason, they shall be canceled and exchanged as
provided in this Article II, except as otherwise provided by law.
(e) NO FRACTIONAL SHARES. Notwithstanding anything to the contrary
contained herein, no certificates or scrip representing fractional shares of
HealthWatch Common Stock shall be issued upon the surrender for exchange of
Certificates, no dividend or distribution of HealthWatch shall relate to such
fractional share interests and such fractional share interests will not entitle
the owner thereof to vote or to any rights of a stockholder of HealthWatch. In
lieu of the issuance of such fractional shares, HealthWatch shall pay each
former holder of Halis Common Stock an amount in cash equal to the product
obtained by multiplying (A) the fractional share interest to which such former
holder would otherwise be entitled by (B) the average closing price per share
(or if there is no sale on such date then the average between the closing bid
and ask prices on any such day) for shares of HealthWatch Common Stock as
reported by the Nasdaq SmallCap Market (as reported in The Wall Street Journal,
or, if not reported therein, any other authoritative source) during the ten
trading days preceding the Closing Date (such average, the "Average HealthWatch
Price").
(f) TERMINATION OF EXCHANGE FUND. Any portion of the Exchange Fund which
remains undistributed to the holders of the Certificates for six (6) months
after the Effective Time shall be delivered to HealthWatch, upon demand, and any
holders of the Certificates who have not theretofore complied with this Article
II shall thereafter look only to HealthWatch for payment of their claim for
Merger Consideration, any dividends or distributions with respect to HealthWatch
Common Stock and any cash in lieu of fractional shares of HealthWatch Common
Stock.
(g) NO LIABILITY. None of Halis, HealthWatch, Merger Sub or the Exchange
Agent shall be liable to any person in respect of any shares of HealthWatch
Common Stock, any dividends or distributions with respect thereto, any cash in
lieu of fractional shares of HealthWatch Common Stock or any cash from the
Exchange Fund, in each case delivered to a public official pursuant to any
applicable abandoned property, escheat or similar law.
(h) INVESTMENT OF EXCHANGE FUND. The Exchange Agent shall invest any cash
included in the Exchange Fund, as directed by HealthWatch, on a daily basis. Any
interest and other income resulting from such investments shall be paid to
HealthWatch.
A-5
(i) LOST CERTIFICATES. If any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such Certificate to be lost, stolen or destroyed and, if required by the
Surviving Corporation, the posting by such person of a bond in such reasonable
amount as the Surviving Corporation may direct as indemnity against any claim
that may be made against it with respect to such Certificate, the Exchange Agent
shall issue in exchange for such lost, stolen or destroyed Certificate the
Merger Consideration and, if applicable, any unpaid dividends and distributions
on shares of HealthWatch Common Stock deliverable in respect thereof and any
cash in lieu of fractional shares, in each case pursuant to this Agreement.
(j) HALIS DISSENTING SHARES. Notwithstanding any provision of this
Agreement to the contrary, shares of Halis which are issued and outstanding
immediately prior to the Effective Time and which are held by Halis Shareholders
who have timely filed with Halis a written objection to the Merger (the
"Dissenting Shares") shall not be converted into or represent a right to receive
HealthWatch Common Stock, pursuant to Section 2.1 hereof, but the holder thereof
shall be entitled only to such rights as are granted by Article 13 of the
Georgia Business Corporation Code (O.C.G.A. (S) 14-2-1301 et seq.). Each holder
of Dissenting Shares who becomes entitled to payment for such shares pursuant to
the foregoing statutory provision shall receive payment for their shares from
Halis in accordance with such statutory provision. If such holder shall have
failed to perfect, or shall have effectively withdrawn or lost, his right to
appraisal and payment for his shares under such statutory provisions, each such
share shall be converted into and represent the right to receive shares of
HealthWatch Common Stock, pursuant to Section 2.1 hereof, upon surrender of the
certificate representing such share to Halis.
SECTION 2.3 CERTAIN ADJUSTMENTS. If between the date hereof and the
Effective Time, the outstanding shares of HealthWatch Common Stock or of Halis
Common Stock shall be changed into a different number of shares by reason of any
reclassification, recapitalization, split-up, combination or exchange of shares,
or any dividend payable in stock or other securities shall be declared thereon
with a record date within such period, the Exchange Ratio shall be adjusted
accordingly to provide to the holders of Halis Common Stock the same economic
effect as contemplated by this Agreement prior to such reclassification,
recapitalization, split-up, combination, exchange or dividend.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.1 REPRESENTATIONS AND WARRANTIES OF HEALTHWATCH AND MERGER SUB.
Except as disclosed in the Disclosure Schedule delivered by HealthWatch and
Merger Sub to Halis as contemplated by this Agreement (the "HealthWatch
Disclosure Schedule") and making reference to the particular subsection of this
Agreement to which exception is being taken, HealthWatch and Merger Sub jointly
and severally represent and warrant to Halis as follows:
(a) ORGANIZATION, STANDING AND CORPORATE POWER.
(i) Each of HealthWatch and its subsidiaries (including Merger Sub)
(as defined in Section 8.3), is a corporation or other legal entity duly
organized, validly existing and in good standing (with respect to jurisdictions
which recognize such concept) under the laws of the jurisdiction in which it is
organized and has the requisite corporate or other power, as the case may be,
and authority to carry on its business as now being conducted, except for those
jurisdictions where the failure to be so organized, existing or in good standing
individually or in the aggregate would not have a material adverse effect (as
defined in Section 8.3) on HealthWatch. Each of HealthWatch and its subsidiaries
is duly qualified or licensed to do business and is in good standing (with
respect to jurisdictions which recognize such concept) in each jurisdiction in
which the nature of its
A-6
business or the ownership, leasing or operation of its properties makes such
qualification or licensing necessary, except for those jurisdictions where the
failure to be so qualified or licensed or to be in good standing individually or
in the aggregate would not have a material adverse effect on HealthWatch.
(ii) HealthWatch has delivered to Halis prior to the execution of
this Agreement complete and correct copies of any amendments to its articles of
incorporation (the "HealthWatch Articles") and by-laws not filed as of the date
hereof with the HealthWatch Filed SEC Documents (as defined in Section 3.1(e)).
(iii) In all material respects, the minute books of HealthWatch and
its subsidiaries contain accurate records of all meetings and accurately reflect
all other actions taken by the stockholders, the Board of Directors and all
committees of the Board of Directors of HealthWatch (or, as the case may be,
each of its subsidiaries) through December 31, 1999.
(b) SUBSIDIARIES. Exhibit 21 to HealthWatch's Annual Report on Form 10-KSB
for the fiscal year ended June 30, 1999 includes all the subsidiaries of
HealthWatch which as of the date of this Agreement are Significant Subsidiaries
(as defined in Rule 1-02 of Regulation S-X of the SEC). All the outstanding
shares of capital stock of, or other equity interests in, each such Significant
Subsidiary have been validly issued and are fully paid and nonassessable and are
owned directly or indirectly by HealthWatch, free and clear of all pledges,
claims, liens, charges, encumbrances and security interests of any kind or
nature whatsoever (collectively, "Liens") and free of any other restriction
(including any restriction on the right to vote, sell or otherwise dispose of
such capital stock or other ownership interests).
(c) CAPITAL STRUCTURE. The authorized capital stock of HealthWatch consists
of 10,000,000 shares of HealthWatch Common Stock, par value $.05 per share
("HealthWatch Common Stock") and 1,000,000 shares of HealthWatch Preferred
Stock. At the close of business on March 31, 2000 (as adjusted to reflect the
issuance of 20,050 shares of HealthWatch's Series D 8% Convertible Preferred
Stock on May 8, 2000), (i) 2,095,418 shares of HealthWatch Common Stock were
issued and outstanding; (ii) 5,000 shares of HealthWatch 6% Series A Preferred
Stock, 4,000 shares of HealthWatch Series C 8% Convertible Preferred Stock,
74,130 shares of HealthWatch Series D 8% Convertible Preferred Stock, and 66,886
shares of HealthWatch Series P Preferred Stock were issued and outstanding
(collectively "HealthWatch Preferred Stock"); (iii) 3,009,717 shares of
HealthWatch Common Stock were reserved for issuance pursuant to HealthWatch
Preferred Stock; (iv) 2,530,006 shares were reserved for issuance pursuant to
warrant conversion rights; and (v) 529,500 shares were reserved for issuance
pursuant to agent option conversion rights, as described in Section 3.1(c) of
the HealthWatch Disclosure Schedule. All stock options, restricted stock or
other stock-based compensation, benefits or savings plans, agreements or
arrangements in which current or former employees or directors of HealthWatch or
its subsidiaries participate as of the date hereof (including, without
limitation, the plans set forth on Exhibit A attached hereto), complete and
correct copies of which, in each case as amended as of the date hereof, have
been filed as exhibits to the HealthWatch Filed SEC Documents or delivered to
Halis (such plans, collectively, the "HealthWatch Stock Plans"); Section 3.1(c)
of the HealthWatch Disclosure Schedule sets forth a complete and correct list,
as of March 31, 2000, of the number of shares of HealthWatch Common Stock
subject to employee stock options or other rights to purchase or receive
HealthWatch Common Stock granted under the HealthWatch Stock Plans
(collectively,"HealthWatch Employee Stock Options"). All outstanding shares of
capital stock of HealthWatch, and all shares which may be issued pursuant to the
Stock Plans when issued, are duly authorized, validly issued, fully paid and
nonassessable and not subject to preemptive rights. Except as set forth in this
Section 3.1(c) and except for changes since March 31, 2000 resulting from the
issuance of shares of HealthWatch Common Stock pursuant to the HealthWatch
Employee Stock Options, or as expressly permitted by this Agreement, (x) there
are not issued, reserved for issuance or outstanding (A) any shares of capital
stock or other voting securities of HealthWatch, (B) any securities of
HealthWatch or any
A-7
HealthWatch subsidiary convertible into or exchangeable or exercisable for
shares of capital stock or voting securities of HealthWatch, (C) any warrants,
calls, options or other rights to acquire from HealthWatch or any HealthWatch
subsidiary (including any subsidiary trust), or obligations of HealthWatch or
any HealthWatch subsidiary to issue, any capital stock, voting securities or
securities convertible into or exchangeable or exercisable for capital stock or
voting securities of HealthWatch, and (y) there are no outstanding obligations
of HealthWatch or any HealthWatch subsidiary to repurchase, redeem or otherwise
acquire any such securities or to issue, deliver or sell, or cause to be issued,
delivered or sold, any such securities. There are no outstanding (A) securities
of HealthWatch or any HealthWatch subsidiary convertible into or exchangeable or
exercisable for shares of capital stock or other voting securities or ownership
interests in any HealthWatch subsidiary, (B) warrants, calls, options or other
rights to acquire from HealthWatch or any HealthWatch subsidiary, and any
obligation of HealthWatch or any HealthWatch subsidiary to issue, any capital
stock, voting securities or other ownership interests in, or any securities
convertible into or exchangeable or exercisable for any capital stock, voting
securities or ownership interests in, any HealthWatch subsidiary or (C)
obligations of HealthWatch or any HealthWatch subsidiary to repurchase, redeem
or otherwise acquire any such outstanding securities of HealthWatch subsidiaries
or to issue, deliver or sell, or cause to be issued, delivered or sold, any such
securities. Neither HealthWatch nor any HealthWatch subsidiary is a party to any
agreement restricting the purchase or transfer of, relating to the voting of,
requiring registration of, or granting any preemptive or, except as provided by
the terms of outstanding warrants, and the terms of HealthWatch Employee Stock
Options, antidilutive rights with respect to, any securities of the type
referred to in the two preceding sentences (except for the antidilutive rights
provided for in the HealthWatch Series C 8% Convertible Preferred Stock and the
Series D 8% Convertible Preferred Stock). Other than the HealthWatch
subsidiaries, HealthWatch does not directly or indirectly beneficially own any
securities or other beneficial ownership interests in any other entity (except
Halis) except for non-controlling investments made in the ordinary course of
business.
(d) AUTHORITY; NONCONTRAVENTION. Each of HealthWatch and Merger has all
requisite corporate power and authority to enter into this Agreement, subject to
the HealthWatch Stockholder Approval (as defined in Section 3.1(l)), to
consummate the transactions contemplated hereby and thereby. The execution and
delivery of this Agreement by each of HealthWatch and Merger Sub, and the
consummation by HealthWatch and Merger Sub of the transactions contemplated
hereby and thereby have been duly authorized by all necessary corporate action
on the part of HealthWatch and Merger Sub, subject, in the case of the Merger
and the issuance of HealthWatch Common Stock in connection with the Merger and
the conversion of the Assumed Options, to the HealthWatch Stockholder Approval.
This Agreement has been, duly executed and delivered by HealthWatch and Merger
Sub and, assuming the due authorization, execution and delivery thereof by
Halis, constitutes (or will constitute, as the case may be) the legal, valid and
binding obligation of HealthWatch and Merger Sub, enforceable against
HealthWatch and Merger Sub in accordance with its terms. The execution and
delivery of this Agreement does not and the consummation of the transactions
contemplated hereby and thereby and compliance with the provisions of this
Agreement will not, conflict with, or result in any violation of, or default
(with or without notice or lapse of time, or both) under, or give rise to a
right of termination, cancellation or acceleration of any obligation or loss of
a benefit under, or result in the creation of any Lien upon any of the
properties or assets of HealthWatch or any of its subsidiaries or in any
restriction on the conduct of HealthWatch's business or operations under, (i)
the HealthWatch Articles or the by-laws of HealthWatch or the comparable
organizational documents of any of its subsidiaries, (ii) any loan or credit
agreement, note, bond, mortgage, indenture, trust document, lease or other
agreement, instrument, permit, concession, franchise, license or similar
authorization applicable to HealthWatch or any of its subsidiaries or their
respective properties or assets or (iii) subject to the governmental filings and
other matters referred to in the following sentence, any judgment, order,
decree, statute, law, ordinance, rule or regulation applicable to HealthWatch or
any of its subsidiaries or their respective properties or assets, other than, in
the case of clauses (ii) and (iii), any such conflicts, violations, defaults,
rights, losses, restrictions or Liens that individually or in the aggregate
would not (x) have a material adverse effect on HealthWatch or Halis or (y)
reasonably be expected
A-8
to impair the ability of HealthWatch or Merger Sub to perform its obligations
under this Agreement. No consent, approval, order or authorization of, action by
or in respect of, or registration, declaration or filing with, any federal,
state, local or foreign government, any court, administrative, regulatory or
other governmental agency, commission or authority or any nongovernmental self-
regulatory agency, commission or authority (a "Governmental Entity") is required
by or with respect to HealthWatch or any of its subsidiaries in connection with
the execution and delivery of this Agreement by HealthWatch, or the consummation
by HealthWatch or Merger Sub of the transactions contemplated hereby and
thereby, except for (1) the filing with the SEC of (A) a proxy statement
relating to the HealthWatch Stockholders' Meeting (as defined in Section 5.1(b))
(such proxy statement which is combined with the proxy statement relating to the
Halis Stockholders' Meeting (as defined in Section 5.1(c)), in each case as
amended or supplemented from time to time, the "Joint Proxy Statement"), (B) the
Form S-4 and (C) such reports under Sections 13(a), 13(d), 15(d) or 16(a) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), as may be
required in connection with this Agreement, and the transactions contemplated
hereby and thereby; (2) the filing of the Certificate of Merger with the
Secretary of State of the State of Georgia and appropriate documents with the
relevant authorities of other states in which Halis is qualified to do business
and such filings with Governmental Entities to satisfy the applicable
requirements of state securities or "blue sky" laws; (3) such filings and
approvals of Nasdaq to permit the shares of HealthWatch Common Stock that are to
be issued in the Merger to be approved for listing, subject to notice of
issuance, by Nasdaq; and (4) such consents, approvals, orders or authorizations
the failure of which to be made or obtained individually or in the aggregate
would not (x) have a material adverse effect on HealthWatch or (y) reasonably be
expected to impair the ability of HealthWatch or Merger Sub to perform its
obligations under this Agreement.
(e) SEC DOCUMENTS; UNDISCLOSED LIABILITIES. HealthWatch has filed all
required registration statements, prospectuses, reports, schedules, forms,
statements and other documents (including exhibits and all other information
incorporated therein) with the SEC since December 31, 1997 (the "HealthWatch SEC
Documents"); however, HealthWatch did not hold a Shareholder Meeting for the
fiscal year end of June 30, 1999 and HealthWatch's Form 10-KSB for the year
ended June 30, 1998 is currently under review by the SEC. In addition, the proxy
statement for HealthWatch's annual meeting which was tentatively scheduled for
June 23, 2000 is currently being reviewed by the SEC. As of their respective
dates, the HealthWatch SEC Documents complied in all material respects with the
requirements of the Securities Act of 1933, as amended (the "Securities Act"),
or the Exchange Act, as the case may be, and the rules and regulations of the
SEC promulgated thereunder applicable to such HealthWatch SEC Documents, and
none of the HealthWatch SEC Documents when filed contained any untrue statement
of a material fact or omitted to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The financial
statements of HealthWatch included in the HealthWatch SEC Documents comply as to
form, as of their respective dates of filing with the SEC, in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto, have been prepared in accordance
with GAAP (except, in the case of unaudited statements, as permitted by Form 10-
QSB of the SEC) applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) and fairly present the
consolidated financial position of HealthWatch and its consolidated subsidiaries
as of the dates thereof and the consolidated results of their operations and
cash flows for the periods then ended (subject, in the case of unaudited
statements, to normal year-end audit adjustments which are not material). Except
(i) as reflected in such financial statements or in the notes thereto or (ii)
for liabilities incurred in connection with this Agreement, or the transactions
contemplated hereby or thereby, neither HealthWatch nor any of its subsidiaries
has any liabilities or obligations of any nature which, individually or in the
aggregate, would have a material adverse effect on HealthWatch.
A-9
(f) INFORMATION SUPPLIED. None of the information supplied or to be
supplied by HealthWatch specifically for inclusion or incorporation by reference
in (i) the registration statement on Form S-4 to be filed with the SEC by
HealthWatch in connection with the issuance of HealthWatch Common Stock in the
Merger (the "Form S-4") will, at the time the Form S-4 becomes effective under
the Securities Act, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading or (ii) the Joint Proxy Statement included
therein will, at the date it is first mailed to HealthWatch's stockholders or at
the time of the HealthWatch Stockholders' Meeting, contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. The Form S-4 and the
Joint Proxy Statement included therein will comply as to form in all material
respects with the requirements of the Securities Act and the Exchange Act and
the rules and regulations thereunder, except that no representation or warranty
is made by HealthWatch with respect to statements made or incorporated by
reference therein based on information supplied by Halis specifically for
inclusion or incorporation by reference in the Form S-4 or the Joint Proxy
Statement.
(g) ABSENCE OF CERTAIN CHANGES OR EVENTS. Except for liabilities incurred
in connection with this Agreement, or the transactions contemplated hereby and
thereby, and except as permitted by Section 4.1(a) (and the sale of HealthWatch
Series D 8% Convertible Preferred Stock pursuant to that certain private
placement memorandum dated March 8, 2000), since March 31, 2000, HealthWatch and
its subsidiaries have conducted their business only in the ordinary course
consistent with past practice or as disclosed in any HealthWatch SEC Documents
filed since such date and prior to the date hereof, and there has not been
except as required by outstanding preferred stock and the Additional
Consideration Agreements: (i) any material adverse change (as defined in Section
8.3) in HealthWatch, (ii) any declaration, setting aside or payment of any
dividend or other distribution (whether in cash, stock or property) with respect
to any of HealthWatch's capital stock, (iii) any split, combination or
reclassification of any of HealthWatch's capital stock or any issuance or the
authorization of any issuance of any other securities in respect of, in lieu of,
or in substitution for shares of HealthWatch's capital stock, except for
issuances of HealthWatch Common Stock upon exercise or conversion of HealthWatch
Employee Stock Options, in each case awarded prior to the date hereof in
accordance with their present terms or issued pursuant to Section 4.1(a),
(iv)(A) any granting by HealthWatch or any of its subsidiaries to any current or
former director, officer or other key employee of HealthWatch or its
subsidiaries of any increase in compensation, bonus or other benefits, except
for normal increases as a result of promotions, normal increases of base pay or
target bonuses in the ordinary course of business or as was required under any
employment agreements in effect as of December 31, 1999 or in connection with
the employment of and entering into an employment agreement with David Engert,
(B) any granting by HealthWatch or any of its subsidiaries to any such current
or former director, officer or key employee of any increase in severance or
termination pay or (C) any entry by HealthWatch or any of its subsidiaries into,
or any amendment of, any employment, deferred compensation, consulting,
severance, termination or indemnification agreement with any such current or
former director or officer, or any material amendment of any of the foregoing
with any key employee, except in connection with the employment of David Engert,
(v) except insofar as may have been disclosed in HealthWatch SEC Documents filed
and publicly available prior to the date of this Agreement (as amended to the
date hereof, the "HealthWatch Filed SEC Documents") or required by a change in
GAAP, any change in accounting methods, principles or practices by HealthWatch
materially affecting its assets, liabilities or business, (vi) except in so far
as may have been disclosed in the HealthWatch Filed SEC Documents, any tax
election that individually or in the aggregate would have a material adverse
effect on HealthWatch or any of its tax attributes or any settlement or
compromise of any material income tax liability, or (vii) any action taken by
HealthWatch or any of the HealthWatch subsidiaries during the period from
January 1, 2000 through the date of this Agreement that, if taken during the
period from the date of this Agreement through the Effective Time, would
constitute a breach of Section 4.1(a) (excepting the agency agreement made with
Commonwealth Associates, L.P.
A-10
which acted as placement agent in the sale of the HealthWatch Series D 8%
Convertible Preferred Stock and Series C 8% Convertible Preferred Stock (and
related warrants)).
(h) COMPLIANCE WITH APPLICABLE LAWS; LITIGATION.
(i) HealthWatch, its subsidiaries and employees hold all permits,
licenses, variances, exemptions, orders, registrations and approvals of all
Governmental Entities which are required for the operation of the businesses of
HealthWatch and its subsidiaries (the "HealthWatch Permits"), except where the
failure to have any such HealthWatch Permits individually or in the aggregate
would not have a material adverse effect on HealthWatch. Except as specifically
disclosed in the HealthWatch SEC Documents filed with the Commission prior to
the date hereof, HealthWatch and its subsidiaries are in compliance with the
terms of the HealthWatch Permits and all applicable laws, statutes, orders,
rules, regulations, policies or guidelines promulgated, or judgments, decisions
or orders entered by any Governmental Entity, relating to HealthWatch or its
business or properties, except where the failure to be in compliance with such
Applicable Laws individually or in the aggregate would not have a material
adverse effect on HealthWatch. As of the date of this Agreement, except as
disclosed in the HealthWatch Filed SEC Documents, no action, demand, requirement
or investigation by any Governmental Entity and no suit, action or proceeding by
any person, in each case with respect to HealthWatch or any of its subsidiaries
or any of their respective properties, is pending or, to the knowledge (as
defined in Section 8.3) of HealthWatch, threatened, other than, in each case,
those the outcome of which individually or in the aggregate would not (A) have a
material adverse effect on HealthWatch or (B) reasonably be expected to impair
the ability of HealthWatch or Merger Sub to perform its obligations under this
Agreement or prevent or materially delay the consummation of any of the
transactions contemplated hereby or thereby.
(ii) Neither HealthWatch nor any HealthWatch subsidiary is subject to
any outstanding order, injunction or decree which has had or, insofar as can be
reasonably foreseen, individually or in the aggregate will have, a material
adverse effect on HealthWatch.
(iii) Although not a Governmental Entity, Nasdaq has required
HealthWatch to hold an annual shareholders meeting no later than June 30, 2000
to maintain its SmallCap listing.
(i) ABSENCE OF CHANGES IN BENEFIT PLANS. HealthWatch has delivered to Halis
or provided to Halis for review true and complete copies of vacation, severance,
disability, death benefit, hospitalization, medical or other plan, arrangement
or understanding providing benefits to any current or former officers, directors
or employees of HealthWatch or any of its wholly owned subsidiaries
(collectively, the "HealthWatch Benefit Plans"). Since December 31, 1999,
neither HealthWatch nor any HealthWatch subsidiary has amended any HealthWatch
Employee Stock Options or any HealthWatch Stock Plans to accelerate the vesting
of, or release restrictions on, awards thereunder, or to provide for such
acceleration in the event of a change in control.
(j) BENEFIT PLANS.
(i) With respect to the HealthWatch Benefit Plans, to the knowledge of
HealthWatch, no event has occurred and there exists no condition or set of
circumstances, in connection with which HealthWatch or any of its subsidiaries
would be subject to any liability that individually or in the aggregate would
have a material adverse effect on HealthWatch under the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), the Code or any other
applicable law.
A-11
(ii) Each HealthWatch Benefit Plan has been administered in
accordance with its terms, except for any failures so to administer any
HealthWatch Benefit Plan that individually or in the aggregate would not have a
material adverse effect on HealthWatch. To the knowledge of HealthWatch, the
HealthWatch Benefit Plans have been operated, and are, in compliance with the
applicable provisions of ERISA, the Code and all other applicable laws, except
for any failures to be in such compliance that individually or in the aggregate
would not have a material adverse effect on HealthWatch.
(iii) No HealthWatch Benefit Plan provides medical benefits (whether
or not insured), with respect to current or former employees after retirement or
other termination of service (other than coverage mandated by applicable law or
benefits, the full cost of which is borne by the current or former employee) the
amounts of which are not material.
(iv) HealthWatch has no collective bargaining or other labor union
contract applicable to persons employed by HealthWatch or any of its
subsidiaries. No collective bargaining agreement is being negotiated or
renegotiated by HealthWatch or any of its subsidiaries. As of the date of this
Agreement, there is no labor dispute, strike or work stoppage against
HealthWatch or any of its subsidiaries pending or, to the knowledge of
HealthWatch, threatened which may interfere with the respective business
activities of HealthWatch or any of its subsidiaries, except where such dispute,
strike or work stoppage individually or in the aggregate would not have a
material adverse effect on HealthWatch. As of the date of this Agreement, to the
knowledge of HealthWatch, none of HealthWatch, any of its subsidiaries or any of
their respective representatives or employees has committed any material unfair
labor practice in connection with the operation of the respective businesses of
HealthWatch or any of its subsidiaries, and there is no material charge or
complaint against HealthWatch of any of its subsidiaries by the National Labor
Relations Board or any comparable governmental agency pending or threatened in
writing.
(v) No employee of HealthWatch will be entitled to any material
payment, additional benefits or any acceleration of the time of payment or
vesting of any benefits under any HealthWatch Benefit Plan as a result of the
transactions contemplated by this Agreement (either alone or in conjunction with
any other event such as a termination of employment), except that substantially
all HealthWatch Employee Stock Options will vest as of the date on which
HealthWatch Stockholder Approval is obtained.
(vi) No material oral or written representation or commitment with
respect to any aspect of any HealthWatch Benefit Plan has been or will be made
to employees of HealthWatch or any HealthWatch subsidiaries by an authorized
HealthWatch employee prior to the Closing Date that is not materially in
accordance with the written or otherwise preexisting terms and provisions of
such HealthWatch Benefit Plans in effect immediately prior to the Closing Date.
(vii) Except such as would not have a material adverse effect, there
are no material unresolved claims or disputes under the terms of, or in
connection with, any HealthWatch Benefit Plan (other than routine undisputed
claims for benefits), and no action, legal or otherwise, has been commenced with
respect to any material claim.
(k) TAXES.
(i) Each of HealthWatch and its subsidiaries has filed all material
tax returns and reports required to be filed by it (taking into account all
applicable extensions) and all such returns and reports are complete and correct
in all material respects, or requests for extensions to file such returns or
reports have been timely filed, granted and have not expired, except to the
extent that such failures to file, to be complete or correct or to have
A-12
extensions granted that remain in effect individually or in the aggregate would
not have a material adverse effect on HealthWatch. HealthWatch and each of its
subsidiaries has paid (or HealthWatch has paid or caused to be paid on its
behalf) all taxes (as defined herein) shown as due on such returns, and the most
recent financial statements contained in the HealthWatch Filed SEC Documents
reflect an adequate reserve in accordance with GAAP for all taxes payable by
HealthWatch and its subsidiaries for all taxable periods and portions thereof
accrued through the date of such financial statements.
(ii) No deficiencies for any taxes have, to the knowledge of
HealthWatch, been proposed, asserted or assessed against HealthWatch or any of
its subsidiaries that are not adequately reserved for, except for deficiencies
that individually or in the aggregate would not have a material adverse effect
on HealthWatch. Except as provided in Section 3.1(k) of the HealthWatch
Disclosure Schedule, all of the federal income tax returns of the affiliated
group of which HealthWatch is the common parent have closed by virtue of the
applicable statute of limitations.
(iii) Neither HealthWatch nor any of its subsidiaries has
taken any action or knows of any fact, agreement, plan or other circumstance
that is reasonably likely to prevent the Merger from qualifying as a
reorganization within the meaning of Section 368(a) of the Code.
(iv) As used in this Agreement, "taxes" shall include all (x)
federal, state, local or foreign income, property, sales, excise and other taxes
or similar governmental charges, including any interest, penalties or additions
with respect thereto, (y) liability for the payment of any amounts of the type
described in (x) as a result of being a member of an affiliated, consolidated,
combined or unitary group, and (z) liability for the payment of any amounts
described in (x) or (y) as a result of being party to any tax sharing agreement
or as a result of any express or implied obligation to indemnify any other
person with respect to the payment of any amounts of the type described in
clause (x) or (y).
(v) Neither HealthWatch nor any HealthWatch subsidiary has
made any parachute payments as such term is defined in Section 280G of the Code,
neither is obligated to make any parachute payments, and neither is a party to
any agreement that under certain circumstances could obligate it, or any
successor in interest, to make any parachute payments that will not be
deductible under Section 280G of the Code. Neither HealthWatch nor any
HealthWatch subsidiary is obligated to make reimbursement or gross-up payments
to any person in respect to excess parachute payments.
(l) VOTING REQUIREMENTS. The affirmative vote at the HealthWatch
Stockholders Meeting (the "HealthWatch Stockholder Approval") of the holders of
a majority of all outstanding shares of HealthWatch Common Stock, Series D 8%
Preferred Stock and Series C 8% Preferred Stock present in person or by proxy
and entitled to vote at a duly convened and held meeting of HealthWatch
Stockholders is the only vote of the holders of any class or series of
HealthWatch's capital stock necessary to approve and adopt this Agreement and
the transactions contemplated hereby, including the Merger.
(m) STATE TAKEOVER STATUTES. The Board of Directors of HealthWatch and
Merger Sub have approved the Merger, this Agreement and the transactions
contemplated hereby and thereby, and such approval is sufficient to render
inapplicable to the Merger, this Agreement, and the transactions contemplated
hereby and thereby the provisions of Code Section 14-2-1110 et seq. and 14-2-
1131 et seq. of Georgia law to the extent, if any, such sections are applicable
to the Merger, this Agreement and the transactions contemplated hereby and
thereby. No other state takeover statute or regulation applies to or purports to
apply to the Merger, this Agreement, or the transactions contemplated hereby and
thereby.
A-13
(n) BROKERS. No broker, investment banker, financial advisor or other
person is entitled to any broker's, finder's, financial advisor's or other
similar fee or commission in connection with the transactions contemplated by
this Agreement based upon arrangements made by or on behalf of HealthWatch
(excepting the agency agreement with Commonwealth Associates, L.P. made in
conjunction with the sale of the Series C 8% Preferred Stock and Series D 8%
Convertible Preferred Stock of HealthWatch, wherein Commonwealth shall receive a
fee equal to 5% of the Merger Consideration).
(o) INTELLECTUAL PROPERTY.
(i) Neither HealthWatch nor its subsidiaries owns any
trademark, patents or copyrights; however, HealthWatch and its subsidiaries own
or have a valid right to use all trademarks, service marks, trade names,
Internet domain names, designs, slogans and general intangibles of like nature,
together with all applications, registrations and goodwill related to the
Software (as defined below); technology, trade secrets and other confidential
information, know-how, proprietary processes, formulae, algorithms, models, and
methodologies (collectively, "Trade Secrets") used in or necessary for the
conduct of HealthWatch's and each of its subsidiary's business as currently
conducted, except where the failure to possess such right would not have a
material adverse effect (all such intellectual property being referred to herein
as the "Intellectual Property"). For purposes of this Section 3.1(p), "Software"
means any and all (a) computer programs, including any and all software
implementations of algorithms, models and methodologies, whether in source code
or object code, (b) databases and compilations, including any and all data and
collections of data, whether machine readable or otherwise, (c) descriptions,
flowcharts and other work product used to design, plan, organize and develop any
of the foregoing, (d) the technology supporting any Internet site(s) operated by
or on behalf of HealthWatch or any of its subsidiaries and (e) all
documentation, including user manuals and training materials, relating to any of
the foregoing.
(ii) The Intellectual Property owned by HealthWatch or any of
its subsidiaries is free and clear of all Liens.
(iii) The Intellectual Property owned by HealthWatch or any of
its subsidiaries and, to HealthWatch's knowledge, any Intellectual Property used
by HealthWatch, is valid and subsisting, in full force and effect, and has not
been canceled, expired, or abandoned. There is no pending or, to HealthWatch's
knowledge, threatened opposition, interference or cancellation proceeding before
any court or registration authority in any jurisdiction against any
registrations in respect of the Intellectual Property owned by HealthWatch or
any of its subsidiaries, or, to HealthWatch's knowledge, against any
Intellectual Property licensed to HealthWatch or any of its subsidiaries.
(iv) To the actual knowledge of HealthWatch or any of its
subsidiaries, the conduct of the business of HealthWatch and its subsidiaries as
currently conducted does not infringe upon (either directly or indirectly such
as through contributory infringement or inducement to infringe) any intellectual
property rights owned or controlled by any third party. There are no claims or
suits pending or, to the knowledge of HealthWatch, threatened, and neither
HealthWatch nor any of its subsidiaries has received any notice of a third-party
claim or suit, (a) alleging that its activities or the conduct of its business
infringes upon, violates or constitutes the unauthorized use of the intellectual
property rights of any third party or (b) challenging the ownership, use,
validity or enforceability of any Intellectual Property, which in any case would
have a material adverse effect.
(v) There are no settlements, forebearances to sue, consents,
judgments, orders or similar obligations which in any material respect (a)
restrict the right of HealthWatch or its subsidiaries to use any Intellectual
Property, or (b) restrict the business of HealthWatch or its subsidiaries in
order to accommodate a third
A-14
party's intellectual property rights or (c) except for licenses with customers
for HealthWatch's Software, there are no agreements that permit third parties to
use any Intellectual Property owned or controlled by HealthWatch or any of its
subsidiaries.
(vi) HealthWatch and each of its subsidiaries take reasonable
measures to protect the confidentiality of Trade Secrets, including (i)
requiring its employees and independent contractors having access thereto to
execute written nondisclosure agreements and (ii) requiring all licensees to
maintain the confidentiality of its Trade Secrets. To the actual knowledge of
HealthWatch or its subsidiaries, no Trade Secret has been knowingly disclosed or
authorized to be disclosed to any third party other than pursuant to a
nondisclosure agreement or other appropriate instrument that adequately protects
HealthWatch and the applicable subsidiary's proprietary interests in and to such
Trade Secrets. To the knowledge of HealthWatch, no party to any nondisclosure
agreement or nondisclosure obligation relating to its Trade Secrets is in breach
or default thereof.
(vii) To the knowledge of HealthWatch, no third party is
misappropriating, infringing, diluting or violating any Intellectual Property
owned by HealthWatch or any of its subsidiaries.
(viii) The consummation of the transaction contemplated hereby
shall not result in the loss or impairment of HealthWatch's or of any
subsidiary's right to own or use any of the Intellectual Property, and will not
require the consent of any governmental authority, except where such loss or
impairment or the failure to obtain consent would not result in a material
adverse effect.
(ix) Neither HealthWatch nor any of its subsidiaries has
entered into any software license agreement in which it (a) failed to limit its
liability to the amount of licensing fees paid pursuant to the agreement; or (b)
warranted as to the performance or functionality of the Software other than
stating that the Software would perform in accordance with its documentation
and/or specifications; except in any case in which the contrary would not have a
material adverse effect.
(p) CERTAIN CONTRACTS. Except as set forth in the HealthWatch Filed SEC
Documents, neither HealthWatch nor any of its subsidiaries is a party to or
bound by (i) any "material contract" (as such term is defined in Item 601(b)(10)
of Regulation S-K of the SEC), (ii) any non-competition agreement or any other
agreement or obligation which purports to limit in any material respect the
manner in which, or the localities in which, all or any material portion of the
business of HealthWatch and its subsidiaries (including, for purposes of this
Section 3.1(p), Halis and its subsidiaries, assuming the Merger has taken
place), taken as a whole, is or would be conducted, (iii) any exclusive supply
or purchase contracts or any exclusive requirements contracts or (iv) any
contract or other agreement which would prohibit or materially delay the
consummation of the Merger or any of the transactions contemplated by this
Agreement (all contracts of the type described in clauses (i) and (ii) being
referred to herein as "HealthWatch Material Contracts"). HealthWatch has
delivered to Halis or provided to Halis for review, prior to the execution of
this Agreement, complete and correct copies of all HealthWatch Material
Contracts not filed as exhibits to the HealthWatch Filed SEC Documents. Each
HealthWatch Material Contract is valid and binding on HealthWatch (or, to the
extent a HealthWatch subsidiary is a party, such subsidiary) and is in full
force and effect, and HealthWatch and each HealthWatch subsidiary have in all
material respects performed all obligations required to be performed by them to
date under each HealthWatch Material Contract, except where such noncompliance,
individually or in the aggregate, would not have a material adverse effect on
HealthWatch. Neither HealthWatch nor any HealthWatch subsidiary knows of, or has
received notice of, any violation or default under (nor, to the knowledge of
HealthWatch, does there exist any condition which with the passage of time or
the giving of notice or both would result in such a violation or default under)
any HealthWatch Material Contract.
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(q) ENVIRONMENTAL LIABILITY. Except as set forth in the HealthWatch Filed
SEC Documents, there are no legal, administrative, arbitral or other
proceedings, claims, actions, causes of action, private environmental
investigations or remediation activities or governmental investigations of any
nature pending or threatened against HealthWatch or any of its subsidiaries
seeking to impose, or that could reasonably be expected to result in the
imposition of, on HealthWatch or any of its subsidiaries, any liability or
obligation arising under common law or under any local, state or federal
environmental statute, regulation or ordinance, including, without limitation,
the Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("CERCLA"), which liability or obligation could reasonably be
expected to have a material adverse effect on HealthWatch. To the knowledge of
HealthWatch, there is no reasonable basis for any such proceeding, claim, action
or governmental investigation that would impose any liability or obligation that
could reasonably be expected to have a material adverse effect on HealthWatch.
(r) INSURANCE. HealthWatch and each of its subsidiaries have policies of
insurance and bonds of the type and in amounts customarily carried by persons
conducting businesses or owning assets similar to those of HealthWatch and its
subsidiaries. There is no claim pending under any of such policies or bonds as
to which coverage has been questioned, denied or disputed by the underwriters of
such policies or bonds, except questioned, denied or disputed claims the failure
to provide coverage for which would not, individually or in the aggregate, have
a material adverse effect on HealthWatch. All premiums due and payable under all
such policies and bonds have been paid and HealthWatch and its subsidiaries are
otherwise in compliance in all material respects with the terms of such policies
and bonds. HealthWatch has no knowledge of any threatened termination of, or
material premium increase with respect to, any of such policies.
(s) TRANSACTIONS WITH AFFILIATES. Except as disclosed in the HealthWatch
SEC Documents filed prior to the date of this Agreement or as disclosed in the
HealthWatch Disclosure Schedule, since December 31, 1999, there have been no
transactions, agreements, arrangements or understandings between HealthWatch and
its affiliates that would be required to be disclosed under the Item 404 of
Regulation S-K under the Securities Act.
(t) FULL DISCLOSURE. None of the representations or warranties made by
HealthWatch herein or in any schedule hereto, including the HealthWatch
Disclosure Schedule, or any certificate furnished by HealthWatch pursuant to
this Agreement, contains or will contain at the Effective Time any untrue
statement of a material fact, or omits or will omit at the Effective Time, to
state any material fact necessary in order to make the statements contained
herein or therein, in the light of the circumstances under which made, not
misleading.
SECTION 3.2 REPRESENTATIONS AND WARRANTIES OF HALIS. Except as disclosed in
the Disclosure Schedule delivered by Halis to HealthWatch as contemplated by
this Agreement (the "Halis Disclosure Schedule") and making reference to the
particular subsection of this Agreement to which exception is being taken, Halis
represents and warrants to HealthWatch as follows:
(a) ORGANIZATION, STANDING AND CORPORATE POWER.
(i) Each of Halis and its subsidiaries (as defined in Section
8.3) is a corporation or other legal entity duly organized, validly existing and
in good standing (with respect to jurisdictions which recognize such concept)
under the laws of the jurisdiction in which it is organized and has the
requisite corporate or other power, as the case may be, and authority to carry
on its business as now being conducted, except, as to subsidiaries, for those
jurisdictions where the failure to be so organized, existing or in good standing
individually or in the aggregate would not have a material adverse effect (as
defined in Section 8.3) on Halis. Each of Halis and its subsidiaries is duly
qualified or licensed to do business and is in good standing (with respect to
jurisdictions which recognize such
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concept) in each jurisdiction in which the nature of its business or the
ownership, leasing or operation of its properties makes such qualification or
licensing necessary, except for those jurisdictions where the failure to be so
qualified or licensed or to be in good standing individually or in the aggregate
would not have a material adverse effect on Halis.
(ii) Halis has delivered to HealthWatch prior to the
execution of this Agreement complete and correct copies of any amendments to its
articles of incorporation (the "Halis Certificate") and by-laws not filed as of
the date hereof with the Halis SEC Documents (as defined in Section 3.2(e)).
(iii) In all material respects, the minute books of Halis and
its subsidiaries contain accurate records of all meetings and accurately reflect
all other actions taken by the stockholders, the Board of Directors and all
committees of the Board of Directors of Halis (or, as the case may be, each of
its subsidiaries) through December 31, 1999.
(b) SUBSIDIARIES. Exhibit 21.1 to Halis' Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1999 includes all the subsidiaries of Halis
which as of the date of this Agreement are Significant Subsidiaries (as defined
in Rule 1.02 of Regulation S-X of the SEC). All the outstanding shares of
capital stock of, or other equity interests in, each such Significant Subsidiary
have been validly issued and are fully paid and nonassessable and are owned
directly or indirectly by Halis, free and clear of all Liens and free of any
other restriction (including any restriction on the right to vote, sell or
otherwise dispose of such capital stock or other ownership interests).
(c) CAPITAL STRUCTURE. The authorized capital stock of Halis consists of
100,000,000 shares of $.01 par value common stock ("Halis Common Stock") and
5,000,000 shares of $.10 par value shares of preferred stock ("Halis Preferred
Stock"). At the close of business on March 31, 2000 (as adjusted for the
issuance of 5,000,000 shares of Halis Common Stock to HealthWatch on April 29,
2000 in accordance with the terms of the financing option contained in the
Letter of Intent dated March 8, 2000): (i) 62,317,222 shares of Halis Common
Stock were issued and outstanding (15,763,655 shares of Halis are owned by
HealthWatch and the remaining shares are owned by others); (ii) no shares of
Halis Common Stock were held by Halis in its treasury; (iii) no shares of Halis
Preferred Stock were issued and outstanding; (iv) 12,780,290 shares of Halis
Common Stock were reserved for issuance pursuant to all stock options and
2,394,918 shares were reserved for issuance pursuant to warrant conversion
rights, as described in Section 3.2(c) of the Halis Disclosure Schedule. All
stock option, restricted stock or other stock based compensation, benefits or
savings plans, agreements or arrangements in which current or former employees
or directors of Halis or its subsidiaries participate as of the date hereof
(including, without limitation, the plans set forth on Exhibit B attached
hereto), complete and correct copies of which, in each case as amended as of the
date hereof, have been filed as exhibits to the Halis Filed SEC Documents or
delivered to HealthWatch (such plans, collectively, the "Halis Stock Plans");
Section 3.2(c) of the Halis Disclosure Schedule sets forth a complete and
correct list, as of March 31, 2000, of the number of shares of Halis Common
Stock subject to employee stock options or other rights to purchase or receive
Halis Common Stock granted under the Halis Stock Plans (collectively, "Halis
Employee Stock Options"). All outstanding shares of capital stock of Halis are,
and all shares which may be issued pursuant to this Agreement or otherwise will
be, when issued, duly authorized, validly issued, fully paid and nonassessable
and not subject to preemptive rights. Except as set forth in this Section
3.2(c), and except for changes since March 31, 2000 resulting from the issuance
of shares of Halis Common Stock pursuant to the Halis Employee Stock Options or
as expressly permitted by this Agreement, (x) there are not issued, reserved for
issuance or outstanding (A) any shares of capital stock or other voting
securities of Halis, (B) any securities of Halis or any Halis subsidiary
convertible into or exchangeable or exercisable for shares of capital stock or
voting securities of Halis, (C) any warrants, calls, options or other rights to
acquire from Halis or any Halis subsidiary, and
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any obligation of Halis or any Halis subsidiary to issue, any capital stock,
voting securities or securities convertible into or exchangeable or exercisable
for capital stock or voting securities of Halis, and (y) there are no
outstanding obligations of Halis or any Halis subsidiary to repurchase, redeem
or otherwise acquire any such securities or to issue, deliver or sell, or cause
to be issued, delivered or sold, any such securities. There are no outstanding
(A) securities of Halis or any Halis subsidiary convertible into or exchangeable
or exercisable for shares of capital stock or other voting securities or
ownership interests in any Halis subsidiary, (B) warrants, calls, options or
other rights to acquire from Halis or any Halis subsidiary, or obligations of
Halis or any Halis subsidiary to issue, any capital stock, voting securities or
other ownership interests in, or any securities convertible into or exchangeable
or exercisable for any capital stock, voting securities or ownership interests
in, any Halis subsidiary or (C) obligations of Halis or any Halis subsidiary to
repurchase, redeem or otherwise acquire any such outstanding securities of Halis
subsidiaries or to issue, deliver or sell, or cause to be issued, delivered or
sold, any such securities. Neither Halis nor any Halis subsidiary is a party to
any agreement restricting the purchase or transfer of, relating to the voting
of, requiring registration of, or granting any preemptive or, except as provided
by the terms of the Halis Employee Stock Options, antidilutive rights with
respect to, any securities of the type referred to in the two preceding
sentences. Other than the Halis subsidiaries, Halis does not directly or
indirectly beneficially own any securities or other beneficial ownership
interests in any other entity except for non-controlling investments made in the
ordinary course of business in entities which are not individually or in the
aggregate material to Halis and its subsidiaries as a whole.
(d) AUTHORITY; NONCONTRAVENTION. Halis has all requisite corporate power
and authority to enter into this Agreement, to and, subject to the Halis
Stockholder Approval (as defined in Section 3.2(l)), to consummate the
transactions contemplated hereby and thereby. The execution and delivery of this
Agreement by Halis and the consummation by Halis of the transactions
contemplated hereby and thereby have been duly authorized by all necessary
corporate action on the part of Halis, subject, in the case of the Merger, to
the Halis Stockholder Approval. This Agreement has been duly executed and
delivered by Halis and, assuming the due authorization, execution and delivery
thereof by HealthWatch, constitutes (or will constitute, as the case may be) the
legal, valid and binding obligation of Halis, enforceable against Halis in
accordance with their terms. The execution and delivery of this Agreement does
not, and the consummation of the transactions contemplated hereby and thereby
and compliance with the provisions of this Agreement will not, conflict with, or
result in any violation of, or default (with or without notice or lapse of time,
or both) under, or give rise to a right of termination, cancellation or
acceleration of any obligation or loss of a benefit under, or result in the
creation of any Lien upon any of the properties or assets of Halis or any of its
subsidiaries or any restriction on the conduct of Halis's business or operations
under, (i) the Halis Certificate or the by-laws of Halis or the comparable
organizational documents of any of its subsidiaries, (ii) any loan or credit
agreement, note, bond, mortgage, indenture, trust document, lease or other
agreement, instrument, permit, concession, franchise, license or similar
authorization applicable to Halis or any of its subsidiaries or their respective
properties or assets or (iii) subject to the governmental filings and other
matters referred to in the following sentence, any judgment, order, decree,
statute, law, ordinance, rule or regulation applicable to Halis or any of its
subsidiaries or their respective properties or assets, other than, in the case
of clauses (ii) and (iii), any such conflicts, violations, defaults, rights,
losses, restrictions or Liens that individually or in the aggregate would not
(x) have a material adverse effect on Halis or (y) reasonably be expected to
impair the ability of Halis to perform its obligations under this Agreement. No
consent, approval, order or authorization of, action by, or in respect of, or
registration, declaration or filing with, any Governmental Entity is required by
or with respect to Halis or any of its subsidiaries in connection with the
execution and delivery of this Agreement or by Halis or the consummation by
Halis of the transactions contemplated hereby or thereby, except for (1) the
filing with the SEC of (A) the Joint Proxy Statement relating to the Halis
Stockholders' Meeting, and (B) such reports under Sections 13(a), 13(d), 15(d)
or 16(a) of the Exchange Act as may be required in connection with this
Agreement and the transactions contemplated hereby and thereby; (2) the filing
of the Certificate of Merger with the Secretary of State
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of the State of Georgia and appropriate documents with the relevant authorities
of other states in which Halis is qualified to do business and such filings with
Governmental Entities to satisfy the applicable requirements of state securities
or "blue sky" laws; and (3) such consents, approvals, orders or authorizations
the failure of which to be made or obtained individually or in the aggregate
would not (x) have a material adverse effect on Halis or (y) reasonably be
expected to impair the ability of Halis to perform its obligations under this
Agreement.
(e) SEC DOCUMENTS; UNDISCLOSED LIABILITIES. Halis has filed all required
registration statements, prospectuses, reports, schedules, forms, statements and
other documents (including exhibits and all other information incorporated
therein) with the SEC since December 31, 1997 (the "Halis SEC Documents");
however, Halis did not hold a Shareholders Meeting for fiscal years ending
December 31, 1998 and December 31, 1999 and Halis is delinquent in filing its
Form 10-KSB for fiscal year ending December 31, 1999. As of their respective
dates, the Halis SEC Documents complied in all material respects with the
requirements of the Securities Act or the Exchange Act, as the case may be, and
the rules and regulations of the SEC promulgated thereunder applicable to such
Halis SEC Documents, and none of the Halis SEC Documents when filed contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The financial statements of Halis included in the Halis SEC
Documents comply as to form, as of their respective dates of filing with the
SEC, in all material respects with applicable accounting requirements and the
published rules and regulations of the SEC with respect thereto, have been
prepared in accordance with GAAP (except, in the case of unaudited statements,
as permitted by Form 10-QSB of the SEC) applied on a consistent basis during the
periods involved (except as may be indicated in the notes thereto) and fairly
present the consolidated financial position of Halis and its consolidated
subsidiaries as of the dates thereof and the consolidated results of their
operations and cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal year-end audit adjustments which are not
material). Except (i) as reflected in such financial statements or in the notes
thereto or (ii) for liabilities incurred in connection with this Agreement, or
the transactions contemplated hereby or thereby, neither Halis nor any of its
subsidiaries has any liabilities or obligations of any nature which,
individually or in the aggregate, would have a material adverse effect on Halis.
(f) INFORMATION SUPPLIED. None of the information supplied or to be
supplied by Halis specifically for inclusion or incorporation by reference in
(i) the Form S-4 will, at the time the Form S-4 becomes effective under the
Securities Act, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading or (ii) the Joint Proxy Statement included in
the Form S-4 will, at the date it is first mailed to Halis' stockholders or at
the time of the Halis Stockholders' Meeting, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. The Joint Proxy
Statement will comply as to form in all material respects with the requirements
of the Securities Act and the Exchange Act and the rules and regulations
thereunder, except that no representation or warranty is made by Halis with
respect to statements made or incorporated by reference therein based on
information supplied by HealthWatch specifically for inclusion or incorporation
by reference in the Joint Proxy Statement.
(g) ABSENCE OF CERTAIN CHANGES OR EVENTS. Except for liabilities incurred
in connection with this Agreement or the transactions contemplated hereby or
thereby, Halis and its subsidiaries have conducted their business only in the
ordinary course consistent with past practice or as disclosed in any Halis SEC
Document filed since such date and prior to the date hereof, and there has not
been (i) any material adverse change (as defined in Section 8.3) in Halis, (ii)
any declaration, setting aside or payment of any dividend or other distribution
(whether in cash, stock or property) with respect to any of Halis' capital
stock, (iii) any split, combination or reclassification of
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any of Halis' capital stock or any issuance or the authorization of any issuance
of any other securities in respect of, in lieu of or in substitution for shares
of Halis' capital stock, except for issuances of Halis Common Stock upon
exercise or conversion of Halis Employee Stock Options, in each case awarded
prior to the date hereof in accordance with their present terms, (iv) (A) any
granting by Halis or any of its subsidiaries to any current or former director,
officer or other key employee of Halis or its subsidiaries of any increase in
compensation, bonus or other benefits, except for normal increases as a result
of promotions, normal increases of base pay or target bonuses in the ordinary
course of business or as was required under any employment agreements in effect
as of December 31, 1999, (B) any granting by Halis or any of its subsidiaries to
any such current or former director, officer or key employee of any increase in
severance or termination pay, or (C) any entry by Halis or any of its
subsidiaries into, or any amendment of, any employment, deferred compensation,
consulting, severance, termination or indemnification agreement with any such
current or former director, officer, or any material amendment of any of the
foregoing with any key employee, (v) except insofar as may have been disclosed
in Halis SEC Documents filed and publicly available prior to the date of this
Agreement (as amended to the date hereof, the "Halis Filed SEC Documents") or
required by a change in GAAP, any change in accounting methods, principles or
practices by Halis materially affecting its assets, liabilities or business,
(vi) except insofar as may have been disclosed in the Halis Filed SEC Documents,
any tax election that individually or in the aggregate would have a material
adverse effect on Halis or any of its tax attributes or any settlement or
compromise of any material income tax liability or (vii) any action taken by
Halis or any of the Halis subsidiaries during the period from December 31, 1999
through the date of this Agreement that, if taken during the period from the
date of this Agreement through the Effective Time, would constitute a breach of
Section 4.1(b).
(h) COMPLIANCE WITH APPLICABLE LAWS; LITIGATION.
(i) Halis, its subsidiaries and employees hold all permits,
licenses, variances, exemptions, orders, registrations and approvals of all
Governmental Entities which are required for the operation of the businesses of
Halis and its subsidiaries (the "Halis Permits") except where the failure to
have any such Halis Permits individually or in the aggregate would not have a
material adverse effect on Halis. Except as specifically disclosed in the Halis
SEC Documents filed with the Commission prior to the date hereof, Halis and its
subsidiaries are in compliance with the terms of the Halis Permits and all
Applicable Laws relating to Halis or its business or properties, except where
the failure to be in compliance with such Applicable Laws individually or in the
aggregate would not have a material adverse effect on Halis. As of the date of
this Agreement, except as disclosed in the Halis Filed SEC Documents, no action,
demand, requirement or investigation by any Governmental Entity and no suit,
action or proceeding by any person, in each case with respect to Halis or any of
its subsidiaries or any of their respective properties, is pending or, to the
knowledge of Halis, threatened, other than, in each case, those the outcome of
which individually or in the aggregate would not (A) have a material adverse
effect on Halis or (B) reasonably be expected to impair the ability of Halis to
perform its obligations under this Agreement or prevent or materially delay the
consummation of any of the transactions contemplated hereby or thereby.
(ii) Neither Halis nor any Halis subsidiary is subject to any
outstanding order, injunction or decree which has had or, insofar as can be
reasonably foreseen, individually or in the aggregate will have, a material
adverse effect on Halis.
(i) ABSENCE OF CHANGES IN BENEFIT PLANS. Halis has delivered to
HealthWatch or provided to HealthWatch for review true and complete copies of
any material bonus, pension, profit sharing, deferred compensation, incentive
compensation, stock ownership, stock purchase, stock option, phantom stock,
retirement, vacation, severance, disability, death benefit, hospitalization,
medical or other plan, arrangement or understanding providing benefits to any
current or former officers, directors or employees of Halis or any of its wholly
owned
A-20
subsidiaries (collectively, the "Halis Benefit Plans"), or any material change
in any actuarial or other assumption used to calculate funding obligations with
respect to any Halis pension plans, or any material change in the manner in
which contributions to any Halis pension plans are made or the basis on which
such contributions are determined. Since December 31, 1999, neither Halis nor
any Halis subsidiary has amended any Halis Employee Stock Options or any Halis
Stock Plans to accelerate the vesting of, or release restrictions on, awards
thereunder, or to provide for such acceleration in the event of a change in
control.
(j) BENEFIT PLANS.
(i) With respect to the Halis Benefit Plans, to the knowledge
of Halis, no event has occurred and there exists no condition or set of
circumstances, in connection with which Halis or any of its subsidiaries would
be subject to any liability that individually or in the aggregate could have a
material adverse effect on Halis under ERISA, the Code or any other applicable
law.
(ii) Each Halis Benefit Plan has been administered in
accordance with its terms, except for any failures so to administer any Halis
Benefit Plan that individually or in the aggregate would not have a material
adverse effect on Halis. To the knowledge of Halis, the Halis Benefit Plans have
been operated, and are, in compliance with the applicable provisions of ERISA,
the Code and all other applicable laws, except for any failures to be in such
compliance that individually or in the aggregate would not have a material
adverse effect on Halis. Each Halis Benefit Plan that is intended to be
qualified under Section 401(a) or 401(k) of the Code has received a favorable
determination letter from the IRS that it is so qualified and each trust
established in connection with any Halis Benefit Plan that is intended to be
exempt from federal income taxation under Section 501(a) of the Code has
received a determination letter from the IRS that such trust is so exempt. To
the knowledge of Halis, no fact or event has occurred since the date of any
determination letter from the IRS which is reasonably likely to affect adversely
the qualified status of any such Halis Benefit Plan or the exempt status of any
such trust.
(iii) No Halis Benefit Plan is subject to Title IV of ERISA or
is a "multi-employer plan" within the meaning of Section 3(37) of ERISA.
(iv) No Halis Benefit Plan provides medical benefits (whether
or not insured),with respect to current or former employees after retirement or
other termination of service (other than coverage mandated by applicable law or
benefits, the full cost of which is borne by the current or former employee)
other than individual arrangements the amounts of which are not material.
(v) No employee of Halis will be entitled to any material
payment, additional benefits or any acceleration of the time of payment or
vesting of any benefits under any Halis Benefit Plan as a result of the
transactions contemplated by this Agreement (either alone or in conjunction with
any other event such as a termination of employment).
(vi) No material oral or written representation or commitment
with respect to any aspect of any Halis Benefit Plan has been or will be made to
employees of Halis or any Halis subsidiaries by an authorized Halis employee
prior to the Closing Date that is not materially in accordance with the written
or otherwise preexisting terms and provisions of such Halis Benefit Plans in
effect immediately prior to the Closing Date.
(vii) Except as would not have a material adverse effect, there
are no material unresolved claims or disputes under the terms of, or in
connection with, any Halis Benefit Plan (other than routine undisputed claims
for benefits), and no action, legal or otherwise, has been commenced with
respect to any material claim.
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(viii) To the knowledge of Halis, no non-exempt "prohibited
transaction" (within the meaning of Section 4975(c) of the Tax Code) involving
any Halis Benefit Plan has occurred that could subject Halis to any material tax
penalty or other cost or liability (by indemnification or otherwise).
(k) TAXES.
(i) Each of Halis and its subsidiaries has filed all material
tax returns and reports required to be filed by it (taking into account
applicable extensions) and all such returns and reports are complete and correct
in all material respects, or requests for extensions to file such returns or
reports have been timely filed, granted and have not expired, except to the
extent that such failures to file, to be complete or correct or to have that
remain in effect individually or in the aggregate would not have a material
adverse effect on Halis (except Halis has not yet filed its 1998 and 1999
Federal Income Tax Return). Halis and each of its subsidiaries has paid (or
Halis has paid or caused to be paid on its behalf) all taxes shown as due on
such returns, if any, and the most recent financial statements contained in the
Halis Filed SEC Documents reflect an adequate reserve in accordance with GAAP
for all taxes payable by Halis and its subsidiaries, if any, for all taxable
periods and portions thereof accrued through the date of such financial
statements.
(ii) No deficiencies for any taxes have, to the knowledge of
Halis, been proposed, asserted or assessed against Halis or any of its
subsidiaries that are not adequately reserved for, except for deficiencies that
individually or in the aggregate would not have a material adverse effect on
Halis. Except as provided in Section 3.2(k) of the Halis Disclosure Schedule,
all of the federal income tax returns of the affiliated group of which Halis is
the common parent have closed by virtue of the applicable statute of
limitations.
(iii) Neither Halis nor any of its subsidiaries has taken any
action or knows of any fact, agreement, plan or other circumstance that is
reasonably likely to prevent the Merger from qualifying as a reorganization
within the meaning of Section 368(a) of the Code.
(iv) Neither Halis nor any Halis subsidiary has made any
parachute payments as such term is defined in Section 280G of the Tax Code,
neither is obligated to make any parachute payments, and neither is a party to
any agreement that under certain circumstances could obligate it, or any
successor in interest, to make any parachute payments that will not be
deductible under Section 280G of the Tax Code. Neither Halis nor any Halis
subsidiary is obligated to make reimbursement or gross-up payments to any person
in respect to excess parachute payments.
(l) VOTING REQUIREMENTS. The affirmative vote at the Halis Stockholders'
Meeting (the "Halis Stockholder Approval") of the holders of a majority of all
outstanding shares of Halis Common Stock entitled to vote at a duly convened and
held meeting of Halis stockholders is the only vote of the holders of any class
or series of Halis' capital stock necessary to approve and adopt this Agreement
and the transactions contemplated hereby, including the Merger. Prior to the
Halis Stockholders' Meeting, Halis Stockholders shall be provided the requisite
notice that they are entitled to assert dissenters' rights under Georgia
Business Corporate Code Section 14-2-1302 and a copy of Article 13 of the
Georgia Business Corporation Code dealing with dissenters' rights shall
accompany the notice.
(m) STATE TAKEOVER STATUTES. The Board of Directors of Halis has approved
the Merger, this Agreement and the transactions contemplated hereby and thereby,
and such approval is sufficient to render inapplicable to the Merger, this
Agreement, and the transactions contemplated hereby and thereby the provisions
of Code Section 14-2-1110 et seq. and 14-2-1131 et seq. of Georgia law to the
extent, if any, such sections are
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applicable to the Merger, this Agreement and the transactions contemplated
hereby and thereby. No other state takeover statute or regulation applies to or
purports to apply to the Merger, this Agreement, or the transactions
contemplated hereby and thereby.
(n) BROKERS. No broker, investment banker, financial advisor or other
person is entitled to any broker's, finder's, financial advisor's or other
similar fee or commission in connection with the transactions contemplated by
this Agreement based upon arrangements made by or on behalf of Halis.
(o) INTELLECTUAL PROPERTY.
(i) Halis or its subsidiaries own or have a valid right to
use all trademarks, service marks, trade names, Internet names, designs,
slogans, and general intangibles of like nature, together with all applications,
registrations and goodwill related to the foregoing (collectively,
"Trademarks"); Software (as defined below); technology, trade secrets and other
confidential information, know-how, proprietary processes, formulae, algorithms,
models, and methodologies (collectively, "Trade Secrets") used in or necessary
for the conduct of Halis' and each of its subsidiary's business as currently
conducted, except where the failure to possess such right would not have a
material adverse effect (all such intellectual property being referred to herein
as the "Intellectual Property"). For purposes of this Section 3.2(o), "Software"
means any and all (a) computer programs, including any and all software
implementations of algorithms, models and methodologies, whether in source code
or object code, (b) databases and compilations, including any and all data and
collections of data, whether machine readable or otherwise, (c) descriptions,
flowcharts and other work product used to design, plan, organize and develop any
of the foregoing, (d) the technology supporting any Internet site(s) operated by
or on behalf of Halis or any of its subsidiaries and (e) all documentation,
including user manuals and training materials, relating to any of the foregoing.
(ii) The Intellectual Property owned by Halis or any subsidiary
is free and clear of all Liens.
(iii) The Intellectual Property owned by Halis or any of its
subsidiaries and, to Halis' knowledge, any Intellectual Property used by Halis,
is valid and subsisting, in full force and effect, and has not been canceled,
expired, or abandoned. There is no pending or, to Halis' knowledge, threatened
opposition, interference or cancellation proceeding before any court or
registration authority in any jurisdiction against any registrations in respect
of the Intellectual Property owned by Halis or any of its subsidiaries, or, to
Halis' knowledge, against any Intellectual Property licensed to Halis or any of
its subsidiaries.
(iv) To the actual knowledge of Halis or any of its
subsidiaries, the conduct of the business of Halis and its subsidiaries as
currently conducted does not infringe upon (either directly or indirectly such
as through contributory infringement or inducement to infringe) any intellectual
property rights owned or controlled by any third party. There are no claims or
suits pending or, to the knowledge of Halis, threatened, and neither Halis nor
any of its subsidiaries has received any notice of a third-party claim or suit,
(a) alleging that its activities or the conduct of its business infringes upon,
violates, or constitutes the unauthorized use of the intellectual property
rights of any third party or (b) challenging the ownership, use, validity or
enforceability of any Intellectual Property, which in any case would have a
material adverse effect.
(v) There are no settlements, forebearances to sue, consents,
judgments, orders or similar obligations which in any material respect (a)
restrict the right of Halis or its subsidiaries to use any Intellectual
Property, (b) restrict the business of Halis or its subsidiaries in order to
accommodate a third party's intellectual
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property rights or (c) except for licenses with customers for Halis' Software,
there are no agreements that permit third parties to use any Intellectual
Property owned or controlled by Halis or any of its subsidiaries.
(vi) Halis and each of its subsidiaries take reasonable
measures to protect the confidentiality of Trade Secrets, including (i)
requiring its employees and independent contractors having access thereto to
execute written nondisclosure agreements and (ii) requiring all licensees to
maintain the confidentiality of its Trade Secrets. To the actual knowledge of
Halis or its subsidiaries, no Trade Secret has been knowingly disclosed or
authorized to be disclosed to any third party other than pursuant to a
nondisclosure agreement or other appropriate instrument that adequately protects
Halis and the applicable subsidiary's proprietary interests in and to such Trade
Secrets. To the knowledge of Halis, no party to any nondisclosure agreement or
nondisclosure obligation relating to its Trade Secrets is in breach or default
thereof.
(vii) To the knowledge of Halis, no third party is
misappropriating, infringing, diluting or violating any Intellectual Property
owned by Halis or any of its subsidiaries other than immaterial disputes
concerning use by a third party of Trademarks of Halis or a subsidiary.
(viii) The consummation of the transaction contemplated hereby
shall not result in the loss or impairment of Halis' or of any subsidiary's
right to own or use any of the Intellectual Property, and will not require the
consent of any governmental authority, except where such loss or impairment or
the failure to obtain consent would not result in a material adverse effect.
(ix) Neither Halis nor any of its subsidiaries has entered
into any software license agreement in which it (a) failed to limit its
liability to the amount of licensing fees paid pursuant to the agreement; or (b)
warranted as to the performance or functionality of the Software other than
stating that the Software would perform in accordance with its documentation
and/or specifications; except in any case in which the contrary would not have a
material adverse effect.
(p) CERTAIN CONTRACTS. Except as set forth in the Halis Filed SEC
Documents or listed in Section 3.2(p) of the Halis Disclosure Schedule, neither
Halis nor any of its subsidiaries is a party to or bound by (i) any "material
contract" (as such term is defined in Item 601(b)(10) of Regulation S-K of the
SEC), (ii) any non-competition agreement or any other agreement or obligation
which purports to limit in any material respect the manner in which, or the
localities in which, all or any material portion of the business of Halis and
its subsidiaries (including, for purposes of this Section 3.2(p), HealthWatch
and its subsidiaries, assuming the Merger has taken place), taken as a whole, is
or would be conducted, (iii) any exclusive supply or purchase contracts or any
exclusive requirements contracts or (iv) any contract or other agreement which
would prohibit or materially delay the consummation of the Merger or any of the
transactions contemplated by this Agreement (all contracts of the type described
in clauses (i) and (ii) being referred to herein as "Halis Material Contracts").
Halis has delivered to HealthWatch or made available to HealthWatch for review,
prior to the execution of this Agreement, complete and correct copies of all
Halis Material Contracts not filed as exhibits to the Halis Filed SEC Documents.
Each Halis Material Contract is valid and binding on Halis (or, to the extent a
Halis subsidiary is a party, such subsidiary) and is in full force and effect,
and Halis and each Halis subsidiary have in all material respects performed all
obligations required to be performed by them to date under each Halis Material
Contract, except where such noncompliance, individually or in the aggregate,
would not have a material adverse effect on Halis. Neither Halis nor any Halis
subsidiary knows of, or has received notice of, any violation or default under
(nor, to the knowledge of Halis, does there exist any condition which with the
passage of time or the giving of notice or both would result in such a violation
or default under) any Halis Material Contract.
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(q) ENVIRONMENTAL LIABILITY. Except as set forth in the Halis Filed SEC
Documents, there are no legal, administrative, arbitral or other proceedings,
claims, actions, causes of action, private environmental investigations or
remediation activities or governmental investigations of any nature pending or
threatened against Halis or any of its subsidiaries seeking to impose, or that
could reasonably be expected to result in the imposition, on Halis or any of its
subsidiaries, of any liability or obligation arising under common law or under
any local, state or federal environmental statute, regulation or ordinance,
including, without limitation, CERCLA, which liability or obligation could
reasonably be expected to have a material adverse effect on Halis. To the
knowledge of Halis, there is no reasonable basis for any such proceeding, claim,
action or governmental investigation that would impose any liability or
obligation that could reasonably be expected to have a material adverse effect
on Halis.
(r) INSURANCE. Halis and each of its subsidiaries have policies of
insurance and bonds of the type and in amounts customarily carried by persons
conducting businesses or owning assets similar to those of Halis and its
subsidiaries. There is no material claim pending under any of such policies or
bonds as to which coverage has been questioned, denied or disputed by the
underwriters of such policies or bonds, except questioned, denied or disputed
claims the failure to provide coverage for which would not, individually or in
the aggregate, have a material adverse effect on Halis. All premiums due and
payable under all such policies and bonds have been paid and Halis and its
subsidiaries are otherwise in compliance in all material respects with the terms
of such policies and bonds. Halis has no knowledge of any threatened termination
of, or material premium increase with respect to, any of such policies.
(s) TRANSACTIONS WITH AFFILIATES. Except as disclosed in the Halis SEC
Documents filed prior to the date of this Agreement or as disclosed in the Halis
Disclosure Schedule, since December 31, 1999, there have been no transactions,
agreements, arrangements or understandings between Halis and its affiliates that
would be required to be disclosed under the Item 404 of Regulation S-K under the
Securities Act.
(t) FULL DISCLOSURE. None of the representations or warranties made by
Halis herein or in any schedule hereto, including the Halis Disclosure Schedule,
or any certificate furnished by Halis pursuant to this Agreement, contains or
will contain at the Effective Time any untrue statement of a material fact, or
omits or will omit at the Effective Time, to state any material fact necessary
in order to make the statements contained herein or therein, in the light of the
circumstances under which made, not misleading.
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS
SECTION 4.1 CONDUCT OF BUSINESS.
(a) CONDUCT OF BUSINESS BY HEALTHWATCH. Except as set forth in Section
4.1(a) of the HealthWatch Disclosure Schedule, as otherwise expressly
contemplated by this Agreement or as consented to by Halis in writing, such
consent not to be unreasonably withheld or delayed, during the period from the
date of this Agreement to the Effective Time, HealthWatch shall, and shall cause
its subsidiaries to, carry on their respective businesses in the ordinary course
consistent with past practice and in compliance in all material respects with
all applicable laws and regulations and, to the extent consistent therewith, use
all reasonable efforts to preserve intact their current business organizations,
use reasonable efforts to keep available the services of their current officers
and other key employees and preserve their relationships with those persons
having business dealings with them to the end that their goodwill and ongoing
businesses shall be unimpaired at the Effective Time.
(b) CONDUCT OF BUSINESS BY HALIS. Except as set forth in Section 4.1(b) of
the Halis Disclosure Schedule, as otherwise expressly contemplated by this
Agreement or as consented to by HealthWatch in writing,
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such consent not to be unreasonably withheld or delayed, during the period from
the date of this Agreement to the Effective Time, Halis shall, and shall cause
its subsidiaries to, carry on their respective businesses in the ordinary course
consistent with past practice and in compliance in all material respects with
all applicable laws and regulations and, to the extent consistent therewith, use
all reasonable efforts to preserve intact their current business organizations,
use reasonable efforts to keep available the services of their current officers
and other key employees and preserve their relationships with those persons
having business dealings with them to the end that their goodwill and ongoing
businesses shall be unimpaired at the Effective Time.
(c) OTHER ACTIONS. Except as required by law, HealthWatch and Halis shall
not, and shall not permit any of their respective subsidiaries to, voluntarily
take any action that would, or that could reasonably be expected to, result in
(i) any of the representations and warranties of such party set forth in this
Agreement that are qualified as to materiality becoming untrue at the Effective
Time, (ii) any of such representations and warranties that are not so qualified
becoming untrue in any material respect at the Effective Time, or (iii) any of
the conditions to the Merger set forth in Article VI not being satisfied.
(d) ADVISE OF CHANGES. HealthWatch and Halis shall promptly advise the
other party orally and in writing to the extent it has knowledge of (i) any
representation or warranty made by it contained in this Agreement that is
qualified as to materiality becoming untrue or inaccurate in any respect or any
such representation or warranty that is not so qualified becoming untrue or
inaccurate in any material respect, (ii) the failure by it to comply in any
material respect with or satisfy in any material respect any covenant, condition
or agreement to be complied with or satisfied by it under this Agreement and
(iii) any change or event having, or which, insofar as can reasonably be
foreseen, could reasonably be expected to have a material adverse effect on such
party or on the truth of such party's representations and warranties or the
ability of the conditions set forth in Article VI to be satisfied; provided,
however, that no such notification shall affect their presentations, warranties,
covenants or agreements of the parties (or remedies with respect thereto) or the
conditions to the obligations of the parties under this Agreement.
SECTION 4.2 NO SOLICITATION BY HALIS.
(a) Halis shall not, nor shall it permit any of its subsidiaries to, nor
shall it authorize or permit any of its officers, directors or employees or any
investment banker, financial advisor, attorney, accountant or other
representative retained by it or any of its subsidiaries to, directly or
indirectly through another person, (i) solicit, initiate or encourage (including
by way of furnishing information), or take any other action designed to
facilitate, any inquiries or the making of any proposal the consummation of
which would constitute an Alternative Transaction (as hereinafter defined) or
(ii) participate in any discussions or negotiations regarding any Alternative
Transaction; provided, however, that if, at any time prior to the adoption of
this Agreement by the holders of Halis Common Stock, the Board of Directors of
Halis determines in good faith, after receipt of advice from outside counsel,
that the failure to provide such information or participate in such negotiations
or discussions would result in a reasonable possibility that the Board of
Directors of Halis breach its fiduciary duties to Halis' stockholders under
applicable law, Halis may, in response to any such proposal that was not
solicited by it or which did not otherwise result from a breach of this Section
4.2(a), and subject to compliance with Section 4.2(c), (x) furnish information
with respect to Halis and its subsidiaries to any person pursuant to a customary
confidentiality agreement containing terms as to confidentiality no less
restrictive than the Confidentiality Agreement and (y) participate in
negotiations regarding such proposal.
(b) For purposes of this Agreement "Alternative Transaction" means any of
(i) a transaction or series of transactions pursuant to which any person (or
group of persons) other than Halis and its subsidiaries (a "Third Party")
acquires or would acquire, directly or indirectly, beneficial ownership (as
defined in Rule 13d-3 under the
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Exchange Act) of more than 20% of the outstanding shares of Halis whether from
Halis or pursuant to a tender offer or exchange offer or otherwise, (ii) any
acquisition or proposed acquisition of Halis or any of its significant
subsidiaries or by a merger or other business combination (including any so
called "merger of equals" and whether or not Halis or any of its significant
subsidiaries is the entity surviving any such merger or business combination) or
(iii) any other transaction pursuant to which any Third Party acquires or would
acquire, directly or indirectly, control of assets (including for this purpose
the outstanding equity securities of subsidiaries of Halis and any entity
surviving any merger or combination including any of them) of Halis or any of
its subsidiaries for consideration equal to 20% or more of the fair market value
of all of the outstanding shares of Halis Common Stock or all of the outstanding
shares of HealthWatch Common Stock, as the case may be, on the date prior to the
date hereof.
(c) Neither the Board of Directors of Halis nor any committee thereof
shall (i) except as expressly permitted by this Section 4.2, withdraw, qualify
or modify, or propose publicly to withdraw, qualify or modify, in a manner
adverse to HealthWatch, the approval or recommendation by such Board of
Directors or such committee of the Merger, or this Agreement, (ii) approve or
recommend, or propose publicly to approve or recommend, any Alternative
Transaction, or (iii) cause Halis to enter into any letter of intent, agreement
in principle, acquisition agreement or other similar agreement (each, an "Halis
Acquisition Agreement") related to any Alternative Transaction. Notwithstanding
the foregoing, in the event that prior to the adoption of this Agreement by the
holders of Halis Common Stock the Board of Directors of Halis determines in good
faith, after it has received a Halis Superior Proposal (as defined below) and
after receipt of advice from outside counsel, that the failure to do so would
result in a reasonable possibility that the Board of Directors of Halis would
breach its fiduciary duties to Halis' stockholders under applicable law, the
Board of Directors of Halis may (subject to this and the following sentences)
inform Halis stockholders that it no longer believes that the Merger or this
Agreement is advisable and no longer recommends approval (a "Halis Subsequent
Determination"), but only at a time that is after the fifth business day
following HealthWatch's receipt of written notice advising HealthWatch that the
Board of Directors of Halis has received a Halis Superior Proposal, specifying
the material terms and conditions of such Halis Superior Proposal, identifying
the person making such Halis Superior Proposal and stating that it intends to
make a Halis Subsequent Determination. After providing such notice, Halis shall
provide a reasonable opportunity to HealthWatch to make such adjustments in the
terms and conditions of this Agreement and/or of the Halis Option Agreement as
would enable Halis to proceed with its recommendation to stockholders without
making a Halis Subsequent Determination; provided, however, that any such
adjustments shall be at the discretion of the parties at such time. For purposes
of this Agreement, a "Halis Superior Proposal" means any proposal (on its most
recently amended or modified terms, if amended or modified) made by a Third
Party to enter into an Alternative Transaction on terms which the Board of
Directors of Halis determines in its good faith judgment (based on the advice of
a financial advisor of nationally recognized reputation) to be more favorable to
Halis' stockholders than the Merger taking into account all relevant factors
(including whether, in the good faith judgment of the Board of Directors of
Halis, after obtaining advice from a financial advisor of nationally recognized
reputation, the third party is reasonably able to finance the transaction, and
any proposed changes to this Agreement and/or the Halis Option Agreement that
may be proposed by HealthWatch in response to such Alternative Transaction).
Notwithstanding any other provision of this Agreement, Halis shall submit this
Agreement to its stockholders whether or not the Board of Directors of Halis
make a Halis Subsequent Determination.
(d) In addition to the obligations of Halis set forth in paragraphs (a)
and (b) of this Section 4.2, Halis shall promptly advise HealthWatch orally and
in writing of any request for information or of any proposal in connection with
an Alternative Transaction, the material terms and conditions of such request or
proposal and the identity of the person making such request or proposal. Halis
will keep HealthWatch reasonably informed of the status and details (including
amendments or proposed amendments) of any such request or proposal on a current
basis.
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(e) Nothing contained in this Section 4.2 shall prohibit Halis from (i)
taking and disclosing to its stockholders a position contemplated by Rule 14d-9
or Rule 14e-2(a) promulgated under the Exchange Act or (ii) from making any
disclosure to its stockholders if, in the good faith judgment of the Board of
Directors of Halis, after receipt of advice from outside counsel, failure so to
disclose would be inconsistent with its fiduciary duties to Halis' stockholders
under applicable law.
SECTION 4.3 HEALTHWATCH PRIVATE PLACEMENT. Nothing contained in this
Agreement shall prohibit HealthWatch from issuing additional securities pursuant
to that certain Private Placement Memorandum dated March 8, 2000 relating to its
Series D Preferred Stock and warrants and such sale of additional securities
shall in no way be deemed a breach of the representation made by HealthWatch in
Section 3.1 hereof.
ARTICLE V
ADDITIONAL AGREEMENTS
SECTION 5.1 PREPARATION OF THE FORM S-4 AND THE JOINT PROXY STATEMENT;
STOCKHOLDERS' MEETINGS.
(a) As soon as practicable following the date of this Agreement,
HealthWatch shall prepare the Form S-4 and HealthWatch and Halis shall prepare
the Joint Proxy Statement to be included in the Form S-4 and HealthWatch shall
cause such Form S-4 so prepared to be filed with the SEC. Each of HealthWatch
and Halis shall use commercially reasonable efforts to have the Form S-4
declared effective under the Securities Act as promptly as practicable after
such filing. HealthWatch will use all commercially reasonable efforts to cause
the Joint Proxy Statement to be mailed to HealthWatch's stockholders, and Halis
will use all commercially reasonable efforts to cause the Joint Proxy Statement
to be mailed to Halis' stockholders, in each case as promptly as practicable
after the Form S-4 is declared effective under the Securities Act. HealthWatch
shall also take any action (other than qualifying to do business in any
jurisdiction in which it is not now so qualified or to file a general consent to
service of process) required to be taken under any applicable state securities
laws in connection with the issuance of HealthWatch Common Stock in the Merger
and the conversion of Assumed Options, and Halis shall furnish all information
concerning Halis and the holders of Halis Common Stock as may be reasonably
requested in connection with any such action. No filing of, or amendment or
supplement to, the Form S-4 or the Joint Proxy Statement will be made by
HealthWatch without Halis' prior consent (which shall not be unreasonably
withheld) and without providing Halis the opportunity to review and comment
thereon. HealthWatch will advise Halis promptly after it receives notice
thereof, of the time when the Form S-4 has become effective or any supplement or
amendment has been filed, the issuance of any stop order, the suspension of the
qualification of the HealthWatch Common Stock issuable in connection with the
Merger for offering or sale in any jurisdiction, or any request by the SEC for
amendment of the Joint Proxy Statement or the Form S-4 or comments thereon and
responses thereto or requests by the SEC for additional information. If at any
time prior to the Effective Time any information relating to HealthWatch or
Halis, or any of their respective affiliates, officers or directors, should be
discovered by HealthWatch or Halis which should be set forth in an amendment or
supplement to any of the Form S-4 or the Joint Proxy Statement, so that any of
such documents would not include any misstatement of a material fact or omit to
state any material fact necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading, the party which
discovers such information shall promptly notify the other parties hereto and an
appropriate amendment or supplement describing such information shall be
promptly filed with the SEC and, to the extent required by law, disseminated to
the stockholders of HealthWatch and Halis.
(b) HealthWatch shall, as promptly as practicable after the Form S-4 is
declared effective under the Securities Act, duly give notice of, convene and
hold a meeting of its stockholders (the "HealthWatch Stockholders'
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Meeting") in accordance with Minnesota law for the purpose of obtaining the
HealthWatch Stockholder Approval and shall, through its Board of Directors,
recommend to its stockholders the approval and adoption of this Agreement, the
Merger and the other transactions contemplated hereby.
(c) Halis shall, as promptly as practicable after the Form S-4 is declared
effective under the Securities Act, duly give notice of, convene and hold a
meeting of its stockholders (the "Halis Stockholders' Meeting") in accordance
with the Georgia law for the purpose of obtaining the Halis Stockholder Approval
and shall, subject to the provisions of Section 4.2(b) hereof, through its Board
of Directors, recommend to its stockholders the approval and adoption of this
Agreement, the Merger and the other transactions contemplated hereby.
(d) Halis and HealthWatch will use commercially reasonable efforts to hold
the HealthWatch Stockholders' Meeting and the Halis Stockholders' Meeting on the
same date and as soon as reasonably practicable after the date hereof, but not
later than September 30, 2000.
(e) Each of HealthWatch's and Halis' obligations under this Section 5.1
shall at all times remain subject to the provisions of Section 4.2(c), in the
event that under the circumstances described therein, the Board of Directors of
Halis shall have made a Halis Subsequent Determination, as the case may be.
SECTION 5.2 LETTERS OF HEALTHWATCH'S ACCOUNTANTS. HealthWatch shall use
commercially reasonable efforts to cause to be delivered to Halis two letters
from HealthWatch's independent accountants, one dated as of the date the Form S-
4 is declared effective and one dated as of the Closing Date, each addressed to
Halis, in form and substance reasonably satisfactory to Halis and customary in
scope and substance for comfort letters delivered by independent public
accountants in connection with registration statements similar to the Form S-4.
SECTION 5.3 LETTERS OF HALIS' ACCOUNTANTS . Halis shall use commercially
reasonable efforts to cause to be delivered to HealthWatch two letters from
Halis' independent accountants, one dated as of the date the Form S-4 is
declared effective and one dated as of the Closing Date, each addressed to
HealthWatch, in form and substance reasonably satisfactory to HealthWatch and
customary in scope and substance for comfort letters delivered by independent
public accountants in connection with registration statements similar to the
Form S-4.
SECTION 5.4 ACCESS TO INFORMATION; CONFIDENTIALITY. Subject to the
Confidentiality Agreement and subject to applicable law, each of HealthWatch and
Halis shall, and shall cause each of its respective subsidiaries to, afford to
the other party and to the officers, employees, accountants, counsel, financial
advisors and other representatives of such other party, reasonable access during
normal business hours during the period prior to the Effective Time to all their
respective properties, books, contracts, commitments, personnel and records
(provided that such access shall not interfere with the business or operations
of such party) and, during such period, each of HealthWatch and Halis shall, and
shall cause each of its respective subsidiaries to, furnish promptly to the
other party (a) a copy of each report, schedule, registration statement and
other document filed by it during such period pursuant to the requirements of
federal or state securities laws and (b) all other information concerning its
business, properties and personnel as such other party may reasonably request.
No review pursuant to this Section 5.4 shall affect any representation or
warranty given by the other party hereto. Each of HealthWatch and Halis will
hold, and will cause its respective officers, employees, accountants, counsel,
financial advisors and other representatives and affiliates to hold, any
nonpublic information in accordance with the terms of the Confidentiality
Agreements.
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SECTION 5.5 COMMERCIALLY REASONABLE EFFORTS.
(a) Upon the terms and subject to the conditions set forth in this
Agreement, each of the parties agrees to use commercially reasonable efforts to
take, or cause to be taken, all actions, and to do, or cause to be done, and to
assist and cooperate with the other parties in doing, all things necessary,
proper or advisable to consummate and make effective, in the most expeditious
manner practicable, the Merger and the other transactions contemplated by this
Agreement, including (i) the obtaining of all necessary actions or nonactions,
waivers, consents and approvals from Governmental Entities and the making of all
necessary registrations and filings and the taking of all steps as may be
necessary to obtain an approval or waiver from, or to avoid an action or
proceeding by, any Governmental Entity (except obtaining a revenue ruling that
the Merger qualifies as a tax-free reorganization), (ii) the obtaining of all
necessary consents, approvals or waivers, and any necessary or appropriate
financing arrangements, from third parties, (iii) the defending of any lawsuits
or other legal proceedings, whether judicial or administrative, challenging this
Agreement or the consummation of the transactions contemplated by this
Agreement, including seeking to have any stay or temporary restraining order
entered by any court or other Governmental Entity vacated or reversed, and (iv)
the execution and delivery of any additional instruments necessary to consummate
the transactions contemplated by, and to fully carry out the purposes of, this
Agreement. Notwithstanding anything to the contrary in this Agreement, neither
Halis nor HealthWatch shall be required to hold separate (including by trust or
otherwise) or divest any of their respective businesses or assets, or enter into
any consent decree or other agreement that would restrict either Halis or
HealthWatch in the conduct of its business as heretofore conducted.
(b) In connection with and without limiting the foregoing, HealthWatch and
Halis shall (i) take all action necessary to ensure that no state takeover
statute or similar statute or regulation is or becomes applicable to this
Agreement, or any of the transactions contemplated hereby and thereby and (ii)
if any state takeover statute or similar statute or regulation becomes
applicable to such agreements or transactions, take all action necessary to
ensure that such transactions may be consummated as promptly as practicable on
the terms contemplated by this Agreement and otherwise to minimize the effect of
such statute or regulation on the Merger and the other transactions contemplated
by this Agreement.
SECTION 5.6 INDEMNIFICATION, EXCULPATION AND INSURANCE.
(a) For a period of three (3) years from the Closing, HealthWatch agrees to
maintain in effect in accordance with their terms all rights to indemnification
and exculpation from liabilities for acts or omissions occurring at or prior to
the Effective Time existing as of the date of this Agreement in favor of the
current or former directors or officers of Halis and its subsidiaries as
provided in their respective articles of incorporation or by-laws (or comparable
organizational documents) and any indemnification agreements of Halis. In
addition, from and after the Effective Time, directors and officers of Halis who
become directors or officers of HealthWatch will be entitled to the same
indemnity rights and protections, and directors' and officers' liability
insurance, as are afforded from time to time to other directors and officers of
HealthWatch.
(b) In the event that HealthWatch or any of its successors or assigns (i)
consolidates with or merges into any other person and is not the continuing or
surviving corporation or entity of such consolidation or merger or (ii)
transfers or conveys all or substantially all of its properties and assets to
any person, then, and in each such case, proper provision will be made so that
the successors and assigns of HealthWatch assume the obligations set forth in
this Section 5.6.
(c) The provisions of this Section 5.6 (i) are intended to be for the
benefit of, and will be enforceable by, each indemnified party, his or her heirs
and his or her representatives and (ii) are in addition to, and not in
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substitution for, any other rights to indemnification or contribution that any
such person may have by contract or otherwise.
SECTION 5.7 FEES AND EXPENSES.
(a) Except as set forth in this Section 5.7 and in Section 7.2, all fees
and expenses incurred in connection with the Merger, this Agreement and the
transactions contemplated by this Agreement shall be paid by the party incurring
such fees or expenses, whether or not the Merger is consummated, except that
each of Halis and HealthWatch shall bear and pay one-half of the costs and
expenses incurred in connection with the filing, printing and mailing of the
Form S-4 and the Joint Proxy Statement (including SEC filing fees). In
addition, all transfer taxes (if any) incurred in connection with the Merger
arising on or after the Effective Time shall be borne by HealthWatch.
SECTION 5.8 PUBLIC ANNOUNCEMENTS.
Halis and HealthWatch will consult with each other before issuing, and
provide each other the opportunity to review, comment upon and concur with, and
use reasonable efforts to agree on, any press release or other public statements
with respect to the transactions contemplated by this Agreement, including the
Merger, and shall not issue any such press release or make any such public
statement prior to such consultation, except as either party may determine is
required by applicable law, court process or by obligations pursuant to any
listing agreement with any national securities exchange or stock market. The
parties agree that the initial press release to be issued with respect to the
transactions contemplated by this Agreement shall be in the form heretofore
agreed to by the parties.
SECTION 5.9 AFFILIATES. As soon as practicable after the date hereof,
Halis shall deliver to HealthWatch a letter identifying all persons who may be
deemed to be, at the time this Agreement is submitted for adoption by the
stockholders of Halis, "affiliates" of Halis for purposes of Rule 145 under the
Securities Act. Halis shall use commercially reasonable efforts to cause each
person identified on such list to deliver to HealthWatch on or before the date
immediately preceding the date of filing the Form S-4, written agreements
substantially in the forms attached as Exhibit C hereto, and in the event any
other person becomes an affiliate of Halis thereafter to cause such person to
deliver such an agreement to HealthWatch as soon as practicable but in any event
at Closing.
SECTION 5.10 NASDAQ. HealthWatch shall use commercially reasonable efforts
to cause the HealthWatch Common Stock issuable under Article II to be approved
for listing on Nasdaq SmallCap Market, subject to official notice of issuance,
as promptly as practicable after the date hereof, and in any event prior to the
Effective Time.
SECTION 5.11 TAX TREATMENT. Each of Halis and HealthWatch shall use
commercially reasonable efforts to cause the Merger to qualify as a
reorganization under the provisions of Section 368 of the Code and to obtain the
opinions of counsel referred to in Section 6.1(g). The parties will characterize
the Merger as such a reorganization for purposes of all tax returns and other
filings.
SECTION 5.12 EMPLOYEE BENEFITS. Each of Halis and HealthWatch agrees to
provide immediately following the Effective Time employee benefits and
compensation arrangements for all their respective employees, at a level no less
favorable in the aggregate than those provided for such employees immediately
prior to the Effective Time, subject to later amendment or other alteration as
may be directed by the Board of Directors of HealthWatch subsequent to the
Effective Time.
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SECTION 5.13 LOCK-UP. Substantial Halis Stockholders (defined as directors,
officers and Halis Shareholders owning 5% or more of Halis Common Stock) and
Affiliates will be required to agree not to sell, transfer or otherwise dispose
of any HealthWatch Common Stock prior to March 31, 2001 (the "Lockup Period");
if HealthWatch undertakes a public offering within the Lockup Period, Halis
Stockholders shall agree not to sell, transfer or otherwise dispose of the
HealthWatch Common Stock for such period of time after completion of such public
offering (not to exceed one year).
ARTICLE VI
CONDITIONS PRECEDENT
SECTION 6.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The
respective obligation of each party to effect the Merger is subject to the
satisfaction or waiver on or prior to the Closing Date of the following
conditions:
(a) STOCKHOLDER APPROVALS. Each of the HealthWatch Stockholder Approval and
the Halis Stockholder Approval shall have been obtained.
(b) GOVERNMENTAL, REGULATORY AND OTHER APPROVALS. (i) All consents,
approvals and actions of, filings with and notices to any Governmental Entity
required of HealthWatch, Halis or any of their subsidiaries to consummate the
Merger and the other transactions contemplated hereby (together with the matters
contemplated by Section 6.1(b), the "Requisite Regulatory Approvals") shall have
been obtained and (ii) except as would not have a material adverse effect on any
of HealthWatch, Halis or the Surviving Corporation, the consents and approvals
set forth in Section 3.1(d) of the HealthWatch Disclosure Schedule and Section
3.2(d) of the Halis Disclosure Schedule shall have been obtained or shall no
longer be required.
(c) NO INJUNCTIONS OR RESTRAINTS. No judgment, order, decree, statute, law,
ordinance, rule or regulation, entered, enacted, promulgated, enforced or issued
by any court or other Governmental Entity of competent jurisdiction or other
legal restraint or prohibition (collectively, "Restraints") shall be in effect
(i) preventing the consummation of the Merger, or (ii) which otherwise is
reasonably likely to have a material adverse effect on HealthWatch or Halis, as
applicable; provided, however, that each of the parties shall have used
commercially reasonable efforts to prevent the entry of any such Restraints and
to appeal as promptly as possible any such Restraints that may be entered.
(d) FORM S-4. The Form S-4 shall have become effective under the Securities
Act prior to the mailing of the Joint Proxy Statement by each of HealthWatch and
Halis to their respective stockholders and no stop order or proceedings seeking
a stop order shall be threatened by the SEC or shall have been initiated by the
SEC.
(e) NASDAQ LISTINGS. The shares of HealthWatch Common Stock issuable to
Halis' stockholders as contemplated by Article II shall have been approved for
listing on Nasdaq SmallCap Market, subject to official notice of issuance.
(f) TAX OPINIONS. Halis shall have received from Gomel & Davis, L.L.P.,
counsel to Halis, and HealthWatch shall have received from Gambrell & Stolz,
L.L.P., counsel to HealthWatch, an opinion, dated as of the date that the
Registration Statement is declared effective, to the effect that the Merger will
constitute a "reorganization" within the meaning of Section 368(a) of the Code,
and such opinions shall not have been withdrawn or materially modified as of the
Closing Date. In rendering such opinions, each of counsel for Halis and
HealthWatch shall have been entitled to receive and rely upon representations of
fact contained in certificates of
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officers of Halis and HealthWatch, which representations shall be in form and
substance satisfactory to such counsel.
(g) OPINION OF FINANCIAL ADVISORS. HealthWatch shall receive an opinion
from a financial advisor, to be engaged at a later date, in HealthWatch's sole
discretion, to the effect that, as of the date of such opinion, the Merger
Consideration and Exchange Ratio for the conversion of Halis Common Stock into
HealthWatch Common Stock is fair from a financial point of view to the
stockholders of HealthWatch, a signed copy of which opinion shall be delivered
to Halis. In the event HealthWatch is unable to obtain this opinion, the
termination fee set forth in Section 7.2 shall not be paid by HealthWatch to
Halis.
(h) OPINION OF FINANCIAL ADVISORS. Halis shall receive the opinion of New
York Capital Corporation, to the effect that, as of the date of such opinion,
the Exchange Ratio for the conversion of HealthWatch Common Stock into Halis
Common Stock is fair from a financial point of view to the stockholders of
Halis, a signed copy of which opinion shall be delivered to HealthWatch. In the
event Halis is unable to obtain this opinion, the termination fee set forth in
Section 7.2 shall not be paid by Halis to HealthWatch.
(i) LOCKUP AGREEMENTS. Halis obtains from all Substantial Halis
Stockholders and Affiliates a fully executed Lock-up Agreement as provided for
in Section 5.13.
SECTION 6.2 CONDITIONS TO OBLIGATIONS OF HALIS. The obligation of Halis to
effect the Merger is further subject to satisfaction or waiver of the following
conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of
HealthWatch set forth herein shall be true and correct both when made and at and
as of the Closing Date, as if made at and as of such time (except to the extent
expressly made as of an earlier date, in which case as of such date), except
where the failure of such representations and warranties to be so true and
correct (without giving effect to any limitation as to "materiality" or
"material adverse effect" set forth therein) does not have, and is not likely to
have, individually or in the aggregate, a material adverse effect on
HealthWatch.
(b) PERFORMANCE OF OBLIGATIONS OF HEALTHWATCH. HealthWatch shall have
performed in all material respects all obligations required to be performed by
it under this Agreement at or prior to the Closing Date.
(c) NO MATERIAL ADVERSE CHANGE. At any time after the date of this
Agreement there shall not have occurred any material adverse change relating to
HealthWatch.
SECTION 6.3 CONDITIONS TO OBLIGATIONS OF HEALTHWATCH. The obligation of
HealthWatch to effect the Merger is further subject to satisfaction or waiver of
the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of
Halis set forth herein shall be true and correct both when made and at and as of
the Closing Date, as if made at and as of such time (except to the extent
expressly made as of an earlier date, in which case as of such date), except
where the failure of such representations and warranties to be so true and
correct (without giving effect to any limitation as to "materiality," or
"material adverse effect" set forth therein) does not have, and is not likely to
have, individually or in the aggregate, a material adverse effect on Halis.
(b) PERFORMANCE OF OBLIGATIONS OF HALIS. Halis shall have performed in all
material respects
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all obligations required to be performed by it under this Agreement at or prior
to the Closing Date.
(c) NO MATERIAL ADVERSE CHANGE. At any time after the date of this
Agreement there shall not have occurred any material adverse change relating to
Halis.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
SECTION 7.1 TERMINATION. This Agreement may be terminated at any time prior
to the Effective Time, and (except in the case of 7.1(e) or 7.1(f)) whether
before or after the HealthWatch Stockholder Approval or the Halis Stockholder
Approval:
(a) by mutual written consent of Halis and HealthWatch, if the Board of
Directors of each so determines by a vote of a majority of its entire Board;
(b) by either the Board of Directors of Halis or the Board of Directors of
HealthWatch: (i) if the Merger shall not have been consummated by September 30,
2000, unless such termination right has been expressly restricted in writing by
the Board of Directors of Halis or HealthWatch, as the case may be; provided,
however, that the right to terminate this Agreement pursuant to this Section
7.1(b)(i) shall not be available to any party whose failure to perform any of
its obligations under this Agreement results in the failure of the Merger to be
consummated by such time; (ii) if the HealthWatch Stockholder Approval shall not
have been obtained at a HealthWatch Stockholders' Meeting duly convened therefor
or at any adjournment or postponement thereof; (iii) if the Halis Stockholder
Approval shall not have been obtained at a Halis Stockholders' Meeting duly
convened therefor or at any adjournment or postponement thereof; (iv) if any
Restraint having any of the effects set forth in Section 6.1(d) shall be in
effect and shall have become final and nonappealable, or if any Governmental
Entity that must grant a Requisite Regulatory Approval has denied approval of
the Merger and such denial has become final and nonappealable; provided, that
the party seeking to terminate this Agreement pursuant to this Section
7.1(b)(iv) shall have used commercially reasonable efforts to prevent the entry
of and to remove such Restraint or to obtain such Requisite Regulatory Approval,
as the case may be; or (v) if the financial advisor opinion required by Section
6.1(g) or (h) is not received because the advisor indicates that it does not
deem the transaction fair as stated in such Sections.
(c) by the Board of Directors of Halis (provided that Halis is not then in
material breach of any representation, warranty, covenant or other agreement
contained herein), if HealthWatch shall have breached or failed to perform any
of its representations, warranties, covenants or other agreements contained in
this Agreement, which breach or failure to perform (A) would give rise to the
failure of a condition set forth in Section 6.2(a) or (b), and (B) is incapable
of being cured by HealthWatch or is not cured within 30 days of written notice
thereof;
(d) by the Board of Directors of HealthWatch (provided that HealthWatch is
not then in material breach of any representation, warranty, covenant or other
agreement contained herein), if Halis shall have breached or failed to perform
in any material respect any of its representations, warranties, covenants or
other agreements contained in this Agreement, which breach or failure to perform
(A) would give rise to the failure of a condition set forth in Section 6.3(a) or
(b), and (B) is incapable of being cured by Halis or is not cured within 30 days
of written notice thereof;
(e) by the Board of Directors of Halis, at any time prior to the
HealthWatch Stockholders' Meeting, if the HealthWatch Board of Directors shall
have (A) failed to include in the Joint Proxy Statement to the HealthWatch
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Stockholders, its recommendation without modification or qualification that such
stockholders approve this Agreement and the transactions contemplated hereby, or
(B) subsequently withdrawn such recommendation or (C) modified or qualified such
recommendation in a manner adverse to the interests of Halis;
(f) by the Board of Directors of HealthWatch, at any time prior to the
Halis Stockholders' Meeting, if the Halis Board of Directors shall have (A)
failed to include in the Joint Proxy Statement to the Halis Stockholders, its
recommendation without modification or qualification that such stockholders
approve this Agreement and the transaction contemplated hereby, (B) subsequently
withdrawn such recommendation or (C) modified or qualified such recommendation
in a manner adverse to the interests of HealthWatch; or
(g) by Halis if the Board of Directors of HealthWatch shall have failed to
take any of the actions contemplated by Section 5.1 as a result of the exercise
of its rights under Section 5.1(e); or
(h) by HealthWatch if the Board of Directors of Halis shall have failed to
take any of the actions contemplated by Section 5.1 as a result of the exercise
of its rights under Section 5.1(e).
SECTION 7.2 EFFECT OF TERMINATION.
(a) In the event of termination of this Agreement as provided in Section
7.1 hereof, and subject to the provisions of Section 8.1 hereof, this Agreement
shall forthwith become void and there shall be no liability on the part of any
of the parties, except (i) as set forth in this Section 7.2 and in Sections 5.4,
5.7, 3.1(n) and 3.2(n) hereof, and (ii) nothing herein shall relieve any party
from liability for any willful breach hereof.
(b) If this Agreement is terminated (i) by Halis pursuant to Section 7.1(e)
hereof, (ii) by Halis or HealthWatch pursuant to Section 7.1(b)(ii) hereof
because of the failure to obtain the required approval from the HealthWatch
stockholders and at the time of such termination or prior to the meeting of
HealthWatch's or (iii) by Halis as a result of HealthWatch's material breach of
Section 5.1 hereof which is not cured within 30 days after notice thereof to
HealthWatch, HealthWatch shall pay to Halis a termination fee of Five Hundred
Thousand Dollars ($500,000.00) (the "HealthWatch Termination Fee").
(c) If this Agreement is terminated (i) by HealthWatch pursuant to Sections
7.1(f) hereof, (ii) by Halis or HealthWatch pursuant to Section 7.1(b)(iii)
hereof because of the failure to obtain the required approval from the Halis
stockholders and at the time of such termination or prior to the meeting of
Halis' stockholders there shall have been an offer or proposal for, an
announcement of any intention with respect to (including, without limitation,
the filing of a statement of beneficial ownership on Schedule 13D discussing the
possibility of or reserving the right to engage in), any agreement with respect
to, a transaction that would constitute an Alternative Transaction (as defined
in Section 4.2(b) hereof, except that for purposes of clause (i) of such
definition, the applicable percentage shall be fifty percent (50%) involving
Halis or any of the Halis Subsidiaries (whether or not such offer, proposal,
announcement or agreement shall have been rejected or shall have been withdrawn
prior to the time of such termination or of the meeting), (iii) by HealthWatch
as a result of Halis' material breach of Section 4.2 or 5.1 hereof which, in the
case of Section 5.1 only, is not cured within 30 days after notice thereof to
Halis or (iv) by HealthWatch pursuant to Section 7.1(h) hereof, Halis shall pay
to HealthWatch a termination fee of Five Hundred Thousand Dollars ($500,000.00)
(the "Halis Termination Fee").
(d) Each Termination Fee payable under Sections 7.2(b) and (c) above shall
be payable in cash, payable no later than one business day following the
delivery of notice of termination to the other party.
A-35
(e) Halis and HealthWatch agree that the agreements contained in Sections
7.2(b) and (c) above are an integral part of the transaction contemplated by
this Agreement and constitute liquidated damages and not a penalty. If one party
fails to promptly pay to the other any fee due under such Sections 7.2(b) and
(c), the defaulting party shall pay the costs and expenses (including legal fees
and expenses) in connection with any action, including the filing of any lawsuit
or other legal action, taken to collect payment.
SECTION 7.3 AMENDMENT. Subject to compliance with applicable law, this
Agreement may be amended by the parties at any time before or after the
HealthWatch Stockholder Approval or the Halis Stockholder Approval; provided,
however, that after any such approval, there may not be, without further
approval of such the stockholders of HealthWatch (in the case of the HealthWatch
Stockholders Approval) and the stockholders of Halis (in the case of the Halis
Stockholders Approval), any amendment of this Agreement that changes the amount
or the form of the consideration to be delivered to the holders of HealthWatch
Common Stock hereunder, or which by law otherwise expressly requires the further
approval of such stockholders. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto and duly
approved by the parties' respective Boards of Directors or a duly designated
committee thereof.
SECTION 7.4 EXTENSION; WAIVER. At any time prior to the Effective Time, a
party may, subject to the proviso of Section 7.3 (and for this purpose treating
any waiver referred to below as an amendment), (a) extend the time for the
performance of any of the obligations or other acts of the other parties, (b)
waive any inaccuracies in the representations and warranties of the other
parties contained in this Agreement or in any document delivered pursuant to
this Agreement or (c) waive compliance by the other party with any of the
agreements or conditions contained in this Agreement. Any agreement on the part
of a party to any such extension or waiver shall be valid only if set forth in
an instrument in writing signed on behalf of such party. Any extension or waiver
given in compliance with this Section 7.4 or failure to insist on strict
compliance with an obligation, covenant, agreement or condition shall not
operate as a waiver of, or estoppel with respect to, any subsequent or other
failure.
ARTICLE VIII
GENERAL PROVISIONS
SECTION 8.1 NONSURVIVAL OF REPRESENTATIONS AND WARRANTIES. None of the
representations and warranties in this Agreement or in any instrument delivered
pursuant to this Agreement shall survive the Effective Time. This Section 8.1
shall not limit any covenant or agreement of the parties which by its terms
contemplates performance after the Effective Time.
SECTION 8.2 NOTICES. All notices, requests, claims, demands and other
communications under this Agreement shall be in writing and shall be deemed
given if delivered personally, telecopied (which is confirmed) or sent by
overnight courier (providing proof of delivery) to the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice):
(a) if to Halis, to: 7 Piedmont Center
Suite 300
3525 Piedmont Road
Atlanta, Georgia 30305
A-36
with a copy to: Gomel & Davis, L.L.P.
285 Peachtree Center Avenue, Suite 700
Atlanta, Georgia 30303
Facsimile No: 404-524-4755
Attention: Jed S. Beardsley, Esq.
(b) if to HealthWatch, to: 7 Piedmont Center
Suite 300
3525 Piedmont Road
Atlanta, Georgia 30305
with a copy to: Gambrell & Stolz, L.L.P.
Suntrust Plaza, Suite 4300
303 Peachtree Street, N.E.
Atlanta, GA 30308-3252
Facsimile No.: 404-221-6501
Attention: Michael M. Smith, Esq.
SECTION 8.3 DEFINITIONS. For purposes of this Agreement:
(a) except for purposes of Section 5.10, an "affiliate" of any person means
another person that directly or indirectly, through one or more intermediaries,
controls, is controlled by, or is under common control with, such first person,
where "control" means the possession, directly or indirectly, of the power to
direct or cause the direction of the management policies of a person, whether
through the ownership of voting securities, by contract, as trustee or executor,
or otherwise;
(b) "material adverse change" or "material adverse effect" means, when used
in connection with HealthWatch or Halis, any change, effect, event, occurrence
or state of facts that is or could reasonably be expected to be materially
adverse to the business, financial condition or results of operations of such
party and its subsidiaries taken as a whole, it being understood that none of
the following shall be deemed by itself or by themselves, either alone or in
combination, to constitute a material adverse effect: (i) a change in the market
price or trading volume of Halis or HealthWatch Common Stock, as the case maybe
or (ii) conditions affecting the U.S. economy as a whole;
(c) "Nasdaq" means the National Association of Securities Dealers Automated
Quotation.
(d) "person" means an individual, corporation, partnership, limited
liability company, joint venture, association, trust, unincorporated
organization or other entity;
(e) a "subsidiary" of any person means another person, an amount of the
voting securities, other voting ownership or voting partnership interests of
which is sufficient to elect at least a majority of its Board of Directors or
other governing body (or, if there are no such voting interests, 50% or more of
the equity interests of which) is owned directly or indirectly by such first
person; and
(f) "knowledge" of any person which is not an individual means the
knowledge of such person's executive officers or senior management of such
person's operating divisions and segments.
SECTION 8.4 INTERPRETATION. When a reference is made in this Agreement to
an Article, Section
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or Exhibit, such reference shall be to an Article or Section of, or an Exhibit
to, this Agreement unless otherwise indicated. Whenever the words "include,"
"includes" or "including" are used in this Agreement, they shall be deemed to be
followed by the words "without limitation." The words "hereof," "herein" and
"hereunder" and words of similar import when used in this Agreement shall refer
to this Agreement as a whole and not to any particular provision of this
Agreement. All terms defined in this Agreement shall have the defined meanings
when used in any certificate or other document made or delivered pursuant hereto
unless otherwise defined therein. The definitions contained in this Agreement
are applicable to the singular as well as the plural forms of such terms and to
the masculine as well as to the feminine and neuter genders of such term. Any
agreement, instrument or statute defined or referred to herein or in any
agreement or instrument that is referred to herein means such agreement,
instrument or statute as from time to time amended, modified or supplemented,
including (in the case of agreements or instruments) by waiver or consent and
(in the case of statutes) by succession of comparable successor statutes and
references to all attachments thereto and instruments incorporated therein.
References to a person are also to its permitted successors and assigns.
SECTION 8.5 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties.
SECTION 8.6 ENTIRE AGREEMENT; NO THIRD-PARTY BENEFICIARIES. This Agreement
(including the documents and instruments referred to herein) and the
Confidentiality Agreement (a) constitute the entire agreement, and supersede all
prior agreements and understandings, both written and oral, between the parties
with respect to the subject matter of this Agreement and (b) except for the
provisions of Section 5.6, are not intended to confer upon any person other than
the parties any rights or remedies.
SECTION 8.7 GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Georgia, regardless of
the laws that might otherwise govern under applicable principles of conflict of
laws thereof.
SECTION 8.8 ASSIGNMENT. Neither this Agreement nor any of the rights,
interests or obligations under this Agreement shall be assigned, in whole or in
part, by operation of law or otherwise by either of the parties hereto without
the prior written consent of the other party. Any assignment in violation of the
preceding sentence shall be void. Subject to the preceding two sentences, this
Agreement will be binding upon, inure to the benefit of, and be enforceable by,
the parties and their respective successors and assigns.
SECTION 8.9 CONSENT TO JURISDICTION. Each of the parties hereto (a)
consents to submit itself to the personal jurisdiction of any federal court
located in the State of Georgia or any Georgia state court in the event any
dispute arises out of this Agreement or any of the transactions contemplated by
this Agreement, (b) agrees that it will not attempt to deny or defeat such
personal jurisdiction by motion or other request for leave from any such court
and (c) agrees that it will not bring any action relating to this Agreement or
any of the transactions contemplated by this Agreement in any court other than a
federal court sitting in the State of Georgia or a Georgia state court.
SECTION 8.10 HEADINGS, ETC. The headings and table of contents contained in
this Agreement are for reference purposes only and shall not affect in any way
the meaning or interpretation of this Agreement.
SECTION 8.11 SEVERABILITY. If any term or other provision of this Agreement
is invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other conditions and provisions of this
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Agreement shall nevertheless remain in full force and effect, insofar as the
foregoing can be accomplished without materially affecting the economic benefits
anticipated by the parties to this Agreement. Upon such determination that any
term or other provision is invalid, illegal or incapable of being enforced, the
parties hereto shall negotiate in good faith to modify this Agreement so as to
effect the original intent of the parties as closely as possible to the fullest
extent permitted by applicable law in an acceptable manner to the end that the
transactions contemplated hereby are fulfilled to the extent possible.
SECTION 8.12 DISCLOSURE SCHEDULES AND EXHIBITS. The HealthWatch Disclosure
Schedules shall be delivered to Halis and the Halis Disclosure Schedules shall
be delivered to HealthWatch on or before July 15, 2000; however, the
capitalization schedule of each party is attached hereto.
IN WITNESS WHEREOF, Halis, HealthWatch and Merger Sub have caused this
Agreement to be signed by their respective officers thereunto duly authorized,
all as of the date first written above.
HALIS, INC.
By: /s/ Joel Greenspan
Its: Member of the Board of Directors
Attest: /s/ Marilyn May
Its: Secretary
[CORPORATE SEAL]
HEALTHWATCH, INC.
By: /s/ Robert Tucker
Its: Member of the Board of Directors
Attest: /s/ Marilyn May
Its: Secretary
[CORPORATE SEAL]
HEALTHWATCH MERGER SUB, INC.
By: /s/ Paul W. Harrison
Its: President
Attest: /s/ Marilyn May
Its: Secretary
[CORPORATE SEAL]
A-39
ANNEX B
Amendment to the Agreement and Plan of Merger,
dated as of September 29, 2000
AMENDMENT TO THE
----------------
AGREEMENT AND PLAN OF MERGER BY AND AMONG, HALIS, INC., HEALTHWATCH MERGER SUB,
-------------------------------------------------------------------------------
INC. AND HEALTHWATCH, INC.
--------------------------
This AMENDMENT TO THE AGREEMENT AND PLAN OF MERGER BY AND AMONG, HALIS,
INC., HEALTHWATCH MERGER SUB, INC. AND HEALTHWATCH, INC. ("Amendment"), dated as
of September 29, 2000 is made and entered into by and among (i) Halis, Inc.
("Halis"), a Georgia corporation, (ii) HealthWatch Merger Sub, Inc.("Merger
Sub"), a Georgia Corporation and (iii) HealthWatch, Inc. ("HealthWatch"), a
Minnesota corporation.
WHEREAS, Halis, Merger Sub and HealthWatch have entered into that certain
Agreement and Plan of Merger dated as of June 29, 2000 (the "Agreement") in
which HealthWatch will acquire Halis upon the merger of Halis with and into
Merger Sub, a wholly-owned subsidiary of HealthWatch, upon the terms and
conditions included in the Agreement; and
WHEREAS, the parties desire to extend the date provided in Section 7.1(b)
and Section 5.1(d) of the Agreement to allow the additional time required to
satisfy the conditions to closing the merger.
THEREFORE, for good and valuable consideration, the receipt and sufficiency
of which hereby are acknowledged, the parties, intending to be legally bound, do
hereby agree as follows:
1. Section 7.1(b) of the Agreement shall be deleted in its entirety and
replaced with the following:
"(b) by either the Board of Directors of Halis or the Board of Directors of
HealthWatch: (i) if the Merger shall not have been consummated by January
31, 2001, unless such termination right has been expressly restricted in
writing by the Board of Directors of Halis or HealthWatch, as the case may
be; provided, however, that the right to terminate this Agreement pursuant
to this Section 7.1(b)(i) shall not be available to any party whose failure
to perform any of its obligations under this Agreement results in the
failure of the Merger to be consummated by such time; (ii) if the
HealthWatch Stockholder Approval shall not have been obtained at a
HealthWatch Stockholders' Meeting duly convened therefor or at any
adjournment or postponement thereof; (iii) if the Halis Stockholder
Approval shall not have been obtained at a Halis Stockholders' Meeting duly
convened therefor or at any adjournment or postponement thereof; (iv) if
any Restraint having any of the effects set forth in Section 6.1(d) shall
be in effect and shall have become final and nonappealable, or if any
Governmental Entity that must grant a Requisite Regulatory Approval has
denied approval of the Merger and such denial has become final and
nonappealable; provided, that the party seeking to terminate this Agreement
pursuant to this Section 7.1(b)(iv) shall have used commercially reasonable
efforts to prevent the entry of and to remove such Restraint or to obtain
such Requisite Regulatory Approval, as the case may be; or (v) if the
financial advisor opinion required by Section 6.1(g) or (h) is not received
because the advisor indicates that it does not deem the transaction fair as
stated in such Sections."
2. Section 5.1(d) of the Agreement shall be deleted in its entirety and
replaced with the following:
"(d) Halis and HealthWatch will use commercially reasonable efforts to hold
the HealthWatch Stockholders' Meeting and the Halis Stockholders' Meeting on the
same date and as soon as reasonably practicable after the date hereof, but not
later than January 31, 2001."
3. Except as modified by this Amendment, all terms and conditions of the
Agreement are hereby reaffirmed.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the
effective date mentioned above.
HALIS, INC.
By: /s/ Joel Greenspan
Its: Member of the Board of Directors
Attest: /s/ Marilyn May
Its: Secretary
[CORPORATE SEAL]
HEALTHWATCH, INC.
By: /s/ Thomas C. Ridenour
Its: Chief Financial Officer
Attest: /s/ Marilyn May
Its: Secretary
[CORPORATE SEAL]
HEALTHWATCH MERGER SUB, INC.
By: /s/ Paul W. Harrison
Its: President
Attest: /s/ Marilyn May
Its: Secretary
[CORPORATE SEAL]
B-2
ANNEX C
Form of HealthWatch Stock Option Agreement
HEALTHWATCH, INC.
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT ("Option Agreement") made and entered into this
__th day of _______, _____ by and between HealthWatch, Inc. (the "Company") and
__________ ("Optionee");
WITNESSETH:
-----------
The Board of Directors of the Company has adopted that certain 2000 Stock Option
Plan (the "Plan"), a copy of which is attached hereto as Exhibit "A" and
incorporated herein by reference. Pursuant to the terms of the Plan and in
consideration of the efforts of Optionee on behalf of the Company, the Board of
Directors has selected Optionee to participate in the Plan and desires to grant
to Optionee certain incentive stock options to purchase shares of the Company's
authorized $.05 par value common stock ("Stock"), subject to the terms and
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual promises, agreements and
covenants contained herein and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. INCORPORATION OF PLAN PROVISIONS
This Option Agreement is subject to and is to be construed in all respects in a
manner, which is consistent with the terms of the Plan, the provisions of which
are hereby incorporated by reference into this Option Agreement. Unless
specifically provided otherwise, all terms used in this Option Agreement shall
have the same meaning as in the Plan.
2. GRANT OF OPTION
Subject to the further terms and conditions of this Option Agreement, Optionee
is hereby granted a stock option to purchase ________ shares of Stock, effective
as of the date first written above.
This stock option is intended to be an Incentive Stock Option as provided in (S)
422 of the Internal Revenue Code.
3. FAIR MARKET VALUE OF STOCK
The Board of Directors has determined, in good faith and in its best judgment,
that the fair market value per share of Stock as of the date this stock option
is granted is $____.
4. OPTION PRICE
The Board of Directors has determined that the price for each share of Stock
purchased under this Option Agreement shall be $______.
5. EXPIRATION OF OPTIONS
The option to acquire Stock pursuant to this Option Agreement shall expire (to
the extent not previously fully exercised) upon the first to occur of the
following:
(a) ____________, _____ (the tenth anniversary of the date of grant of the
option);
(b) The date which is three (3) months following the date which Optionee ceases
his employment with the Company or any subsidiary of the Company, otherwise than
as a result of Optionee's death or total disability;
(c) The date which is the first anniversary of the date upon which Optionee
ceases to be employed by the Company, or any subsidiary of the Company, by
reason of Optionee's death or total disability; or
(d) The date upon which Optionee ceases her employment with the Company or any
subsidiary of the Company, for any reason, including death or total disability,
with respect to any portion of this option that is not then exercisable on the
date Optionee ceases her employment with the Company.
6. EXERCISE OF OPTION
Unless options hereunder shall earlier lapse or expire pursuant to Article 5
hereof, this option shall be exercisable with respect to the full number of
shares subject to this Option Agreement as follows:
(i) as of __________ - ________ shares;
(ii) as of __________ - ________ shares;
(iii) as of __________ - ________ shares; and
(iv) as of __________ - _________ shares.
To the extent such options become exercisable in accordance with the foregoing,
Optionee may exercise this stock option, in whole or in part, from time to time.
The option exercise price may be paid by Optionee either (i) in cash, (ii) by
surrender of shares of Stock owned by Optionee for more than six months on the
date of surrender and which have a fair market value on the date of surrender
equal to the aggregate exercise price of the shares as to which such option
shall be exercised, or (iii) shares of Stock issued or issuable in connection
with the exercise of this option.
Notwithstanding the foregoing Optionee shall be permitted to pay the exercise
price of this option in shares of Stock pursuant to clauses (ii) and (iii) above
only if an organized trading market in the Stock exists on the date of exercise
of this option. In addition, any payment of the option exercise price pursuant
to the aforementioned clause (iii) shall be made only with the prior consent of
the Board of Directors of the Company.
For the purposes of this Article 6, an "organized trading market" shall be
deemed to exist on the date of exercise of the option if. (a) the Stock is
listed on a national securities exchange, or (b) the Stock has been quoted on
the National Association of Securities Dealers Automated Quotation System
("NASDAQ") for the 15 trading days preceding the date of exercise of the option,
or (c) bid and asked quotations for the Stock have been published by the
National Quotation Bureau or other recognized inter-dealer quotation publication
(other than NASDAQ) during 20 of the 30 trading days preceding the date of
exercise of the option. In the event that an organized trading market for the
Stock exists on the date of exercise of the option, Optionee shall be given
credit against the option exercise price hereunder for such shares surrendered
equal to (i) if the Stock is listed on a national securities exchange or is
quoted on the NASDAQ National Market System, the last actual sales transaction
price reported on the day preceding exercise of the option, or, if there were no
actual sales transactions reported for such date, on the date next preceding
such date on which actual sales transactions were reported, or (ii) if the Stock
is quoted on NASDAQ (other than the NASDAQ National Market System) or by the
National Quotation Bureau or other recognized inter-dealer quotation
publication, the average of the high and low price quotations on the day
preceding exercise of the option, or, if there were no price quotations for such
date, on the date next preceding such date on which there were high and low
price quotations for the Stock.
C-2
7. MANNER OF EXERCISE
This stock option may be exercised by written notice to the Secretary of the
Company specifying the number of shares to be purchased and signed by Optionee
or such other person who may be entitled to acquire Stock under this Option
Agreement. If any such notice is signed by a person other than Optionee, such
person shall also provide such other information and documentation as the
Secretary of the Company may reasonably require to assume that such person is
entitled to acquire Stock under the terms of the Plan and this Option Agreement.
After receipt of the notice and any other assurances requested by the Company
under this Article 7, and upon receipt of the full option price, the Company
shall issue to the person giving notice of exercise under this Option Agreement
the number of shares specified in such notice.
8. RESTRICTIONS ON TRANSFERABILITY
The stock option granted hereunder shall not be transferable by Optionee
otherwise than by will or by the laws of descent and distribution, and such
stock option shall be exercisable during Optionee's lifetime only by Optionee.
9.FURTHER RESTRICTIONS ON EXERCISE AND SALE OF STOCK
Optionee acknowledges and understands that the Stock subject to this Option
Agreement is not registered under the Federal Securities Act of 1933, as amended
("Federal Act") or under the Georgia Securities Act of 1973, as amended (the
"State Act"). Each option shall be subject to the requirement that if at any
time the Board of Directors shall determine, in its discretion, that the
listing, registration or qualification of the shares subject to such option upon
any securities exchange or under any state or federal law, or the consent or
approval of any government regulatory body, is necessary or desirable as a
condition of, or in connection with, the granting of such option or the issue or
purchase of shares thereunder, such option may not be exercised in whole or in
part unless such listing, registration, qualification, consent or approval shall
have been effected or obtained free of any conditions not acceptable to the
Board of Directors. The costs of any such listing, registration, qualification,
consent or approval shall be paid by the Company. Alternatively, the Company
shall not pen-nit any exercise of this stock option unless it receives such
representations, factual assurances, and legal opinions as it may deem necessary
to determine and document the availability of an exemption from registration
under both the Federal Act and the State Act with respect to any particular
issuance of shares under this Option Agreement. Further, the Board of Directors
shall require that Stock issued in respect of any exercise of this stock option
shall bear such restrictions on further transfer as shall be necessary to insure
the availability of any exemption so claimed.
10. REORGANIZATION
In the event that dividends are payable in Common Stock of the Company or in the
event there are splits, subdivisions or combinations of shares of Common Stock
of the Company, the number of Shares available under the Plan shall be increased
or decreased proportionately, as the case may be, and the number of Shares
deliverable upon the exercise thereafter of any Option theretofore granted shall
be increased or decreased proportionately, as the case may be, without change in
the aggregate purchase price.
In case the Company is merged or consolidated with another corporation and the
Company is not the surviving corporation, or in case the property or stock of
the Company is acquired by another corporation, or in case of a separation,
reorganization, recapitalization or liquidation of the Company, the Board of
Directors of the Company, or the Board of Directors of any corporation assuming
the obligations of the Company hereunder, shall either (i) make appropriate
provision for the protection of any outstanding Options by the substitution on
an equitable basis of
C-3
appropriate stock of the Company, or of the merged, consolidated or otherwise
reorganized corporation which will be issuable in respect to the shares of
Common Stock of the Company, provided only that the excess of the aggregate fair
market value of the shares subject to option immediately after such substitution
over the purchase price thereof is not more than the excess of the aggregate
fair market value of the shares subject to option immediately before such
substitution over the purchase price thereof, or (ii) upon written notice to the
Optionee provide that the Option (including the shares not then exercisable)
must be exercised within sixty (60) days of the date of such notice or it will
be terminated.
IN WITNESS WHEREOF, the Company has caused this Option Agreement to be
executed by a member of the Board of Directors or a duly authorized officer of
the Company, and Optionee has executed this Option Agreement as of the date
first written above.
HEALTHWATCH, INC.
By:____________________________________
Its: __________________________________
OPTIONEE
_______________________________________
C-4
ANNEX D
Fairness Opinion of New York Capital
[LETTERHEAD OF NEW YORK CAPITAL CORPORATION]
CONFIDENTIAL
August 14, 2000
Board of Directors
Halis, Inc.
3525 Piedmont Road
Building 7, Suite 300
Atlanta, GA 30305
Attention: Mr. Paul W. Harrison, Chairman
Dear Sirs:
You have requested our opinion as to the fairness from a financial point of
view to the public stockholders of Halis, Inc. ("HLIS") of a proposed merger of
HLIS with Healthwatch, Inc. ("HEAL"). It is contemplated that, in essence, the
merger will involve the issuance of one share of common stock of HEAL for each
20 shares of HLIS, i.e., .05 shares of HEAL for each share of HLIS. HEAL
currently owns approximately 25% of the common stock of HLIS and has an option
at $.20 per share to purchase an additional 5 million shares of HLIS prior to
the closing of the merger and an additional 25 million shares for three months
thereafter. Paul W. Harrison is Chairman of the Board of Directors, President
and Chief Executive Officer of HEAL and Chairman of the Board of Directors and
Chief Executive Officer of HLIS.
In formulating our opinion, we have reviewed: 1) drafts of proxy material
of HEAL and HLIS covering the proposed merger; 2) drafts of the Agreement and
Plan of Merger by and among HLIS, Healthwatch Merger Sub, Inc. and HEAL; 3) a
business plan of HEAL, which set forth, among other things, its projected
results of operations and financial condition through the year ended June 30,
2003 (and reflected a number of assumed acquisitions including that of HLIS); 4)
A confidential Private Placement Memorandum of HEAL relating to over $10 million
of financing in late 1999 and early 2000; 5) Forms 10-KSB of HEAL for its fiscal
years June 30, 1997, 1998, and 1999; 6) Form 10-QSB of HEAL for the quarter
ended March 31, 2000; 7) recent Forms 8-K (the latest being that filed as of
March 24, 2000) of HEAL; 8) Forms 1 O-KSB of HLIS for the years 1997, 1998, and
1999; 9) Form 10-QSB of HLIS for the quarter ended March 31, 2000; 10) recent
(for approximately the latest twelve months) prices and trading volumes of HEAL
and HLIS common stock; 11) to the extent we considered appropriate, Annual
Reports and Forms I O-K and 1 O-Q (through the latest available quarter) of
approximately fifteen publicly traded companies regarded by us (and by HEAL and
HLIS) as comparable in nature of business to HEAL and HLIS; 12) to the extent we
considered appropriate, recent merger and acquisition and similar transactions
in the business in which HEAL and HLIS are engaged; and 13) such other matters
as we deemed appropriate and relevant. In addition, we discussed with the Chief
Executive of HEAL and HLIS the purposes of the merger and its probable effects
on the business and results of operation of the two companies.
In arriving at our opinion, we relied on the accuracy and completeness of
the information provided to us by HEAL and HLIS and their personnel as well as
the publicly available information, in each case without independent
verification. We have not made or obtained any evaluations or appraisals of the
properties and facilities of HEAL or HLIS.
In view of. 1) the general absence of earnings in the industry of HEAL and
HLIS (including HEAL and HLIS); 2) the relatively very small size of HEAL and
HLIS in revenues and market value in that industry (i.e., the healthcare-
medical-hospital-pharmaceuticaI management software sectors of SIC codes 3845
and 7372); and 3) the absence of meaningful publicly available information
concerning small acquisitions and mergers in that industry, it was impracticable
to apply conventional measures of value such as price/earnings ratios, market
value to revenues ratios, market value to book value ratios (HLIS had a negative
equity at March 31, 2000) or unlevered multiple comparisons. Accordingly, we
utilized other approaches to assess the fairness to HLIS public stockholders of
the terms of the proposed merger with HEAL.
First, we compared the market prices of HEAL to the market prices of HLIS
over the past year and found that the average ratio of HLIS price to HEAL was
about .04, within a very narrow range. Thus, the proposed ratio of .05 shares of
HEAL per share of HLIS, would constitute approximately a 20% premium over the
market value of HLIS. Similarly, we compared .05 times the market prices of HEAL
to the market prices of HLIS (essentially the same mathematical process) and
found the same approximately 20% premium over market value in the acquisition
terms. In the more recent past, since early April 2000, the ratios indicate a
premium over HLIS market value of 36%.
More important, we relied on the aforementioned business plan of HEAL (see
3 in the second paragraph of this letter) for another approach, which buttressed
our conclusion as to the fairness of the terms of the proposed merger. The
business plan projected revenues, earnings and financial condition for the
fiscal year ending June 2003 and projected substantial issuances of stocks for
acquisitions (including HLIS) and financing to achieve the projected 2003
results. Projected net income for fiscal 2003 was $19.3 million and projected
EBITDA (earnings before interest, taxes and depreciation and amortization) was
$30.2 million. The number of shares of HEAL that we estimated to be outstanding
at that time was 13.9 million (versus 2.6 million after dilution currently).
Considering HLIS and HEAL, analogous to a venture capital investment, we
took the present values of these amounts (over the three years from 2003 to
2000) at discount rates of 30%, 35%, 40% and 60%, which are the typical target
rates of return of venture capital investors (although historical average rates
of return, reflecting a large percentage of failed investments, is about 17%, as
reported in Venture Economics). We then, expecting more normal price/earnings
ratios to prevail in 2003, applied a multiple of 15 to the discounted earnings
and then took .05 of the resultant per share value figure.
Similarly, we took the present values at the aforesaid discount rates of
projected EBITDA, multiplied the results by 7 (a fairly normal multiple of
EBITDA in using unlevered multiple measures of value), subtracted and estimated
$500,000 of interest-bearing debt to be outstanding, and added $7,200,000 of
excess cash. The results were calculated on a per share basis and multiplied
by.05 to obtain a calculated value per equivalent share of HLIS.
Even at the 60% discount rate, the per HLIS share equivalents were $.22 to
$.25, which constitute more than 100% premiums over the average recent prices of
HLIS (since early April, 2000).
D-2
The following table sets for the the results of the preceding calculations:
Discount Rate P/E Multiple Unlevered Multiple
Approach- Approach
Per Share Value Per Share Value
----------------------------------------------------------------
30% $0.48 $0.38
35% $0.42 $0.34
40% $0.37 $0.31
50% $0.31 $0.26
60% $0.25 $0.22
In the absence of comparable transactions over the past year for which data
were publicly available, we used, as a proxy, premiums paid generally in the
acquisition market. They are equaled or substantially exceeded by those set
forth in the second preceding paragraph.
To illustrate the impracticability of applying conventional measures of
value, as indicated in the fourth paragraph of this letter, we applied four
measures to the 14 companies we considered comparable to HEAL and HLIS for which
information was publicly available: a) market value of equity plus interest-
bearing debt, as a multiple of earnings before interest, taxes and depreciations
and amortization (EBITDA); b) market value of equity as a multiple of latest
twelve months' revenue; c) market value of equity as a multiple of latest book
value of stockholder equity and d) market value of equity as a multiple of
latest twelve months' net income. The results for the 14 comparable companies
were as follows:
a) Only 6 companies had meaningful multiples, which ranged from 8.6 to 38 and
averaged about 18;
b) 13 of the companies had meaningful multiples, which ranged from .45 to 20.5
and averaged about 6.25;
c) the range of multiples was .43 to 10.8 and averaged about 3.1;
d) only 3 companies had earnings to which to apply market value of equity and
the range of multiples was 9.5 to 17.6 with an average of about 15.5.
HLIS had marginal EBITDA for the twelve months measured, revenues that were
a very minor fraction of those of the compared companies, a negative book value
and substantial losses. HEAL had the same pattern of negative parameters.
On the basis of the foregoing, it is our opinion that the terms of the
proposed merger of HEAL and HLIS are fair from a financial standpoint to the
public stockholders of HLIS.
Very truly yours,
/s/ Jay Cooke
Jay Cooke, President
D-3
ANNEX E
Certificate of Designation, Preferences and Rights of the Series C 8%
Convertible Preferred Stock of HealthWatch, Inc.
CERTIFICATE OF DESIGNATION, PREFERENCES
AND RIGHTS OF SERIES C 8% CONVERTIBLE
PREFERRED STOCK
-OF-
HEALTHWATCH, INC.
HealthWatch, Inc., a corporation organized and existing under the laws of
the State of Minnesota (the "Company"), by its President and Secretary, does
hereby certify that, pursuant to authority conferred upon the Board of Directors
by Article III of the Articles of Incorporation, as amended, of the Company,
authorizing a class of 1,000,000 shares of preferred stock of the Company, the
Board of Directors of the Company, by unanimous written consent dated December
23, 1999, has duly adopted resolutions providing for the issuance out of such
class of a series of up to 4,500 shares of Series C 8% Convertible Preferred
Stock at an issuance price of $100.00 per share (the "Original Purchase Price")
and setting forth the voting powers, designation, preferences and relative,
participating, optional and other special rights, and the qualifications,
limitations and restrictions thereof, which resolution is as follows:
RESOLVED, that pursuant to the authority vested in the Board of Directors
of the Company in accordance with the provisions of its Articles of
Incorporation, as amended, there be, and hereby is, created out of the class of
1,000,000 shares of preferred stock of the Company authorized in Article III of
its Articles of Incorporation, as amended, a series of preferred stock of the
Company with the following voting powers, designation, preferences and relative,
participating, optional and other special rights, and qualifications,
limitations and restrictions:
1. Designation and Number of Shares. 4,500 shares of preferred stock (the
--------------------------------
"Shares") are hereby designated as Series C 8% Convertible Preferred Stock (the
"Series C Preferred Stock").
2. Liquidation. Upon any liquidation, dissolution or winding up of the
-----------
Company, whether voluntary or involuntary ("Liquidation"), the holders of record
of the shares of the Series C Preferred Stock shall be entitled to receive,
before and in preference to any distribution or payment of assets of the Company
or the proceeds thereof may be made or set apart for the holders of Common Stock
of the Company, par value $.05 per share (the "Common Stock") or any other
security junior to the Series C Preferred Stock in respect of distributions upon
Liquidation out of the assets of the Company legally available for distribution
to its stockholders, an amount in cash equal to the Original Purchase Price per
share (subject to adjustment if the Series C Preferred Stock has been adjusted
pursuant to Paragraph 6 hereof) plus an amount equal to accrued and unpaid
dividends on each share of Series C Preferred Stock on the date fixed for the
distribution of assets of the Company (the "Liquidation Preference").
3. Dividends. Commencing on the date of issuance (the "Issuance Date")
---------
until conversion, each issued and outstanding share of Series C Preferred Stock
shall entitle the holder of record thereof to receive, when, as and if declared
by the Board of Directors, out of any funds legally available therefor,
dividends at the rate of $8.00 per annum per share of Series C Preferred Stock
(the "Dividend Rate"), subject to adjustment as hereinafter set forth, payable
upon liquidation or conversion. Dividends per share shall be payable, at the
Company's option, either (i) in cash or (ii) in shares of Series C Preferred
Stock, subject to an in increase in the number of authorized shares of Series C
Preferred Stock by the Company's Board of Directors. In the event of a split or
subdivision of the outstanding shares of Series C Preferred Stock, or the
combination or the outstanding shares of Series C Preferred Stock, as the case
may be, the dividends provided for in this Section 3 shall automatically and
without any further action be decreased, in the case of a split or subdivision,
or increased, in the case of a combination, in proportion to the increase or
decrease in the number of shares of Series C Preferred Stock outstanding
immediately before such split, subdivision or combination.
4. Conversion Rights Each holder of record of shares of the Series C
-----------------
Preferred Stock shall have the right to convert all or any part of such holder's
share of Series C Preferred Stock into Common Stock as follows:
(A) Optional Conversion. Subject to and upon compliance with the
-------------------
provisions of this Section 4, the holder of any shares of Series C Preferred
Stock shall have the right at such holder's option, at any time or from time to
time, to convert any of such shares of Series C Preferred Stock into fully paid
and nonassessable shares of Common Stock at the Conversion Price (as defined in
Section (4)(c) below) in effect on the Conversion Date (as defined in Section
4(d) below) upon the terms hereinafter set forth.
(B) Automatic Conversion. Each outstanding share of Series C
--------------------
Preferred Stock shall automatically be converted, without any further act of the
Corporation or its stockholders, into fully paid and nonassessable shares of
Common Stock at the Conversion Price then in effect upon: (i) the closing of a
public offering or private placement of the Company's securities raising gross
proceeds in excess of $25 million at a per share price of more than $5.00 (a
"Qualified Offering"); or (ii) at such time as the closing bid price for the
Common Stock of the Company has equaled at least twice the Conversion Price for
a period of 20 consecutive trading days, provided that the Common Stock of the
Company is trading on a national securities exchange or the Nasdaq Small Cap or
National Market System, and the Conversion Shares are fully registered for
resale and not subject to any lock-up provisions.
(C) Conversion Price. Each share of the Series C Preferred Stock
----------------
shall be convertible into that number of fully paid and non-assessable shares of
Common Stock of the Company equal to the Original Purchase Price divided by the
conversion price in effect at the time of conversion (the "Conversion Price"),
determined as hereinafter provided. The Conversion Price shall initially be
$1.875 per share. The number of shares of Common Stock into which each share of
Preferred Stock is convertible is herein referred to as the "Conversion Rate."
The Conversion Price shall be subject to adjustment as set forth in Section 6
hereof.
(D) Mechanics of Conversion. Before any holder of Series C Preferred
-----------------------
Stock shall be entitled to convert the same into shares of Common Stock, such
holder shall surrender the certificate or certificates therefor, duly endorsed,
at the office of the Company or of any transfer agent for the Series C Preferred
Stock, and shall give written notice to the Company at its principal corporate
office, of the election to convert the same and shall state therein the name or
names in which the certificate or certificates for shares of Common Stock are to
be issued. The Company shall, as soon as practicable thereafter, issue and
deliver at such office to such holder of Series C Preferred Stock, or to the
nominee or nominees of such holder, a certificate or certificates for the number
of shares of Common Stock to which such holder shall be entitled as aforesaid.
Conversion shall be deemed to have been effected on the date when delivery of
notice of an election to convert and certificates for shares is made or on the
date of the occurrence of the event specified in Section 5(B), as the case may
be, and such date is referred to herein as the "Conversion Date." All Common
Stock which may be issued upon conversion of the Series C Preferred Stock will,
upon issuance, be duly issued, fully paid and non-assessable and free from all
taxes, liens, and charges with respect to the issuance thereof. At all times
that any shares of Series C Preferred Stock are outstanding, the Company shall
have authorized and shall have reserved for the purpose of issuance upon such
conversion into Common Stock of all Series C Preferred Stock, a sufficient
number of shares of Common Stock to provide for the conversion of all
outstanding shares of Series C Preferred Stock at the then effective Conversion
Rate. Without limiting the generality of the foregoing, if, at any time, the
Conversion Price is decreased, the number of shares of Common Stock authorized
and reserved for issuance upon the conversion of the Series C Preferred Stock
shall be proportionately increased.
(E) Conversion Price Adjustments. The Conversion Price shall be
----------------------------
subject to adjustment provisions of Section 6 below.
5. Priority.
--------
(A) The Series C Preferred Stock shall rank senior to the Company's
Series A Preferred Stock and Series P Preferred Stock with respect to dividend
and/or liquidation rights. The Company shall not create or authorize any other
stock ranking senior to, or pari passu with, the Series C Preferred Stock. So
long as any
E-2
shares of Series C Preferred Stock shall be outstanding, no dividends, whether
in cash or property, shall be paid or declared, nor shall any other distribution
be made, on the Common Stock of the Company or any other security junior to the
Series C Preferred Stock as to dividend rights, unless all dividends on the
Series C Preferred Stock for all past quarterly dividend periods and the full
dividends for the then current semi-annual period shall have been paid or
declared and duly provided for. The provisions of this Section 5 shall not,
however, apply to a dividend payable in Common Stock or any other security of
the Company junior to the Series C Preferred Stock. If any dividend previously
due on the Series C Preferred Stock has not been paid in full, then no dividends
shall be paid or declared upon any shares of any class or series of stock of the
Company ranking on a parity with the Series C Preferred Stock in the payment of
dividends for any period unless a like proportionate dividend for the current
period, ratably in proportion to the respective annual dividend rates fixed
thereupon, shall be paid upon or declared for the Series C Preferred Stock then
issued and outstanding.
(B) The Company may issue, in the future, without the consent of holders
of the Series C Preferred Stock, other series of preferred stock which rank
junior to the Series C Preferred Stock as to dividend and/or liquidation rights.
In accordance with Paragraph 7(C) hereof, the consent of the holders of two-
thirds of the outstanding shares of the Series C Preferred Stock is required for
the issuance of any series of preferred stock which is senior as to dividend
and/or liquidation rights to the Series C Preferred Stock.
6. Anti-Dilution Provisions. Subject to the provisions of Section 1 hereof,
------------------------
the Conversion Price in effect at any time and the number and kind of securities
issuable upon the conversion of the Series C Preferred Stock shall be subject to
adjustment from time to time upon the happening of certain events as follows:
(A) In case the Company shall hereafter (i) declare a dividend or make a
distribution on its outstanding shares of Common Stock in shares of Common
Stock, (ii) subdivide or reclassify its outstanding shares of Common Stock into
a greater number of shares, or (iii) combine or reclassify its outstanding
shares of Common Stock into a smaller number of shares, the Conversion Price in
effect at the time of the record date for such dividend or distribution or of
the effective date of such subdivision, combination or reclassification shall be
adjusted so that it shall equal the price determined by multiplying the
Conversion Price by a fraction, the denominator of which shall be the number of
shares of Common Stock outstanding after giving effect to such action, and the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such action. Such adjustment shall be made successively
whenever any event listed above shall occur.
(B) In case the Company shall fix a record date for the issuance of
rights or warrants to all holders of its Common Stock entitling them to
subscribe for or purchase shares of Common Stock (or securities convertible into
Common Stock) at a price (the "Subscription Price") (or having a conversion
price per share) less than the current market price on such record date, the
Conversion Price shall be adjusted so that the same shall equal the price
determined by multiplying the Conversion Price in effect immediately prior to
the date of such issuance by a fraction, the numerator of which shall be the sum
of the number of shares of Common Stock outstanding on the record date mentioned
below and the number of additional shares of Common Stock which the aggregate
offering price of the total number of shares of Common Stock so offered (or the
aggregate conversion price of the convertible securities so offered) would
purchase at such current market price per share of the Common Stock, and the
denominator of which shall be the sum of the number of shares of Common Stock
outstanding on such record date and the number of additional shares of Common
Stock offered for subscription or purchase (or into which the convertible
securities so offered are convertible). Such adjustment shall be made
successively whenever such rights or warrants are issued and shall become
effective immediately after the record date for the determination of
shareholders entitled to receive such rights or warrants; and to the extent that
shares of Common Stock are not delivered (or securities convertible into Common
Stock are not delivered) after the expiration of such rights or warrants the
Conversion Price shall be readjusted to the Conversion Price which would then be
in effect had the adjustments made upon the issuance of such rights or warrants
been made upon the basis of delivery of only the number of shares of Common
Stock (or securities convertible into Common Stock) actually delivered.
E-3
(C) In case the Company shall hereafter distribute to the holders of
its Common Stock evidences of its indebtedness or assets (excluding cash
dividends or distributions and dividends or distributions referred to in
Subsection (A) above) or subscription rights or warrants (excluding those
referred to in Subsection (B) above), then in each such case the Conversion
Price in effect thereafter shall be determined by multiplying the Conversion
Price in effect immediately prior thereto by a fraction, the numerator of which
shall be the total number of shares of Common Stock outstanding multiplied by
the current market price per share of Common Stock, less the fair market value
(as determined by the Company's Board of Directors) of said assets or evidences
of indebtedness so distributed or of such rights or warrants, and the
denominator of which shall be the total number of shares of Common Stock
outstanding multiplied by such current market price per share of Common Stock.
Such adjustment shall be made successively whenever such a record date is fixed.
Such adjustment shall be made whenever any such distribution is made and shall
become effective immediately after the record date for the determination of
shareholders entitled to receive such distribution.
(D) In case the Company shall hereafter issue shares of its Common
Stock (excluding shares issued (i) in any of the transactions described in
Subsection (A) above, (ii) upon exercise of options granted to the Company's
officers, directors, employees and consultants under a plan or plans adopted by
the Company's Board of Directors and approved by its shareholders, if such
shares would otherwise be included in this Subsection (D), (but only to the
extent that the aggregate number of shares excluded hereby and issued after the
date hereof, shall not exceed 15% of the Company's Common Stock outstanding, on
a fully diluted basis, at the time of any issuance), (iii) upon exercise of
options, warrants, convertible securities and convertible debentures outstanding
as of the final closing of the Private Placement, a Qualified Offering, or
conversion of the Shares, (iv) to shareholders of any corporation which merges
into the Company in proportion to their stock holdings of such corporation
immediately prior to such merger, upon such merger, (v) issued in a private
placement through Commonwealth Associates, L.P., as placement agent, or upon
exercise or conversion of any securities issued in or in connection with such a
private placement (including agent, consulting or advisory warrants), (vi)
issued in a private placement where the Offering Price (as defined below) is at
least 90% of the current market price, (vii) issued in a bona fide public
offering pursuant to a firm commitment underwriting, or (viii) issued in
connection with an acquisition of a business or technology which has been
approved by a majority of the Company's outside directors but only if no
adjustment is required pursuant to any other specific subsection of this Section
6 (without regard to Subsection (I) below) with respect to the transaction
giving rise to such rights) for a consideration per share (the "Offering Price")
less than the current market price, the Conversion Price shall be adjusted
immediately thereafter so that it shall equal the price determined by
multiplying the Conversion Price in effect immediately prior thereto by a
fraction, the numerator of which shall be the sum of the number of shares of
Common Stock outstanding immediately prior to the issuance of such additional
shares and the number of shares of Common Stock which the aggregate
consideration received for the issuance of such additional shares would purchase
at such current market price per share of Common Stock, and the denominator of
which shall be the number of shares of Common Stock outstanding immediately
after the issuance of such additional shares. Such adjustment shall be made
successively whenever such an issuance is made.
(E) In case the Company shall hereafter issue any securities
convertible into or exchangeable for its Common Stock (excluding securities
issued in transactions described in Subsections (B), (C) and (D)(i) through
(viii) above) for a consideration per share of Common Stock (the "Exchange
Price") initially deliverable upon conversion or exchange of such securities
(determined as provided in Subsection (G) below) less than the current market
price, the Conversion Price shall be adjusted immediately thereafter so that it
shall equal the price determined by multiplying the Conversion Price in effect
immediately prior thereto by a fraction, the numerator of which shall be the sum
of the number of shares of Common Stock outstanding immediately prior to the
issuance of such securities and the number of shares of Common Stock which the
aggregate consideration received for such securities would purchase at such
current market price per share of Common Stock, and the denominator of which
shall be the sum of the number of shares of Common Stock outstanding immediately
prior to such issuance and the maximum number of shares of Common Stock of the
Company deliverable upon conversion of or in exchange for such securities at the
initial conversion or exchange price or rate. Such adjustment shall be made
successively whenever such an issuance is made.
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(F) Whenever the Conversion Price is adjusted pursuant to Subsections
(A), (B), (C), (D) and (E) above and (J) below or pursuant to Section 1(D)
hereof, the number of Conversion Shares issuable upon conversion of the Series C
Preferred Stock shall simultaneously be adjusted by multiplying the number of
Conversion Shares initially issuable upon conversion of the Series C Preferred
Stock by the Conversion Price in effect on the date hereof and dividing the
product so obtained by the Conversion Price, as adjusted.
(G) For purposes of any computation respecting consideration received
pursuant to Subsections (D) and (E) above and (J) below, the following shall
apply:
(a) in the case of the issuance of shares of Common Stock for
cash, the consideration shall be the amount of such cash, provided that in no
case shall any deduction be made for any commissions, discounts or other
expenses incurred by the Company for any underwriting of the issue or otherwise
in connection therewith;
(b) in the case of the issuance of shares of Common Stock for a
consideration in whole or in part other than cash, the consideration other than
cash shall be deemed to be the fair market value thereof as determined in good
faith by the Board of Directors of the Company (irrespective of the accounting
treatment thereof), whose determination shall be conclusive; and
(c) in the case of the issuance of securities convertible into
or exchangeable for shares of Common Stock, the aggregate consideration received
therefor shall be deemed to be the consideration received by the Company for the
issuance of such securities plus the additional minimum consideration, if any,
to be received by the Company upon the conversion or exchange thereof (the
consideration in each case to be determined in the same manner as provided in
clauses (A) and (B) of this Subsection (G)).
(H) For the purpose of any computation under Subsections (B), (C),
(D) and (E) above and (K) below, the current market price per share of Common
Stock at any date shall be determined in the manner set forth in Section 11
hereof except that the current market price per share shall be deemed to be the
higher of (i) the average of the prices for 30 consecutive business days before
such date or (ii) the price on the business day immediately preceding such date.
(I) No adjustment in the Conversion Price shall be required unless
such adjustment would require an increase or decrease of at least five cents
($0.05) in such price; provided, however, that any adjustments which by reason
of this Subsection (I) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment required to be made hereunder.
All calculations under this Section 6 shall be made to the nearest cent or to
the nearest one-hundredth of a share, as the case may be. Anything in this
Section 6 to the contrary notwithstanding, the Company shall be entitled, but
shall not be required, to make such changes in the Conversion Price, in addition
to those required by this Section 6, as it shall determine, in its sole
discretion, to be advisable in order that any dividend or distribution in shares
of Common Stock, or any subdivision, reclassification or combination of Common
Stock, hereafter made by the Company shall not result in any Federal income tax
liability to the holders of Common Stock or securities convertible into Common
Stock.
(J) Notwithstanding the provisions of this Section 6, in the event
that the Company shall at any time issue securities under Subsections (B), (D)
or (E) having an Offering Price, Subscription Price or Exchange Price less than
the Conversion Price, then the Conversion Price shall be immediately reset to
equal such lower Offering Price, Subscription Price or Exchange Price.
Furthermore, in the event that the average closing bid price of the Common Stock
for the 20 consecutive trading days prior to the first anniversary of the final
closing of the Private Placement is less than the Conversion Price, the
Conversion Price shall be immediately reset to equal such average closing bid
price.
(K) No adjustment under Subsections (B), (C), (D) or (E) shall be
required for issuances
E-5
below the current market price if either (i) the current market price is at
least 300% of the Conversion Price then in effect and (ii) a registration
statement covering the Warrant Shares is in effect and remains in effect for the
90 days after such issuance or Rule 144(k) under the Securities Act of 1933, as
amended (the "Act") is available for resale of all of the Conversion Shares or
the Company at the time of such issuance has less than $100,000 in cash.
Furthermore, no adjustment under Subsections (B), (C), (D), (E) or (J) shall be
required unless either (i) shareholders of the Company have approved the terms
of this Designation or (ii) such adjustments will not result in a violation of
any qualitative listing criteria of The Nasdaq Stock Market, Inc.
(L) Whenever the Conversion Price is adjusted, as herein
provided, the Company shall promptly but no later than 10 days after any request
for such an adjustment by the Holder, cause a notice setting forth the adjusted
Conversion Price and adjusted number of Conversion Shares issuable upon exercise
of each share of Series C Preferred Stock, and, if requested, information
describing the transactions giving rise to such adjustments, to be mailed to the
Holders at their last addresses appearing in the Share Register, and shall cause
a certified copy thereof to be mailed to its transfer agent, if any. The Company
may retain a firm of independent certified public accountants selected by the
Board of Directors (who may be the regular accountants employed by the Company)
to make any computation required by this Section 6, and a certificate signed by
such firm shall be conclusive evidence of the correctness of such adjustment.
(M) In the event that at any time, as a result of an adjustment
made pursuant to Subsection (A) above, the Holders of the Series C Preferred
Stock thereafter shall become entitled to receive any shares of the Company,
other than Common Stock, thereafter the number of such other shares so
receivable upon conversion of the Series C Preferred Stock shall be subject to
adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Common Stock contained in
Subsections (A) to (J), inclusive above.
7. Voting Rights.
-------------
(A) In addition to any other rights provided for herein or by
law, the holders of Series C Preferred Stock shall be entitled to vote, together
with the holders of Common Stock as one class, on all matters as to which
holders of Common Stock shall be entitled to vote, in the same manner and with
the same effect as such Common Stock holders. In any such vote each share of
Series C Preferred Stock shall entitle the holder thereof to the number of votes
per share that equals the number of whole shares of Common Stock into which each
such share of Series C Preferred Stock is then convertible.
(B) In the event that the holders of the Series C Preferred
Stock are required to vote as a class, the affirmative vote of holders of not
less than two-thirds of the outstanding shares of Series C Preferred Stock shall
be required to approve each such matter to be voted upon and if any matter is
approved by such requisite percentage of holders of Series C Preferred Stock,
such matter shall bind all holders of Series C Preferred Stock.
(C) In addition to the other voting rights provided, so long as
at least 20% of the Shares outstanding on the final closing of the Private
Placement remain outstanding, at each annual meeting of the stockholders of the
Company, the holders of the Series C Preferred Stock, voting as a single class,
shall be entitled to elect one (1) director.
(D) So long as at least 20% of the Shares outstanding on the
final closing of the Private Placement remain outstanding, the consent of the
holders of a two-thirds of the then outstanding Series C Preferred Stock, voting
as one class, together with any other series of preferred stock then entitled to
vote on such matter, regardless of series, either expressed in writing or at a
meeting called for that purpose, shall be necessary to permit, effect or
validate the creation and issuance of any series of preferred stock of the
Company which is senior as to liquidation and/or dividend rights to the Series C
Preferred Stock.
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(E) So long as at least 20% of the Shares outstanding on the
final closing of the Private Placement remain outstanding, the consent of two-
thirds of the holders of the then outstanding Series C Preferred Stock, voting
as one class, either expressed in writing or at a meeting called for that
purpose, shall be necessary to repeal, amend or otherwise change this
Certificate of Designation, Preferences and Rights or the Articles of
Incorporation of the Company, as amended, in a manner which would alter or
change the powers, preferences, rights privileges, restrictions and conditions
of the Series C Preferred Stock so as to adversely affect the Preferred Stock.
(F) Each share of the Series C Preferred Stock shall entitle the
holder thereof to one vote on all matters to be voted on by the holders of the
Series C Preferred Stock, as set forth above.
8. Covenants of Company The Company covenants and agrees that, so
--------------------
long as the Shares are outstanding, it will perform the obligations set forth in
this Section 8:
(A) Taxes and Levies. The Company will promptly pay and
----------------
discharge all taxes, assessments, and governmental charges or levies imposed
upon the Company or upon its income and profits, or upon any of its property,
before the same shall become delinquent, as well as all claims for labor,
materials and supplies which, if unpaid, might become a lien or charge upon such
properties or any part thereof; provided, however, that the Company shall not be
-------- -------
required to pay and discharge any such tax, assessment, charge, levy or claim so
long as the validity thereof shall be contested in good faith by appropriate
proceedings and the Company shall set aside on its books adequate reserves in
accordance with generally accepted accounting principles ("GAAP") with respect
----
to any such tax, assessment, charge, levy or claim so contested;
(B) Maintenance of Existence. The Company will do or cause to be
------------------------
done all things reasonably necessary to preserve and keep in full force and
effect its corporate existence, rights and franchises and comply with all laws
applicable to the Company, except where the failure to comply would not have a
material adverse effect on the Company;
(C) Maintenance of Property. The Company will at all times
-----------------------
maintain, preserve, protect and keep its property used or useful in the conduct
of its business in good repair, working order and condition, and from time to
time make all needful and proper repairs, renewals, replacements and
improvements thereto as shall be reasonably required in the conduct of its
business;
(D) Insurance. The Company will, to the extent necessary for the
---------
operation of its business, keep adequately insured by financially sound
reputable insurers, all property of a character usually insured by similar
corporations and carry such other insurance as is usually carried by similar
corporations;
(E) Books and Records. The Company will at all times keep true
-----------------
and correct books, records and accounts reflecting all of its business affairs
and transactions in accordance with GAAP; and
(F) Notice of Certain Events. The Company will give prompt
------------------------
written notice (with a description in reasonable detail) to Commonwealth
Associates, L.P. in the event the Company shall:
(a) become insolvent or generally fail or be unable to pay,
or admit in writing its inability to pay, its debts as they become due;
(b) apply for, consent to, or acquiesce in, the appointment
of a trustee, receiver, sequestrator or other custodian for the Company or any
of its property, or make a general assignment for the benefit of creditors;
(i) in the absence of such application, consent or
acquiesce in, permit or
E-7
suffer to exist the appointment of a trustee, receiver, sequestrator or other
custodian for the Company or for any part of its property;
(ii) permit or suffer to exist the commencement of any
bankruptcy, reorganization, debt arrangement or other case or proceeding under
any bankruptcy or insolvency law, or any dissolution, winding up or liquidation
proceeding, in respect of the Company, and, if such case or proceeding is not
commenced by the Company or converted to a voluntary case, such case or
proceeding shall be consented to or acquiesced in by the Company or shall result
in the entry of an order for relief; or
9. Miscellaneous.
-------------
(A) There is no sinking fund with respect to the Series C
Preferred Stock.
(B) The shares of the Series C Preferred Stock shall not have
any preferences, voting powers or relative, participating, optional, preemptive
or other special rights except as set forth above in this Certificate of
Designation, Preferences and Rights and in the Articles of Incorporation of the
Company.
(C) The holders of the Series C Preferred Stock shall be
entitled to receive all communications sent by the Company to the holders of the
Common Stock.
IN WITNESS WHEREOF, HealthWatch, Inc. has caused this Certificate to be
signed by its Chief Executive Officer, on this 20/th/ day of March, 2000, and
such person hereby affirms under penalty of perjury that this Certificate is the
act and deed of HealthWatch, Inc. and that the facts stated herein are true and
correct.
HEALTHWATCH, INC.
By:/s/ Paul W. Harrison
--------------------
Paul W. Harrison, Chairman, President and
Chief Executive Officer
Attest:
/s/ Marilyn May, Assistant Secretary
---------------------------------
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ANNEX F
Certificate of Designation, Preferences and Rights of the Series D 8%
Convertible Preferred Stock of HealthWatch, Inc.
CERTIFICATE OF DESIGNATION, PREFERENCES
AND RIGHTS OF SERIES D 8% CONVERTIBLE
PREFERRED STOCK
-OF-
HEALTHWATCH, INC.
HealthWatch, Inc., a corporation organized and existing under the laws of
the State of Minnesota (the "Company"), by its President and Secretary, does
hereby certify that, pursuant to authority conferred upon the Board of Directors
by Article III of the Articles of Incorporation, as amended, of the Company,
authorizing a class of 1,000,000 shares of preferred stock of the Company, the
Board of Directors of the Company, by unanimous written consent dated February
7, 2000, has duly adopted resolutions providing for the issuance out of such
class of a series of up to 300,000 Series D 8% Convertible Preferred Stock at an
issuance price of $100.00 per share (the "Original Purchase Price") and setting
forth the voting powers, designation, preferences and relative, participating,
optional and other special rights, and the qualifications, limitations and
restrictions thereof, which resolution is as follows:
RESOLVED, that pursuant to the authority vested in the Board of Directors
of the Company in accordance with the provisions of its Articles of
Incorporation, as amended, there be, and hereby is, created out of the class of
1,000,000 shares of preferred stock of the Company authorized in Article III of
its Articles of Incorporation, as amended, a series of preferred stock of the
Company with the following voting powers, designation, preferences and relative,
participating, optional and other special rights, and qualifications,
limitations and restrictions:
1. Designation and Number of Shares. 300,000 shares of preferred stock
--------------------------------
(the "Shares") are hereby designated as Series D 8% Convertible Preferred Stock
(the "Series D Preferred Stock").
2. Liquidation. Upon any liquidation, dissolution or winding up of the
-----------
Company, whether voluntary or involuntary ("Liquidation"), the holders of record
of the shares of the Series D Preferred Stock shall be entitled to receive,
before and in preference to any distribution or payment of assets of the Company
or the proceeds thereof may be made or set apart for the holders of Common Stock
of the Company, par value $.05 per share (the "Common Stock") or any other
security junior to the Series D Preferred Stock in respect of distributions upon
Liquidation out of the assets of the Company legally available for distribution
to its stockholders, an amount in cash equal to the Original Purchase Price per
share (subject to adjustment if the Series D Preferred Stock has been adjusted
pursuant to Paragraph 6 hereof) plus an amount equal to accrued and unpaid
dividends on each share of Series D Preferred Stock on the date fixed for the
distribution of assets of the Company (the "Liquidation Preference").
3. Dividends. Commencing on the date of issuance (the "Issuance Date")
---------
until conversion, each issued and outstanding share of Series D Preferred Stock
shall entitle the holder of record thereof to receive, when, as and if declared
by the Board of Directors, out of any funds legally available therefor,
dividends at the rate of $8.00 per annum per share of Series D Preferred Stock
(the "Dividend Rate"), subject to adjustment as hereinafter set forth, payable
upon liquidation or conversion. Dividends per share shall be payable semi-
annually on 6/30 and 12/31 of each year, and shall be payable, at the Company's
option, either (i) in cash or (ii) in shares of Series D Preferred Stock,
subject to an in increase in the number of authorized shares of Series D
Preferred Stock by the Company's Board of Directors. In the event of a split
or subdivision of the outstanding shares of Series D Preferred Stock, or the
combination of the outstanding shares of Series D Preferred Stock, as the case
may be, the dividends provided for in this Section 3 shall automatically and
without any further action be decreased, in the case of a split or subdivision,
or increased, in the case of a combination, in proportion to the increase or
decrease in the number of shares of Series D Preferred Stock outstanding
immediately before such split, subdivision or combination.
4. Conversion Rights Each holder of record of shares of the Series D
-----------------
Preferred Stock shall have the right to convert all or any part of such holder's
share of Series D Preferred Stock into Common Stock as follows:
(A) Optional Conversion. Subject to and upon compliance with the
-------------------
provisions of this Section 4, the holder of any shares of Series D Preferred
Stock shall have the right at such holder's option, at any time or from time to
time, to convert any of such shares of Series D Preferred Stock into fully paid
and nonassessable shares of Common Stock at the Conversion Price (as defined in
Section (4)(c) below) in effect on the Conversion Date (as defined in Section
4(d) below) upon the terms hereinafter set forth.
(B) Automatic Conversion. Each outstanding share of Series D
--------------------
Preferred Stock shall automatically be converted, without any further act of the
Corporation or its stockholders, into fully paid and nonassessable shares of
Common Stock at the Conversion Price then in effect upon: (i) the closing of a
public offering or private placement of the Company's securities raising gross
proceeds in excess of $25 million at a per share price of more than $10.50 (a
"Qualified Offering"); or (ii) at such time as the closing bid price for the
Common Stock of the Company has equaled at least twice the Conversion Price for
a period of 20 consecutive trading days, provided that the Common Stock of the
Company is trading on a national securities exchange or the Nasdaq Small Cap
Market or National Market System, and the Conversion Shares are covered by an
effective registration statement relating to the resale of such securities and
not subject to any lock-up provisions.
(C) Conversion Price. Each share of the Series D Preferred Stock
----------------
shall be convertible into that number of fully paid and non-assessable shares of
Common Stock of the Company equal to the Original Purchase Price divided by the
conversion price in effect at the time of conversion (the "Conversion Price"),
determined as hereinafter provided. The Conversion Price shall initially be
$3.50 per share. The number of shares of Common Stock into which each share of
Series D Preferred Stock is convertible is herein referred to as the "Conversion
Rate." The Conversion Price shall be subject to adjustment as set forth in
Section 6 hereof.
(D) Mechanics of Conversion. Before any holder of Series D Preferred
-----------------------
Stock shall be entitled to convert the same into shares of Common Stock, such
holder shall surrender the certificate or certificates therefor, duly endorsed,
at the office of the Company or of any transfer agent for the Series D Preferred
Stock, and shall give written notice to the Company at its principal corporate
office, of the election to convert the same and shall state therein the name or
names in which the certificate or certificates for shares of Common Stock are to
be issued. The Company shall, as soon as practicable thereafter, issue and
deliver at such office to such holder of Series D Preferred Stock, or to the
nominee or nominees of such holder, a certificate or certificates for the number
of shares of Common Stock to which such holder shall be entitled as aforesaid.
Conversion shall be deemed to have been effected on the date when delivery of
notice of an election to convert and certificates for shares is made or on the
date of the occurrence of the event specified in Section 5(B), as the case may
be, and such date is referred to herein as the "Conversion Date." All Common
Stock which may be issued upon conversion of the Series D Preferred Stock will,
upon issuance, be duly issued, fully paid and non-assessable and free from all
taxes, liens, and charges with respect to the issuance thereof. At all times
that any shares of Series D Preferred Stock are outstanding, the Company shall
have authorized and shall have reserved for the purpose of issuance upon such
conversion into Common Stock of all Series D Preferred Stock, a sufficient
number of shares of Common Stock to provide for the conversion of all
outstanding shares of Series D Preferred Stock at the then effective Conversion
Rate. Without limiting the generality of the foregoing, if, at any time, the
Conversion Price is decreased, the number of shares of Common Stock authorized
and reserved for issuance upon the conversion of the Series D Preferred Stock
shall be proportionately increased.
(E) Conversion Price Adjustments. The Conversion Price shall be
----------------------------
subject to adjustment provisions of Section 6 below.
5. Priority.
--------
(A) The Series D Preferred Stock shall rank senior to the Company's
Series A Preferred Stock and Series P Preferred Stock and shall rank pari passu
with the Company's Series C Preferred Stock with respect to dividend and/or
liquidation rights. The Company shall not create or authorize any other stock
ranking
F-2
senior to, or pari passu with, the Series D Preferred Stock. So long as any
shares of Series D Preferred Stock shall be outstanding, no dividends, whether
in cash or property, shall be paid or declared, nor shall any other distribution
be made, on the Common Stock of the Company or any other security junior to the
Series D Preferred Stock as to dividend rights, unless all dividends on the
Series D Preferred Stock for all past dividend periods and the full dividends
for the then current semi-annual period shall have been paid or declared and
duly provided for. The provisions of this Section 5 shall not, however, apply to
a dividend payable in Common Stock or any other security of the Company junior
to the Series D Preferred Stock. If any dividend previously due on the Series D
Preferred Stock has not been paid in full, then no dividends shall be paid or
declared upon any shares of any class or series of stock of the Company ranking
on a parity with the Series D Preferred Stock in the payment of dividends for
any period unless a like proportionate dividend for the current period, ratably
in proportion to the respective annual dividend rates fixed thereupon, shall be
paid upon or declared for the Series D Preferred Stock then issued and
outstanding.
(B) The Company may issue, in the future, without the consent of holders
of the Series D Preferred Stock, other series of preferred stock which rank
junior to the Series D Preferred Stock as to dividend and/or liquidation rights.
In accordance with Paragraph 7(C) hereof, the consent of the holders of two-
thirds of the outstanding shares of the Series D Preferred Stock is required for
the issuance of any series of preferred stock which is senior as to dividend
and/or liquidation rights to the Series D Preferred Stock.
6. Anti-Dilution Provisions. The Conversion Price in effect at any time and
------------------------
the number and kind of securities issuable upon the conversion of the Series D
Preferred Stock shall be subject to adjustment from time to time upon the
happening of certain events as follows:
(A) In case the Company shall hereafter (i) declare a dividend or make a
distribution on its outstanding shares of Common Stock in shares of Common
Stock, (ii) subdivide or reclassify its outstanding shares of Common Stock into
a greater number of shares, or (iii) combine or reclassify its outstanding
shares of Common Stock into a smaller number of shares, the Conversion Price in
effect at the time of the record date for such dividend or distribution or of
the effective date of such subdivision, combination or reclassification shall be
adjusted so that it shall equal the price determined by multiplying the
Conversion Price by a fraction, the denominator of which shall be the number of
shares of Common Stock outstanding after giving effect to such action, and the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such action. Such adjustment shall be made successively
whenever any event listed above shall occur.
(B) In case the Company shall fix a record date for the issuance of
rights or warrants to all holders of its Common Stock entitling them to
subscribe for or purchase shares of Common Stock (or securities convertible into
Common Stock) at a price (the "Subscription Price") (or having a conversion
price per share) less than the current market price on such record date, the
Conversion Price shall be adjusted so that the same shall equal the price
determined by multiplying the Conversion Price in effect immediately prior to
the date of such issuance by a fraction, the numerator of which shall be the sum
of the number of shares of Common Stock outstanding on the record date mentioned
below and the number of additional shares of Common Stock which the aggregate
offering price of the total number of shares of Common Stock so offered (or the
aggregate conversion price of the convertible securities so offered) would
purchase at such current market price per share of the Common Stock, and the
denominator of which shall be the sum of the number of shares of Common Stock
outstanding on such record date and the number of additional shares of Common
Stock offered for subscription or purchase (or into which the convertible
securities so offered are convertible). Such adjustment shall be made
successively whenever such rights or warrants are issued and shall become
effective immediately after the record date for the determination of
shareholders entitled to receive such rights or warrants; and to the extent that
shares of Common Stock are not delivered (or securities convertible into Common
Stock are not delivered) after the expiration of such rights or warrants the
Conversion Price shall be readjusted to the Conversion Price which would then be
in effect had the adjustments made upon the issuance of such rights or warrants
been made upon the basis of delivery of only the number of shares of Common
Stock (or securities convertible into Common Stock) actually delivered.
F-3
(C) In case the Company shall hereafter distribute to the holders of its
Common Stock evidences of its indebtedness or assets (excluding cash dividends
or distributions and dividends or distributions referred to in Subsection (A)
above) or subscription rights or warrants (excluding those referred to in
Subsection (B) above), then in each such case the Conversion Price in effect
thereafter shall be determined by multiplying the Conversion Price in effect
immediately prior thereto by a fraction, the numerator of which shall be the
total number of shares of Common Stock outstanding multiplied by the current
market price per share of Common Stock, less the fair market value (as
determined by the Company's Board of Directors) of said assets or evidences of
indebtedness so distributed or of such rights or warrants, and the denominator
of which shall be the total number of shares of Common Stock outstanding
multiplied by such current market price per share of Common Stock. Such
adjustment shall be made successively whenever such a record date is fixed. Such
adjustment shall be made whenever any such distribution is made and shall become
effective immediately after the record date for the determination of
shareholders entitled to receive such distribution.
(D) In case the Company shall hereafter issue shares of its Common Stock
(excluding shares issued (i) in any of the transactions described in Subsection
(A) above, (ii) upon exercise of options granted to the Company's officers,
directors, employees and consultants under a plan or plans adopted by the
Company's Board of Directors and approved by its shareholders, if such shares
would otherwise be included in this Subsection (D), (but only to the extent that
the aggregate number of shares excluded hereby and issued after the date hereof,
shall not exceed 15% of the Company's Common Stock outstanding, on a fully
diluted basis, at the time of any issuance), (iii) upon exercise of options,
warrants, convertible securities, including the shares, and convertible
debentures outstanding as of the first date upon which a share of Series D
Preferred Stock is issued or conversion of the Shares, (iv) to shareholders of
any corporation which merges into the Company in proportion to their stock
holdings of such corporation immediately prior to such merger, upon such merger,
(v) issued in a private placement through Commonwealth Associates, L.P., as
placement agent, or upon exercise or conversion of any securities issued in or
in connection with such a private placement (including agent, consulting or
advisory warrants), (vi) issued in a private placement where the Offering Price
(as defined below) is at least 90% of the current market price, (vii) issued in
a bona fide public offering pursuant to a firm commitment underwriting, or
(viii) issued in connection with an acquisition of a business or technology
which has been approved by a majority of the Company's outside directors but
only if no adjustment is required pursuant to any other specific subsection of
this Section 6 (without regard to Subsection (I) below) with respect to the
transaction giving rise to such rights) for a consideration per share (the
"Offering Price") less than the current market price, the Conversion Price shall
be adjusted immediately thereafter so that it shall equal the price determined
by multiplying the Conversion Price in effect immediately prior thereto by a
fraction, the numerator of which shall be the sum of the number of shares of
Common Stock outstanding immediately prior to the issuance of such additional
shares and the number of shares of Common Stock which the aggregate
consideration received for the issuance of such additional shares would purchase
at such current market price per share of Common Stock, and the denominator of
which shall be the number of shares of Common Stock outstanding immediately
after the issuance of such additional shares. Such adjustment shall be made
successively whenever such an issuance is made.
(E) In case the Company shall hereafter issue any securities convertible
into or exchangeable for its Common Stock (excluding securities issued in
transactions described in Subsections (B), (C) and (D)(i) through (viii) above)
where the consideration per share of Common Stock (the "Exchange Price")
initially deliverable upon conversion or exchange of such securities (determined
as provided in Subsection (G) below) plus any consideration received for any
such securities divided by the number of shares of Common Stock issuable upon
exercise or conversion thereof is less than the current market price, the
Conversion Price shall be adjusted immediately thereafter so that it shall equal
the price determined by multiplying the Conversion Price in effect immediately
prior thereto by a fraction, the numerator of which shall be the sum of the
number of shares of Common Stock outstanding immediately prior to the issuance
of such securities and the number of shares of Common Stock which the aggregate
consideration received for such securities would purchase at such current market
price per share of Common Stock, and the denominator of which shall be the sum
of the number of shares of Common Stock outstanding immediately prior to such
issuance and the maximum number of shares of Common
F-4
Stock of the Company deliverable upon conversion of or in exchange for such
securities at the initial conversion or exchange price or rate. Such adjustment
shall be made successively whenever such an issuance is made.
(F) Whenever the Conversion Price is adjusted pursuant to Subsections
(A), (B), (C), (D) and (E) above and (J) below or pursuant to Section 1(D)
hereof, the number of Conversion Shares issuable upon conversion of the Series D
Preferred Stock shall simultaneously be adjusted by multiplying the number of
Conversion Shares initially issuable upon conversion of the Series D Preferred
Stock by the Conversion Price in effect on the date hereof and dividing the
product so obtained by the Conversion Price, as adjusted.
(G) For purposes of any computation respecting consideration received
pursuant to Subsections (D) and (E) above and (J) below, the following shall
apply:
(a) in the case of the issuance of shares of Common Stock for
cash, the consideration shall be the amount of such cash, provided that in no
case shall any deduction be made for any commissions, discounts or other
expenses incurred by the Company for any underwriting of the issue or otherwise
in connection therewith;
(b) in the case of the issuance of shares of Common Stock for a
consideration in whole or in part other than cash, the consideration other than
cash shall be deemed to be the fair market value thereof as determined in good
faith by the Board of Directors of the Company (irrespective of the accounting
treatment thereof), whose determination shall be conclusive; and
(c) in the case of the issuance of securities convertible into or
exchangeable for shares of Common Stock, the aggregate consideration received
therefor shall be deemed to be the consideration received by the Company for the
issuance of such securities plus the additional minimum consideration, if any,
to be received by the Company upon the conversion or exchange thereof (the
consideration in each case to be determined in the same manner as provided in
clauses (a) and (b) of this Subsection (G)).
(H) For the purpose of any computation under Subsections (B), (C),
(D) and (E) above and (J) below, the current market price per share of Common
Stock at any date shall be determined in the manner set forth in Section 9
hereof except that the current market price per share shall be deemed to be the
higher of (i) the average of the prices for 30 consecutive business days before
such date or (ii) the price on the business day immediately preceding such date.
(I) No adjustment in the Conversion Price shall be required unless
such adjustment would require an increase or decrease of at least five cents
($0.05) in such price; provided, however, that any adjustments which by reason
of this Subsection (I) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment required to be made hereunder.
All calculations under this Section 6 shall be made to the nearest cent or to
the nearest one-hundredth of a share, as the case may be. Anything in this
Section 6 to the contrary notwithstanding, the Company shall be entitled, but
shall not be required, to make such changes in the Conversion Price, in addition
to those required by this Section 6, as it shall determine, in its sole
discretion, to be advisable in order that any dividend or distribution in shares
of Common Stock, or any subdivision, reclassification or combination of Common
Stock, hereafter made by the Company shall not result in any Federal income tax
liability to the holders of Common Stock or securities convertible into Common
Stock.
(J) In addition to and in lieu of the other provisions of this
Section 6, in the event that the Company shall at any time issue securities
under Subsections (B), (D) or (E) having an Offering Price, Subscription Price
or Exchange Price less than the Conversion Price (whether initially or due to
provisions in such securities requiring price reductions as a result of anti-
dilution, adjustments, the passage of time, "discount to market" or similar
provisions), then the Conversion Price shall be immediately reset to equal such
lower Offering Price, Subscription Price or Exchange Price.
F-5
(K) No adjustment under Subsections (B), (C), (D) or (E) shall be
required for issuances below the current market price if either (i)A the current
market price is at least 300% of the Conversion Price then in effect and (B) a
registration statement covering the Conversion Shares is in effect and remains
in effect for the 90 days after such issuance or Rule 144(k) under the
Securities Act of 1933, as amended (the "Act") is available for resale of all of
the Conversion Shares or (ii) the Company at the time of such issuance has less
than $100,000 in cash. Furthermore, no adjustment under Subsections (B), (C),
(D), (E) or (J) shall be required unless either (x) shareholders of the Company
have approved the terms of this Designation or (y) such adjustments will not
result in a violation of any qualitative listing criteria of The Nasdaq Stock
Market, Inc.
(L) Whenever the Conversion Price is adjusted, as herein provided, the
Company shall promptly but no later than 10 days after any request for such an
adjustment by the Holder, cause a notice setting forth the adjusted Conversion
Price and adjusted number of Conversion Shares issuable upon exercise of each
share of Series D Preferred Stock, and, if requested, information describing the
transactions giving rise to such adjustments, to be mailed to the Series D
Preferred Stock holders at their last addresses appearing in the Share Register,
and shall cause a certified copy thereof to be mailed to its transfer agent, if
any. The Company may retain a firm of independent certified public accountants
selected by the Board of Directors (who may be the regular accountants employed
by the Company) to make any computation required by this Section 6, and a
certificate signed by such firm shall be conclusive evidence of the correctness
of such adjustment.
(M) In the event that at any time, as a result of an adjustment made
pursuant to Subsection (A) above, the holders of the Series D Preferred Stock
thereafter shall become entitled to receive any shares of the Company, other
than Common Stock, thereafter the number of such other shares so receivable upon
conversion of the Series D Preferred Stock shall be subject to adjustment from
time to time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Common Stock contained in Subsections (A) to (J),
inclusive above.
7. Voting Rights.
-------------
(A) In addition to any other rights provided for herein or by law, the
holders of Series D Preferred Stock shall be entitled to vote, together with the
holders of Common Stock as one class, on all matters as to which holders of
Common Stock shall be entitled to vote, in the same manner and with the same
effect as such Common Stock holders. In any such vote each share of Series D
Preferred Stock shall entitle the holder thereof to the number of votes per
share that equals the number of whole shares of Common Stock into which each
such share of Series D Preferred Stock is then convertible.
(B) In the event that the holders of the Series D Preferred Stock are
required to vote as a class, the affirmative vote of holders of not less than
two-thirds of the outstanding shares of Series D Preferred Stock shall be
required to approve each such matter to be voted upon and if any matter is
approved by such requisite percentage of holders of Series D Preferred Stock,
such matter shall bind all holders of Series D Preferred Stock.
(C) In addition to the other voting rights provided, so long as at
least 20% of the Shares outstanding on the final closing of the offering of
Series D Preferred Stock remain outstanding, at each annual meeting of the
stockholders of the Company, the holders of the Series D Preferred Stock, voting
as a single class, shall be entitled to elect one (1) director.
(D) So long as at least 20% of the Shares outstanding on the final
closing of the offering of Series D Preferred Stock remain outstanding, the
consent of the holders of a two-thirds of the then outstanding Series D
Preferred Stock, voting as one class, together with any other series of
preferred stock then entitled to vote on such matter, regardless of series,
either expressed in writing or at a meeting called for that purpose, shall be
necessary to permit, effect or validate the creation and issuance of any series
of preferred stock of the Company which is senior as to liquidation and/or
dividend rights to the Series D Preferred Stock.
F-6
(E) So long as at least 20% of the Shares outstanding on the final
closing of the offering of Series D Preferred Stock remain outstanding, the
consent of the holders of two-thirds of the then outstanding Series D Preferred
Stock, voting as one class, either expressed in writing or at a meeting called
for that purpose, shall be necessary to repeal, amend or otherwise change this
Certificate of Designation, Preferences and Rights or the Articles of
Incorporation of the Company, as amended, in a manner which would alter or
change the powers, preferences, rights privileges, restrictions and conditions
of the Series D Preferred Stock so as to adversely affect the Series D Preferred
Stock.
(F) Each share of the Series D Preferred Stock shall entitle the
holder thereof to one vote on all matters to be voted on by the holders of the
Series D Preferred Stock, as set forth above.
8. Covenants of Company The Company covenants and agrees that, so long
--------------------
as the Shares are outstanding, it will perform the obligations set forth in this
Section 8:
(A) Taxes and Levies. The Company will promptly pay and discharge all
----------------
taxes, assessments, and governmental charges or levies imposed upon the Company
or upon its income and profits, or upon any of its property, before the same
shall become delinquent, as well as all claims for labor, materials and supplies
which, if unpaid, might become a lien or charge upon such properties or any part
thereof; provided, however, that the Company shall not be required to pay and
-------- -------
discharge any such tax, assessment, charge, levy or claim so long as the
validity thereof shall be contested in good faith by appropriate proceedings and
the Company shall set aside on its books adequate reserves in accordance with
generally accepted accounting principles ("GAAP") with respect to any such tax,
----
assessment, charge, levy or claim so contested;
(B) Maintenance of Existence. The Company will do or cause to be done
------------------------
all things reasonably necessary to preserve and keep in full force and effect
its corporate existence, rights and franchises and comply with all laws
applicable to the Company, except where the failure to comply would not have a
material adverse effect on the Company;
(C) Maintenance of Property. The Company will at all times maintain,
-----------------------
preserve, protect and keep its property used or useful in the conduct of its
business in good repair, working order and condition, and from time to time make
all needful and proper repairs, renewals, replacements and improvements thereto
as shall be reasonably required in the conduct of its business;
(D) Insurance. The Company will, to the extent necessary for the
---------
operation of its business, keep adequately insured by financially sound
reputable insurers, all property of a character usually insured by similar
corporations and carry such other insurance as is usually carried by similar
corporations;
(E) Books and Records. The Company will at all times keep true and
-----------------
correct books, records and accounts reflecting all of its business affairs and
transactions in accordance with GAAP; and
(F) Notice of Certain Events. The Company will give prompt written
------------------------
notice (with a description in reasonable detail) to Commonwealth Associates,
L.P. in the event the Company shall:
(a) become insolvent or generally fail or be unable to pay, or
admit in writing its inability to pay, its debts as they become due;
(b) apply for, consent to, or acquiesce in, the appointment of a
trustee, receiver, sequestrator or other custodian for the Company or any of its
property, or make a general assignment for the benefit of creditors;
(c) in the absence of such application, consent or acquiesce in,
permit or suffer to
F-7
exist the appointment of a trustee, receiver, sequestrator or other custodian
for the Company or for any part of its property;
(d) permit or suffer to exist the commencement of any bankruptcy,
reorganization, debt arrangement or other case or proceeding under any
bankruptcy or insolvency law, or any dissolution, winding up or liquidation
proceeding, in respect of the Company, and, if such case or proceeding is not
commenced by the Company or converted to a voluntary case, such case or
proceeding shall be consented to or acquiesced in by the Company or shall result
in the entry of an order for relief.
9. Fractional Shares. No fractional shares or scrips representing
-----------------
fractional shares shall be issued upon the conversion of the Series D Preferred
Stock. With respect to any fraction of a share called for upon any conversion
hereof, the Company shall pay to the Holder an amount in cash equal to such
fraction multiplied by the current market value of a share, determined as
follows:
(A) If the Common Stock is listed on a national securities exchange or
admitted to unlisted trading privileges on such exchange or listed for trading
on the Nasdaq National Market, the current market value shall be the last
reported sale price of the Common Stock on such exchange or market on the last
business day prior to the date of the conversion of the Series D Preferred Stock
or if no such sale is made on such day, the average of the closing bid and asked
prices for such day on such exchange or market; or
(B) If the Common Stock is not so listed or admitted to unlisted
trading privileges, but is traded on the Nasdaq Smallcap Market, the current
market value shall be the average of the closing bid and asked prices for such
day on such market and if the Common Stock is not so traded, the current market
value shall be the mean of the last reported bid and asked prices by the NASD
Electronic Bulletin Board on the last business day prior to the date of the
conversion of the Series D Preferred Stock; or
(C) If the Common Stock is not so listed or admitted to unlisted
trading privileges and bid and asked prices are not so reported, the current
market value shall be an amount, not less than book value thereof as at the end
of the most recent fiscal year of the Company ending prior to the date of the
conversion of the Series D Preferred Stock, determined in such reasonable manner
as may be prescribed by the Board of Directors if the Company.
10. Miscellaneous.
-------------
(A) There is no sinking fund with respect to the Series D Preferred
Stock.
(B) The shares of the Series D Preferred Stock shall not have any
preferences, voting powers or relative, participating, optional, preemptive or
other special rights except as set forth above in this Certificate of
Designation, Preferences and Rights and in the Articles of Incorporation of the
Company.
(C) The holders of the Series D Preferred Stock shall be entitled to
receive all communications sent by the Company to the holders of the Common
Stock.
F-8
IN WITNESS WHEREOF, HealthWatch, Inc. has caused this Certificate to be
signed by its Chief Executive Officer, on this 20/th/ day of March, 2000, and
such person hereby affirms under penalty of perjury that this Certificate is the
act and deed of HealthWatch, Inc. and that the facts stated herein are true and
correct.
HEALTHWATCH, INC.
By:/s/ Paul W. Harrison
--------------------
Paul W. Harrison, Chairman, President and
Chief Executive Officer
Attest:
/s/ Marilyn May, Assistant Secretary
F-9
ANNEX G
Warrant Agreement and Form of Warrant representative of the Bridge Warrants,
Offering Warrants and Line of Credit Warrants
WARRANT AGREEMENT
AGREEMENT, dated as of this 21 day of March, 2000, by and among
--
HEALTHWATCH, INC., a Minnesota corporation (the "Company"), CORPORATE STOCK
TRANSFER, INC. (the "Warrant Agent"), and COMMONWEALTH ASSOCIATES, L.P., a New
York limited partnership ("Commonwealth" or "Placement Agent").
WITNESSETH
----------
WHEREAS, in connection with a private placement (the "Private Placement")
of (i) a minimum of 50 units and a maximum of 100 units (with an additional 100
units available in the case of an over-subscription) ("Units"), each Unit
consisting of (A) 1,000 shares of Series D 8% Convertible Preferred Stock (the
"Preferred Shares") and (B) 7142 redeemable common stock purchase warrants (the
"Warrants"), each Warrant exercisable to purchase one share of the Company's
common stock, $.05 par value (the "Common Stock"), and (ii) the issuance to the
Placement Agent of options to purchase Preferred Shares and Warrants in an
amount equal to 20% of the Preferred Shares and Warrants sold in the Private
Placement, the Company will issue up to 1,714,200 Warrants (assuming exercise in
full of the over-subscription option); and
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing to so act, in connection with the
issuance, registration, transfer, exchange and redemption of the Warrants, the
issuance of certificates representing the Warrants, the exercise of the
Warrants, and the rights of the holders thereof;
NOW THEREFORE, in consideration of the premises and the mutual agreements
hereinafter set forth and for the purpose of defining the terms and provisions
of the Warrants and the certificates representing the Warrants and the
respective rights and obligations thereunder of the Company, the holders of
certificates representing the Warrants and the Warrant Agent, the parties hereto
agree as follows:
SECTION 1. DEFINITIONS. As used herein, the following terms shall have the
following meanings, unless the context shall otherwise require:
(a) "Common Stock" shall mean stock of the Company of any class,
whether now or hereafter authorized, which has the right to participate in
the distributions of earnings and assets of the Company without limit as,
to amount or percentage, which at the date hereof consists of 10,000,000
authorized shares of Common Stock, $.05 par value.
(b) "Corporate Office" shall mean the office of the Warrant Agent (or
its successor) at which at any particular time its principal business shall
be administered, which office is located at 3200 Cherry Creek Drive South,
Suite 430, Denver, Colorado 80209.
(c) "Exercise Date" shall mean, as to any Warrant, the date on which
the Warrant Agent shall have received both (a) the Warrant Certificate
representing such Warrant, with the exercise form thereon duly executed by
the Registered Holder thereof or his attorney duly authorized in writing,
and (b) payment in cash, or by official bank or certified check made
payable to the Company, of an amount in lawful money of the United States
of America equal to the Exercise Price.
(d) "Exercise Price" shall mean the purchase price to be paid upon
exercise of each Warrant in accordance with the terms hereof, which price
shall be $3.50 per share subject to adjustment from time to time pursuant
to the provisions of Section 8 or Section 9(b) hereof, subject to the
Company's right to reduce the Exercise Price upon notice to all
warrantholders.
(e) "Initial Warrant Exercise Date" shall mean March 21, 2000 [the
initial closing of the Private Placement].
(f) "Qualified Offering" shall mean a public offering or a private
placement of the Company's securities raising gross proceeds in excess of
$25,000,000, where the offering price per share is at least $10.50.
(g) "Registered Holder" shall mean the person in whose name any
certificate representing Warrants shall be registered on the books
maintained by the Warrant Agent pursuant to Section 6.
(h) "Redemption Price" shall mean the price at which the Company may,
at its option in accordance with the terms hereof, redeem the Warrants,
which price shall be $0.05 per Warrant.
(i) "Transfer Agent" shall mean Corporate Stock Transfer (Denver, CO),
as the Company's transfer agent, or its authorized successor, as such.
(j) "Warrant Expiration Date" shall mean 5:00 P.M. (New York time) on
March 21, 2005 or, with respect to Warrants which are outstanding as of the
applicable Redemption Date (as defined in Section 9), the Redemption Date,
whichever is earlier; provided that if such date shall in the State of New
York be a holiday or a day on which banks are authorized to close, then
5:00 P.M. (New York time) on the next following day which in the State of
New York is not a holiday or a day on which banks are authorized to close.
Upon notice to all warrantholders the Company shall have the right to
extend the Warrant Expiration Date.
(k) "Warrant Shares" shall mean the shares of Common Stock deliverable
upon exercise of the Warrants, as adjusted from time to time.
SECTION 2. WARRANTS AND ISSUANCE OF WARRANT CERTIFICATES.
(a) A Warrant shall initially entitle the Registered Holder of the
Warrant Certificate representing such Warrant to purchase one share of
Common Stock upon the exercise thereof, in accordance with the terms
hereof, subject to modification and adjustment as provided in Section 8.
(b) From time to time, up to the Warrant Expiration Date, the Transfer
Agent shall execute and deliver stock certificates in required whole number
denominations representing up to an aggregate of 1,714,200 shares of Common
Stock (assuming the exercise in full of the over-subscription option),
subject to adjustment as described herein, upon the exercise of Warrants in
accordance with this Agreement.
(c) From time to time, up to the Warrant Expiration Date, the Warrant
Agent shall execute and deliver Warrant Certificates in required whole
number denominations to the persons entitled thereto in connection with any
transfer or exchange permitted under this Agreement; provided that no
Warrant Certificates shall be issued except: (i) those initially issued
hereunder; (ii) those issued on or after the Initial Warrant Exercise Date
upon the exercise of fewer than all Warrants represented by any Warrant
Certificate to evidence any unexercised Warrants held by the exercising
Registered Holder; (iii) those issued upon any transfer or exchange
pursuant to Section 6; (iv) those issued in replacement of lost, stolen,
destroyed or mutilated Warrant Certificates pursuant to Section 7; and (v)
at the option of the Company, in such form as may be approved by the its
Board of Directors to reflect (a) any adjustment or change in the Exercise
Price or the number of shares of Common Stock purchasable upon exercise of
the Warrants made pursuant to Section 8 hereof and (b) other modifications
approved in accordance with Section 17 hereof.
G-2
SECTION 3. FORM AND EXECUTION OF WARRANT CERTIFICATES.
(a) The Warrant Certificates shall be substantially in the form
annexed hereto as Exhibit A (the provisions of which are hereby
incorporated herein) and may have such letters, numbers or other marks of
identification or designation and such legends, summaries or endorsements
printed, lithographed, engraved or typed thereon as the Company may deem
appropriate and as are not inconsistent with the provisions of this
Agreement, or as may be required to comply with any law or with any rule or
regulation made pursuant thereto or with any rule or regulation of any
stock exchange on which the Warrants may be listed, or to conform to usage.
The Warrant Certificates shall be dated the date of issuance thereof
(whether upon initial issuance, transfer, exchange or in lieu of mutilated,
lost, stolen, or destroyed Warrant Certificates) and issued in registered
form. Warrants shall be numbered serially with the letters PPW.
(b) Warrant Certificates shall be executed on behalf of the Company by
its Chairman of the Board, Chief Executive Officer, President or any Vice
President and by its Chief Financial Officer, Secretary or an Assistant
Secretary, by manual signatures or by facsimile signatures printed thereon,
and shall have imprinted thereon a facsimile of the Company's seal. In case
any officer of the Company who shall have signed any of the Warrant
Certificates shall cease to be such officer of the Company before the date
of issuance of the Warrant Certificates and issue and delivery thereof,
such Warrant Certificates may nevertheless be issued and delivered with the
same force and effect as though the person who signed such Warrant
Certificates had not ceased to be such officer of the Company. After
execution by the Company, Warrant Certificates shall be delivered by the
Warrant Agent to the Registered Holder.
SECTION 4. EXERCISE.
(a) Each Warrant may be exercised by the Registered Holder thereof at
any time on or after the Initial Exercise Date, but not after the Warrant
Expiration Date, upon the terms and subject to the conditions set forth
herein and in the applicable Warrant Certificate. A Warrant shall be deemed
to have been exercised immediately prior to the close of business on the
Exercise Date and the person entitled to receive the securities deliverable
upon such exercise shall be treated for all purposes as the holder upon
exercise thereof as of the close of business on the Exercise Date. As soon
as practicable on or after the Exercise Date the Warrant Agent shall
deposit the proceeds received from the exercise of a Warrant, and promptly
after clearance of checks received in payment of the Exercise Price
pursuant to such Warrants, cause to be issued and delivered by the Transfer
Agent, to the person or persons entitled to receive the same, a certificate
or certificates for the securities deliverable upon such exercise (plus a
certificate for any remaining unexercised Warrants of the Registered
Holder). Notwithstanding the foregoing, in the case of payment made in the
form of a check drawn on an account of Commonwealth or such other
investment banks and brokerage houses as the Company shall approve,
certificates shall immediately be issued without any delay. Upon the
exercise of any Warrant and clearance of the funds received, the Warrant
Agent shall promptly remit the payment received for the Warrant to the
Company or as the Company may direct in writing.
(b) The Registered Holder may, at its option, exchange this Warrant on
a cashless basis, in whole or in part (a "Warrant Exchange"), into the
number of Warrant Shares determined in accordance with this Section (4)(b),
by surrendering the Warrant Certificate at the principal office of the
Warrant Agent, accompanied by a notice stating such Registered Holder's
intent to effect such exchange, the number of Warrant Shares to be
exchanged and the date on which the Registered Holder requests that such
Warrant Exchange occur (the "Notice of Exchange"). The Warrant Exchange
shall take place on the date specified in the Notice of Exchange or, if
later, the date the Notice of Exchange is received by the Warrant Agent
(the "Exchange Date"). Certificates for the shares issuable upon such
Warrant Exchange and, if applicable, a new warrant of like tenor evidencing
the balance of the shares remaining subject to such Warrant, shall be
issued as of the Exchange Date and delivered to the Registered Holder
within seven (7) days following the
G-3
Exchange Date. In connection with any Warrant Exchange, a Warrant shall
represent the right to subscribe for and acquire the number of Warrant
Shares (rounded to the next highest integer) equal to (i) the number of
Warrant Shares specified by the Registered Holder in its Notice of Exchange
(the "Total Number") less (ii) the number of Warrant Shares equal to the
quotient obtained by dividing (A) the product of the Total Number and the
existing Exercise Price by (B) the current market value of a share of
Common Stock. Current market value shall have the meaning set forth Section
11 (a) hereof, except that for purposes hereof, the date of exercise, as
used in such Section I1 (a) hereof, shall mean the Exchange Date.
SECTION 5. RESERVATION OF SHARES; LISTING; PAYMENT OF TAXES; ETC.
(a) The Company covenants that it will at all times reserve and keep
available out of its authorized Common Stock, solely for the purpose of
issue upon exercise of Warrants, such number of shares of Common Stock as
shall then be issuable upon the exercise of all outstanding Warrants. The
Company covenants that all shares of Common Stock which shall be issuable
upon exercise of the Warrants and payment of the Exercise Price shall, at
the time of delivery, be duly and validly issued, fully paid, nonassessable
and free from all taxes, liens and charges with respect to the issue
thereof (other than those which the Company shall promptly pay or
discharge).
(b) The Company will use reasonable efforts to obtain appropriate
approvals or registrations under state "blue sky" securities laws with
respect to the exercise of the Warrants; provided, however, that the
Company shall not be obligated to file any general consent to service of
process or qualify as a foreign corporation in any jurisdiction. With
respect to any such securities laws, however, Warrants may not be exercised
by, or shares of Common Stock issued to, any Registered Holder in any state
in which such exercise would be unlawful.
(c) The Company shall pay all documentary, stamp or similar taxes and
other governmental charges that may be imposed with respect to the issuance
of Warrants, or the issuance or delivery of any shares upon exercise of the
Warrants; provided, however, that if the shares of Common Stock are to be
delivered in a name other than the name of the Registered Holder of the
Warrant Certificate representing any Warrant being exercised, then no such
delivery shall be made unless the person requesting the same has paid to
the Warrant Agent the amount of transfer taxes or charges incident thereto,
if any.
(d) The Warrant Agent is hereby irrevocably authorized to requisition
the Company's Transfer Agent from time to time for certificates
representing shares of Common Stock required upon exercise of the Warrants,
and the Company will authorize the Transfer Agent to comply with all such
proper requisitions.
SECTION 6. EXCHANGE AND REGISTRATION OF TRANSFER. Subject to the
restrictions on transfer contained in the Warrant Certificates and the
Subscription Agreements between the Company and the purchasers of Units:
(a) Warrant Certificates may be exchanged for other Warrant
Certificates representing an equal aggregate number of Warrants of the same
class or may be transferred in whole or in part. Warrant Certificates to be
exchanged shall be surrendered to the Warrant Agent at its Corporate
Office, and upon satisfaction of the terms and provisions hereof, the
Company shall execute, and the Warrant Agent shall countersign, issue and
deliver in exchange therefor the Warrant Certificate or Certificates which
the Registered Holder making the exchange shall be entitled to receive.
(b) The Warrant Agent shall keep at its office books in which, subject
to such reasonable regulations as it may prescribe, it shall register
Warrant Certificates and the transfer thereof in accordance with its
regular practice. Upon due presentment for registration of transfer of any
Warrant Certificate at its office,
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the Company shall execute and the Warrant Agent shall issue and deliver to
the transferee or transferees a new Warrant Certificate or Certificates
representing an equal aggregate number of Warrants.
(c) With respect to all Warrant Certificates presented for
registration of transfer, or for exchange or exercise, the subscription
form on the reverse thereof shall be duly endorsed, or be accompanied by a
written instrument or instruments of transfer and subscription, in form
satisfactory to the Company, duly executed by the Registered Holder or his
attorney-in-fact duly authorized in writing.
(d) The Company may- require payment by such holder of a sum
sufficient to cover any tax or other governmental charge that may be
imposed in connection therewith.
(e) All Warrant Certificates surrendered for exercise or for exchange
in case of mutilated Warrant Certificates shall be promptly canceled by the
Warrant Agent and thereafter retained by the Warrant Agent until
termination of this Agreement or resignation of the Warrant Agent, 'or,
with the prior written consent of Commonwealth, disposed of or destroyed,
at the direction of the Company.
(f) Prior to due presentment for registration of transfer thereof, the
Company and the Warrant Agent may deem and treat the Registered Holder of
any Warrant Certificate as the absolute owner thereof and of each Warrant
represented thereby (notwithstanding any notations of ownership or writing
thereon made by anyone other than a duly authorized officer of the Company
or the Warrant Agent) for all purposes and shall not be affected by any
notice to the contrary.
SECTION 7. LOSS OR MUTILATION. Upon receipt by the Company and the
Warrant Agent of evidence satisfactory to them of the ownership of and loss,
theft, destruction or mutilation of any Warrant Certificate and (in case of
loss, theft or destruction) of indemnity satisfactory to them, and (in the case
of mutilation) upon surrender and cancellation thereof, the Company shall
execute and the Warrant Agent shall (in the absence of notice to the Company
and/or Warrant Agent that the Warrant Certificate has been acquired by a
bonafide purchaser) countersign and deliver to the Registered Holder in lieu
thereof a new Warrant Certificate of like tenor representing an equal aggregate
number of Warrants. Applicants for a substitute Warrant Certificate shall comply
with such other reasonable regulations and pay such other reasonable charges as
the Warrant Agent may prescribe.
SECTION 8. ANTI-DILUTION PROVISIONS. The Exercise Price in effect at any
time and the number and kind of securities purchasable upon the exercise of the
Warrants shall be subject to adjustment from time to time upon the happening of
certain events as follows:
(a) In case the Company shall hereafter (i) declare a dividend or make
a distribution on its outstanding shares of Common Stock in shares of
Common Stock, (ii) subdivide or reclassify its outstanding shares of Common
Stock into a greater number of shares, or (iii) combine or reclassify its
outstanding shares of Common Stock into a smaller number of shares, the
Exercise Price in effect at the time of the record date for such dividend
or distribution or of the effective date of such subdivision, combination
or reclassification shall be adjusted so that it shall equal the price
determined by multiplying the Exercise Price by a fraction, the denominator
of which shall be the number of shares of Common Stock outstanding after
giving effect to such action, and the numerator of which shall be the
number of shares of Common Stock outstanding immediately prior to such
action. Such adjustment shall be made successively whenever any event
listed above shall occur.
(b) In case the Company shall fix a record date for the issuance of
rights or warrants to all holders of its Common Stock entitling them to
subscribe for or purchase shares of Common Stock (or securities convertible
into Common Stock) at a price (the "Subscription Price") (or having a
conversion price per share) less than the current market price on such
record date, the Exercise Price shall be adjusted so that the same shall
equal the price determined by multiplying the Exercise Price in effect
immediately prior to the
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date of such issuance by a fraction, the numerator of which shall be the
sum of the number of shares of Common Stock outstanding on the record date
mentioned below and the number of additional shares of Common Stock which
the aggregate offering price of the total number of shares of Common Stock
so offered (or the aggregate conversion price of the convertible securities
so offered) would purchase at such current market price per share of the
Common Stock, and the denominator of which shall be the sum of the number
of shares of Common Stock outstanding on such record date and the number of
additional shares of Common Stock offered for subscription or purchase (or
into which the convertible securities so offered are convertible). Such
adjustment shall be made successively whenever such rights or warrants are
issued and shall become effective immediately after the record date for the
determination of shareholders entitled to receive such rights or warrants;
and to the extent that shares of Common Stock are not delivered (or
securities convertible into Common Stock are not delivered) after the
expiration of such rights or warrants the Exercise Price shall be
readjusted to the Exercise Price which would then be in effect had. the
adjustments made upon the issuance of such rights or warrants been made
upon the basis of delivery of only the number of shares of Common Stock (or
securities convertible into Common Stock) actually delivered.
(c) In case the Company shall hereafter distribute to the holders of
its Common Stock evidences of its indebtedness or assets (excluding cash
dividends or distributions and dividends or distributions referred to in
Subsection (a) above) or subscription rights or warrants (excluding those
referred to in Subsection (b) above), then in each such case the Exercise
Price in effect thereafter shall be determined by multiplying the Exercise
Price in effect immediately prior thereto by a fraction, the numerator of
which shall be the total number of shares of Common Stock outstanding
multiplied by the current market price per share of Common Stock, less the
fair market value (as determined by the Company's Board of Directors) of
said assets or evidences of indebtedness so distributed or of such rights
or warrants, and the denominator of which shall be the total number of
shares of Common Stock outstanding multiplied by such current market price
per share of Common Stock. Such adjustment shall be made successively
whenever such a record date is fixed. Such adjustment shall be made
whenever any such distribution is made and shall become effective
immediately after the record date for the determination of shareholders
entitled to receive such distribution.
(d) In case the Company shall hereafter issue shares of its Common
Stock (excluding shares issued (i) in any of the transactions described in
Subsection (a) above, (ii) upon exercise of options granted to the
Company's officers, directors, employees and consultants under a plan or
plans adopted by the Company's Board of Directors and approved by its
shareholders, if such shares would otherwise be included in this Subsection
(d), (but only to the extent that the aggregate number of shares excluded
hereby and issued after the date hereof, shall not exceed 20% of the
Company's Common Stock outstanding, on a fully diluted basis, at the time
of any issuance), (iii) upon exercise of options, warrants (including the
Warrants), convertible securities and convertible debentures outstanding as
of the final closing of the Private Placement, a Qualified Offering, (iv)
to shareholders of any corporation which merges into the Company in
proportion to their stock holdings of such corporation immediately prior to
such merger, upon such merger, (v) issued in a private placement through
Commonwealth, as placement agent, or upon exercise or conversion of any
securities issued in or in connection with such a private placement
(including agent, consulting or advisory warrants), (vi) issued in a
private placement where the Offering Price (as defined below) is at least
90% of the current market price, (vii) issued in a bona fide public
offering pursuant to a firm commitment underwriting, or (viii) issued in
connection with an acquisition of a business or technology which has been
approved by a, majority of the Company's outside directors but only if no
adjustment is required pursuant to any other specific subsection of this
Section 8 (without regard to Subsection (i) below) with respect to the
transaction giving rise to such rights) for a consideration per share (the
"Offering Price") less than the current market-price, the Exercise Price
shall be adjusted immediately thereafter so that it shall equal the price
determined by multiplying the Exercise Price in effect immediately prior
thereto by a fraction, the numerator of which shall be the sum of the
number of shares of Common
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Stock outstanding immediately prior to the issuance of such additional
shares and the number of shares of Common Stock which the aggregate
consideration received for the issuance of such additional shares would
purchase at such current market price per share of Common Stock, and the
denominator of which shall be the number of shares of Common Stock
outstanding immediately after the issuance of such additional shares. Such
adjustment shall be made successively whenever such an issuance is made.
(e) In case the Company shall hereafter issue any securities
convertible into or exchangeable for its Common Stock (excluding securities
issued in transactions described in Subsections (b), (c) and (d)(i) through
(viii) above) for a consideration per share of Common Stock (the "Exchange
Price") initially deliverable upon conversion or exchange of such
securities (determined as provided in Subsection (g) below) plus any
consideration received for any such securities divided by the number of
shares of Common Stock issuable upon exercise or conversion thereof less
than the current market price, the Exercise Price shall be adjusted
immediately thereafter so that it shall equal the price determined by
multiplying the Exercise Price in effect immediately prior thereto by a
fraction, the numerator of which shall be the sum of the number of shares
of Common Stock outstanding immediately prior to the issuance of such
securities and the number of shares of Common Stock which the aggregate
consideration received for such securities would purchase at such current
market price per share of Common Stock, and the denominator of which shall
be the sum of the number of shares of Common Stock outstanding immediately
prior to such issuance and the maximum number of shares of Common Stock of
the Company deliverable upon conversion of or in exchange for such
securities at the initial conversion or exchange price or rate. Such
adjustment shall be made successively whenever such an issuance is made.
(f) Whenever the Exercise Price payable upon exercise of each Warrant
is adjusted pursuant to Subsections (a), (b), (c), (d) and (e) above and
(j) below, the number of Shares purchasable upon exercise of this Warrant
shall simultaneously be adjusted by multiplying the number of Shares
initially issuable upon exercise of this Warrant by the Exercise Price in
effect on the date hereof and dividing the product so obtained by the
Exercise Price, as adjusted.
(g) For purposes of any computation respecting consideration received
pursuant to Subsections (d) and (e) above and 0) below, the following shall
apply:
(A) in the case of the issuance of shares of Common Stock
for cash, the consideration shall be the amount of such cash, provided
that in no case shall any deduction be made for any commissions,
discounts or other expenses incurred by the Company for any underwriting
of the issue or otherwise in connection therewith;
(B) in the case of the issuance of shares of Common Stock
for a consideration in whole or in part other than cash, the
consideration other than cash shall be deemed to be the fair market
value thereof as determined in good faith by the Board of Directors of
the Company (irrespective of the accounting treatment thereof), whose
determination shall be conclusive; and
(C) in the case of the issuance of securities convertible
into or exchangeable for shares of Common Stock, the aggregate
consideration received therefor shall be deemed to be the consideration
received by the Company for the issuance of such securities plus the
additional minimum consideration, if any, to be received by the Company
upon the conversion or exchange thereof (the consideration in each case
to be determined in the same manner as provided in clauses (A) and (B)
of this Subsection (g)).
(h) For the purpose of any computation under Subsections (b), (c), (d)
and (e) above and (j) and (k) below, the current market price per share of
Common Stock at any date shall be determined in the manner set forth in
Section 11 hereof except that the current market price per share shall be
deemed to be the
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higher of (i) the average of the prices for 30 consecutive business days
before such date or (ii) the price on the business day immediately preceding
such date.
(i) No adjustment in the Exercise Price shall be required unless such
adjustment would require an increase or decrease of at least five cents
($0.05) in such price; provided, however, that any adjustments which by
reason of this Subsection (i) are not required to be made shall be carried
forward and taken into account in any subsequent adjustment required to be
made hereunder. All calculations under this Section 8 shall be made to the
nearest cent or to the nearest one-hundredth of a share, as the case may be.
Anything in this Section 8 to the contrary notwithstanding, the Company shall
be entitled, but shall not be required, to make such changes in the Exercise
Price, in addition to those required by this Section 8, as it shall
determine, in its sole discretion, to be advisable in order that any dividend
or distribution in shares of Common Stock, or any subdivision,
reclassification or combination of Common Stock, hereafter made by the
Company shall not result in any Federal income tax liability to the holders
of Common Stock or securities convertible into Common Stock (including
Warrants).
(j) In addition to and lieu of the provisions of this Section 8, in the
event that the Company shall, at any time during the period that the Holder
is subject to a lock-up agreement, issue securities under Subsections (b),
(d) or (e) having an Offering Price, Subscription Price or Exchange Price
less than the Exercise Price (whether initially or due to provisions in such
securities requiring price reductions as a result of anti-dilution
adjustments, the passage of time, "discount to market" or similar
provisions), then the Exercise Price shall be immediately reset to equal such
lower Offering Price, Subscription Price or Exchange Price.
(k) No adjustment under Subsections (b), (c), (d) or (e) shall be
required for issuances below the current market price if either: (i) (A) the
current market price is at least 300% of the Exercise Price then in effect
and (B) a registration statement covering the Warrant Shares is in effect and
remains in effect for the 90 days after such issuance or Rule 144(k) under
the Securities Act of 1933, as amended (the "Act") is available for resale of
all of the Warrant Shares; or (ii) the Company at the time of such issuance
has less than $100,000 in cash. Furthermore, no adjustment under Subsections
(b), (c), (d), (e) or (j) hereof shall be required unless either (x)
shareholders of the Company have approved the terms of this Warrant Agreement
or (y) such adjustments will not result in a violation of any qualitative
listing criteria of The Nasdaq Stock Market, Inc. In the event neither (x)
nor (y) occurs, the number of shares purchasable upon exercise of this
Warrant shall double without any further action on the part of the Company or
the Holder so that the Warrants will be exercisable for an aggregate of
3,428,400 shares of Common Stock at a price of $3.50 per share (assuming the
execise in full of the over-subscription option).
(l) Whenever the Exercise Price is adjusted, as herein provided, the
Company shall promptly but no later than 10 days after any request for such
an adjustment by the Holder, cause a notice setting forth the adjusted
Exercise Price, and adjusted number of Shares issuable upon exercise of each
Warrant, and, if requested, information describing the transactions giving
rise to such adjustments, to be mailed to the Holders at their last addresses
appearing in the Warrant Register, and shall cause a certified copy thereof
to be mailed to the Warrant Agent and its transfer agent, if any. The Company
may retain a firm of independent certified public accountants selected by the
Board of Directors (who may be the regular accountants employed by the
Company) to make any computation required by this Section 8, and a
certificate signed by such firm shall be conclusive evidence of the
correctness of such adjustment.
(m) In the event that at any time, as a result of an adjustment made
pursuant to Subsection (a) above, the Holder of this Warrant thereafter shall
become entitled to receive any shares of the Company, other than Common
Stock, thereafter the number of such other shares so receivable upon exercise
of this Warrant shall be subject to adjustment from time to time in a manner
and on terms as nearly equivalent as practicable to the provisions with
respect to the Common Stock contained in Subsections (a) to (j),
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inclusive above.
(n) Irrespective of any adjustments in the Exercise Price or the
number or kind of shares purchasable upon exercise of this Warrant,
Warrants theretofore or thereafter issued may continue to express the same
price and number and kind of shares as are stated in the similar Warrants
initially issuable pursuant to this Agreement.
SECTION 9. REDEMPTION.
(a) On not less than 30 days written notice (the "Redemption Notice")
to Registered Holders of the Warrants being redeemed, the Warrants may be
redeemed, at the option of the Company, at a redemption price of $0.05 per
Warrant (the "Redemption Price"), provided (i) the market price (determined
in accordance with Section 11 hereof) shall exceed 300% of the then current
Exercise Price (the "Target Price") for the 20 consecutive trading days
ending on the fifth trading day prior to the date of the Redemption Notice
(the "Target Period"), subject to adjustment as set forth in Section 9(g)
hereof, (ii) a registration statement covering the Warrant Shares filed
under the Act has been declared effective and remains effective on the date
fixed for redemption of the Warrants (the "Redemption Date") and (iii) the
Holders are not subject to any lock-up provisions with respect to the sale
or transfer of the Warrants or Warrant Shares.
(b) The Company shall have the option, and, upon written request of
Commonwealth and the Committee (as defined in Section 17 hereof), shall be
obligated to redeem the Warrants at the Redemption Price, on not less than
10 days' written notice in the event that at any time prior to December 21,
2000 [nine months from the Initial Closing] the market price (determined in
accordance with Section 11 hereof) shall equal the Target Price, subject to
adjustment as set forth in Section 9(g) hereof, for the Target Period and
the Company does not have an effective registration statement covering the
Warrant Shares; provided, however, in such event, the Exercise Price,
solely for purposes of the cashless exercise provisions of Section 4(b)
hereof, shall be reduced to a price equal to 10% of the current market
value (determined in accordance with Section 4(b) hereof). No reduction in
the Exercise Price for purposes of a cashless exercise under this Section
9(b) shall be made unless either (x) shareholders of the Company have
approved the terms of this Warrant Agreement or (y) such adjustments will
not result in a violation of any qualitative listing criteria of The Nasdaq
Stock Market, Inc.
(c) If the conditions set forth in Section 9(a) or (b) are met,
and the Company desires to exercise its right to redeem the Warrants, it
shall mail a Redemption Notice to each of the Registered Holders of the
Warrants to be redeemed, first class, postage prepaid, not later than the
thirtieth day before the date fixed for redemption, at their last address
as shall appear on the records maintained pursuant to Section 6(b). Any
notice mailed in the manner provided herein shall be conclusively presumed
to have been duly given whether or not the Registered Holder receives such
notice.
(d) The Redemption Notice shall specify (i) the redemption price, (ii)
the Redemption Date, (iii) the place where the Warrant Certificates shall
be delivered and the redemption price paid, and (iv) that the right to
exercise the Warrant shall terminate at 5:00 P.M. (New York time) on the
business day immediately preceding the Redemption Date. No failure to mail
such notice nor any defect therein or in the mailing thereof shall affect
the validity of the proceedings for such redemption except as to a
Registered Holder (a) to whom notice was not mailed or (b) whose notice was
defective. An affidavit of the Warrant Agent or of the Secretary or an
Assistant Secretary of the Company that notice of redemption has been
mailed shall, in the absence of fraud, be prima facie evidence of the facts
stated therein.
(e) Any right to exercise a Warrant shall terminate at 5:00 P.M. (New
York time) on the business day immediately preceding the Redemption Date.
On and after the Redemption Date, Registered Holders
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of the Warrants shall have no further rights except to receive, upon
surrender of the Warrant, the Redemption Price.
(f) From and after the Redemption Date, the Company shall, at the
place specified in the Redemption Notice, upon presentation and surrender
to the Company by or on behalf of the Registered Holder thereof of one or
more Warrant Certificates evidencing Warrants to be redeemed, deliver or
cause to be delivered to or upon the written order of such Registered
Holder a sum, in cash equal to the Redemption Price of each such Warrant.
From and after the Redemption Date and upon the deposit or setting aside by
the Company of a sum sufficient to redeem all the Warrants called for
redemption, such Warrants shall expire and become void and all rights
hereunder and under the Warrant Certificates, except the right to receive
payment of the Redemption Price, shall cease.
(g) If the shares of the Company's Common Stock are subdivided or
combined into a greater or smaller number of shares of Common Stock, the
Target Price shall be proportionally adjusted by the ratio which the total
number of shares of Common Stock outstanding immediately prior to such
event bears to the total number of shares of Common Stock to be outstanding
immediately after such event.
SECTION 10. REGISTRATION UNDER THE SECURITIES ACT OF 1933. The Company
agrees to register the Warrant Shares for resale under the Securities Act of
1933, as amended (the "Act") on the terms and subject to the conditions set
forth in Article IV of the Subscription Agreement between the Company and each
of the investors in the Private Placement.
SECTION 11. FRACTIONAL WARRANTS AND FRACTIONAL SHARES.
(a) If the number of shares of Common Stock purchasable upon the
exercise of each Warrant is adjusted pursuant to Section 8 hereof, the
Company shall nevertheless not be required to issue fractions of shares,
upon exercise of the Warrants or otherwise, or to distribute certificates
that evidence fractional shares. With respect to any fraction of a share
called for upon any exercise hereof, the Company shall pay to the Holder an
amount in cash equal to such fraction multiplied by the current market
value of such fractional share, determined as follows:
(A) If the Common Stock is listed on a national securities
exchange or admitted to unlisted trading privileges on such exchange
or listed for trading on the Nasdaq National Market, the current
market value shall be the last reported sale price of the Common Stock
on such exchange or market on the last business day prior to the date
of exercise of this Warrant or if no such sale is made on such day,
the average of the closing bid and asked prices for such day on such
exchange or market; or
(B) If the Common Stock is not so listed or admitted to unlisted
trading privileges, but is traded on the Nasdaq SmallCap Market, the
current market value shall be the average of the closing bid and asked
prices for such day on such market and if the Common Stock is not so
traded, the current market value shall be the mean of the last
reported bid and asked prices reported by the NASD Electronic Bulletin
Board on the last business day prior to the date of the exercise of
this Warrant; or
(C) If the Common Stock is not so listed or admitted to unlisted
trading privileges and bid and asked prices are not so reported, the
current market value shall be an amount, not less than book value
thereof as at the end of the most recent fiscal year of the Company
ending prior to the date of the exercise of the Warrant, determined in
such reasonable manner as may be prescribed by the Board of Directors
of the Company.
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SECTION 12. WARRANT HOLDERS NOT DEEMED STOCKHOLDERS. No holder of Warrants
shall, as such, be entitled to vote or to receive dividends or be deemed the
holder of Common Stock that may at any time be issuable upon exercise of such
Warrants for any purpose whatsoever, nor shall anything contained herein be
construed to confer upon the holder of Warrants, as such, any of the rights of a
stockholder of the Company or any right to vote for the election of directors or
upon any matter submitted to stockholders at any meeting thereof, or to give or
withhold consent to any corporate action (whether upon any recapitalization,
issue or reclassification of stock, change of par value or change of stock to no
par value, consolidation, merger or conveyance or otherwise), or to receive
notice of meetings, or to receive dividends or subscription rights, until such
Holder shall have exercised such Warrants and been issued shares of Common Stock
in accordance with the provisions hereof.
SECTION 13. RIGHTS OF ACTION. All rights of action with respect to this
Agreement are vested in the respective Registered Holders of the Warrants, and
any Registered Holder of a Warrant, without consent of the Warrant Agent or of
the holder of any other Warrant, may, on his own behalf and for his own benefit,
enforce against the Company his right to exercise his Warrants for the purchase
of shares of Common Stock in the manner provided in the Warrant Certificate and
this Agreement.
SECTION 14. AGREEMENT OF WARRANT HOLDERS. Every holder of a Warrant, by his
acceptance thereof, consents and agrees with the Company, the Warrant Agent and
every other holder of a Warrant that:
(a) The Warrants are transferable only on the registry books of the
Warrant Agent by the Registered Holder thereof in person or by his attorney
duly authorized in writing and only if the Warrant Certificates
representing such Warrants are surrendered at the office of the Warrant
Agent, duly endorsed or accompanied by a proper instrument of transfer
satisfactory to the Warrant Agent and the Company in their sole discretion,
together with payment of any applicable transfer taxes; and
(b) The Company may deem and treat the person in whose name the
Warrant Certificate is registered as the holder and as the absolute, true
and lawful owner of the Warrants represented thereby for all purposes, and
the Company shall not be affected by any notice or knowledge to the
contrary, except as otherwise expressly provided in Section 7 hereof.
SECTION 15. CANCELLATION OF WARRANT CERTIFICATES. If the Company shall
purchase or acquire any Warrant or Warrants, the Warrant Certificate or Warrant
Certificates evidencing the same shall thereupon be canceled by it and retired.
The Warrant Agent shall also cancel Common Stock following exercise of any or
all of the Warrants represented thereby or delivered to it for transfer,
splitup, combination or exchange.
SECTION 16. CONCERNING THE WARRANT AGENT.
(a) The Warrant Agent acts hereunder as agent and in a ministerial
capacity for the Company, and its duties shall be determined solely by the
provisions hereof The Warrant Agent shall not, by issuing and delivering
Warrant Certificates or by any other act hereunder be deemed to make any
representations as to the validity, value or authorization of the Warrant
Certificates or the Warrants represented thereby or of any securities or
other property delivered upon exercise of any Warrant or whether any stock
issued upon exercise of any Warrant is fully paid and nonassessable.
(b) The Warrant Agent shall account promptly to the Company with
respect to Warrants exercised and concurrently pay the Company, as provided
in Section 4, all moneys received by the Warrant Agent upon the exercise of
such Warrants. The Warrant Agent shall, upon request of the Company from
time to time, deliver to the Company such complete reports of registered
ownership of the Warrants and such complete records of transactions with
respect to the Warrants and the shares of Common Stock as the Company may,
request. The Warrant Agent shall also make available to the Company and
Commonwealth
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for inspection by their agents or employees, from time to time as either of
them may request, such original books of accounts and record (including
original Warrant Certificates surrendered to the Warrant Agent upon
exercise of Warrants) as may be maintained by the Warrant Agent in
connection with the issuance and exercise of Warrants hereunder, such
inspections to occur at the Warrant Agent's office as specified in Section
18, during normal business hours.
(c) The Warrant Agent shall not at any time be under any duty or
responsibility to any holder of Warrant Certificates to make or cause to be
made any adjustment of the Exercise Price provided in this Agreement, or to
determine whether any fact exists which may require any such adjustments,
or with respect to the nature or extent of any such adjustment, when made,
or with respect to the method employed in making the same. It shall not (i)
be liable for any recital or statement of facts contained herein or for any
action taken, suffered or omitted by it in reliance on any Warrant
Certificate or other document or instrument believed by it in good faith to
be genuine and to have been signed or presented by the proper party or
parties, (ii) be responsible for any failure on the part of the Company to
comply with any of its covenants and obligations contained in this
Agreement or in any Warrant Certificate, or (iii) be liable for any act or
omission in connection with this Agreement except for its own negligence or
willful misconduct.
The Warrant Agent may at any time consult with counsel satisfactory to it
(who may be counsel for the Company) and shall incur no liability or
responsibility for any action taken, suffered or omitted by it in good
faith in accordance with the opinion or advice of such counsel.
(d) Any notice, statement, instruction, request, direction, order or
demand of the Company shall be sufficiently evidenced by an instrument
signed by the Chairman of the Board, Chief Executive Officer, President,
any Vice President, its Secretary, or Assistant Secretary, (unless other
evidence in respect thereof is herein specifically prescribed). The Warrant
Agent shall not be liable for any action taken, suffered or omitted by it
in accordance with such notice, statement, instruction, request, direction,
order or demand believed by it to be genuine.
(e) The Company agrees to pay the Warrant Agent reasonable
compensation for its services hereunder and to reimburse it for its
reasonable expenses hereunder; it further agrees to indemnify the Warrant
Agent and save it harmless against any and all losses, expenses and
liabilities, including judgments, costs and counsel fees, for anything done
or omitted by the Warrant Agent in the execution of its duties and powers
hereunder except losses, expenses and liabilities arising as a result of
the Warrant Agent's negligence or willful misconduct.
(f) The Warrant Agent may resign its duties and be discharged from all
further duties and liabilities hereunder (except liabilities arising as a
result of the Warrant Agent's own negligence or willful misconduct), after
giving 30 days' prior written notice to the Company. At least 15 days prior
to the date such resignation is to become effective, the Warrant Agent
shall cause a copy of such notice of resignation to be mailed to the
Registered Holder of each Warrant Certificate at the Company's expense.
Upon such resignation, or any inability of the Warrant Agent to act as such
hereunder, the Company shall appoint a new warrant agent in writing. If the
Company shall fail to make such appointment within a period of 15 days
after it has been' notified in writing of such resignation by the resigning
Warrant Agent, then the Registered Holder of any Warrant Certificate may
apply to any court of competent jurisdiction for the appointment of a new
warrant agent. Any new warrant agent, whether appointed by the Company or
by such a court, shall be a bank or trust company having a capital and
surplus, as shown by its last published report to its stockholders, of not
less than $ 10,000,000 or a stock transfer company. After acceptance in
writing of such appointment by the new warrant agent is received by the
Company, such new warrant agent shall be vested with the same powers,
rights, duties and responsibilities as if it had been originally named
herein as the Warrant Agent, without any further assurance, conveyance, act
or deed; but if for any reason it shall be necessary or expedient to
execute and deliver any further assurance, conveyance, act or deed, the
G-12
same shall be done at the expense of the Company and shall be legally and
validly executed and delivered by the resigning Warrant Agent. Not later
than the effective date of any such appointment the Company shall file
notice thereof with the resigning Warrant Agent and shall forthwith cause a
copy of such notice to be mailed to the Registered Holder of each Warrant
Certificate.
(g) Any corporation into which the Warrant Agent or any new warrant
agent may be converted or merged or any corporation resulting from any
consolidation to which the Warrant Agent or any new warrant agent shall be
a party or any corporation succeeding to the trust business of the Warrant
Agent shall be a successor warrant agent under this Agreement without any
further act, provided that such corporation is eligible for appointment as
successor to the Warrant Agent under the provisions of the preceding
paragraph. Any such successor warrant agent shall promptly cause notice of
its succession as warrant agent to be mailed to the Company and to the
Registered Holder of each Warrant Certificate.
(h) The Warrant Agent, its subsidiaries and affiliates, and any of its
or their officers or directors, may buy and hold or sell Warrants or other
securities of the Company and otherwise deal with the Company in the same
manner and to the same extent and with like effects as though it were not
Warrant Agent. Nothing herein shall preclude the Warrant Agent from acting
in any other capacity for the Company or for any other legal entity.
SECTION 17. MODIFICATION OF AGREEMENT. Subject to the provisions of Section
4(b), the parties hereto may by supplemental agreement make any changes or
corrections in this Agreement (i) that it shall deem appropriate to cure any
ambiguity or to correct any defective or inconsistent provision or manifest
mistake or error herein contained; (ii) to reflect an increase in the number of
Warrants which are to be governed by this Agreement resulting from an increase
in the size of the Private Placement; (iii) to reflect an increase in the number
of Warrants which are to be governed by this Agreement resulting from the
conversion of warrants issued to Commonwealth or its designees in connection
with the Private Placement; or (iv) that it may deem necessary or desirable and
which shall not adversely affect the interests of the holders of Warrant
Certificates; provided, however, that this Agreement shall not otherwise be
modified, supplemented or altered in any respect except with the consent in
writing of the Company, Commonwealth and d committee to be designated by
Commonwealth whose members hold in the aggregate not less than 20% of the
outstanding Warrants (the "Committee"); provided, however, that no such
amendment, modification or waiver which would decrease the number of the
securities purchasable upon the exercise of any Warrant, or increase in the
Exercise Price therefor (other than as a result of the waiver or modification of
any anti-dilution provisions contained in Section 8 hereof), shall be made
without the consent in writing of the holders of not less than 50% of the
outstanding Warrants.
SECTION 18. NOTICES. All notices, requests, consents and other
communications hereunder shall be in writing and shall be deemed to have been
made when delivered or mailed first class registered or certified mail, postage
prepaid as follows: if to the Registered Holder of a Warrant Certificate, at the
address of such holder as shown on the registry books maintained by the Warrant
Agent; if to the Company, 3525 Piedmont Road, 7 Piedmont Center, Suite 300,
Atlanta, Georgia 30350, Att: Paul Harrison; if to the Warrant Agent, at its
Corporate Office and if to Commonwealth, at Commonwealth Associates, 830 Third
Avenue, New York, New York 10022, Attention: Carl Kleidman.
SECTION 19. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York, without
reference to principles of conflict of laws.
SECTION 20. BINDING EFFECT. This Agreement shall be binding upon and inure
to the benefit of the Company and the Warrant Agent (and their respective
successors and assigns) and the holders from time to time of Warrant
Certificates. Nothing in this Agreement is intended or shall be construed to
confer upon any other person any right, remedy or claim, in equity or at law, or
to impose upon any other person any duty, liability or obligation.
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SECTION 21. TERMINATION. This Agreement shall terminate on the earlier to
occur of (i) the close of business on the Expiration Date of all the Warrants;
or (ii) the date upon which all Warrants have been exercised or redeemed.
SECTION 22. COUNTERPARTS. This Agreement may be executed in several
counterparts, which taken together shall constitute a single document.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
HEALTHWATCH, INC.
By: /s/ Paul W. Harrison
--------------------------------------
Name: Paul W. Harrison
Title: Chairman and Chief Executive
Officer
CORPORATE STOCK TRANSFER, INC,
By: /s/ Carolyn K. Bell
--------------------------------------
Name: Carolyn K. Bell
Title: President
COMMONWEALTH ASSOCIATES, L.P.
By: /s/ Joseph Wynne
--------------------------------------
Commonwealth Associates Management
Company, Inc., its general partner
By: /s/ Joseph Wynne
--------------------------------------
Name: Joseph Wynne
Title: Chief Financial Officer
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THIS WARRANT AND ANY SHARES OF COMMON STOCK ISSUABLE UPON ITS EXERCISE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE
TRANSFERRED UNTIL (1) A REGISTRATION STATEMENT UNDER THE ACT SHALL HAVE BECOME
EFFECTIVE WITH RESPECT THERETO, OR (2) RECEIPT BY THE ISSUER OF AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO THE ISSUER TO THE EFFECT THAT REGISTRATION
UNDER THE ACT IS NOT REQUIRED IN CONNECTION WITH SUCH PROPOSED TRANSFER NOR IS
SUCH TRANSFER IN VIOLATION OF ANY APPLICABLE STATE SECURITIES LAWS.
No. PPW ______ _____ Warrants
VOID AFTER ________, 2005
WARRANT CERTIFICATE FOR PURCHASE
OF COMMON STOCK
HEALTHWATCH, INC.
This certifies that FOR VALUE RECEIVED ___________________or
registered assigns (the "Registered Holder") is the owner of the number of
Warrants ("Warrants") specified above. Each Warrant initially entitles the
Registered Holder to purchase, subject to the terms and conditions set forth in
this Certificate and the Warrant Agreement (as hereinafter defined), one fully
paid and nonassessable share of common stock, $.05 par value ("Common Stock") of
HealthWatch, Inc., a Minnesota corporation (the "Company") at any time
commencing on the Initial Exercise Date and prior to the Expiration Date (both
as hereinafter defined), upon the presentation and surrender of this Warrant
Certificate with the Subscription Form on the reverse hereof duly executed, at
the corporate office of Corporate Stock Transfer, Inc., as Warrant Agent, or its
successor (the "Warrant Agent"), accompanied by payment of an amount equal to
$3.50 for each Warrant (the "Exercise Price") in lawful money of the United
States of America in cash or by official bank or certified check made payable to
HealthWatch, Inc.. The Company may, at its election, reduce the Exercise Price.
This Warrant Certificate and each Warrant represented hereby are
issued pursuant to and are subject in all respects to the terms and conditions
set forth in the Warrant Agreement (the "Warrant Agreement"), dated __________,
2000 by and among the Company, the Warrant Agent and Commonwealth Associates,
L.P.
In the event of certain contingencies provided for in the Warrant
Agreement, the Exercise Price or the number of shares of Common Stock subject to
purchase upon the exercise of each Warrant represented hereby are subject to
modification or adjustment.
Each Warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional shares of Common Stock will be issued. In
the case of the exercise of less than all the Warrants represented hereby, the
Company shall cancel this Warrant Certificate upon the surrender hereof and
shall execute and deliver a new Warrant Certificate or Warrant Certificates of
like tenor, which the Warrant Agent shall countersign, for the balance of such
Warrants.
The term "Initial Exercise Date" shall mean _________, 2000.
The term "Expiration Date" shall mean 5:00 P.M. (New York time) on
________, 2005. If such date shall in the State of New York be a holiday or a
day on which the banks are authorized to close, then the Expiration Date shall
mean 5:00 P.M. (New York time) the next following day which in the State of New
York is not a holiday or a day on which banks are authorized to close. The
Company may, at its election, extend the Expiration Date.
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This Warrant Certificate is exchangeable, upon the surrender hereof by the
Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Warrants, each of such new Warrant Certificates to represent
such number of Warrants as shall be designated by such Registered Holder at the
time of such surrender. Upon due presentment with any tax or other governmental
charge imposed in connection therewith, for registration of transfer of this
Warrant Certificate at such office, a new Warrant Certificate or Warrant
Certificates representing an equal aggregate number of Warrants will be issued
to the transferee in exchange therefor, subject to the limitations provided in
the Warrant Agreement.
Prior to the exercise of any Warrant represented hereby, the Registered
Holder shall not be entitled to any of the rights of a stockholder of the
Company, including, without limitation, the right to vote or to receive
dividends or other distributions, and shall not be entitled to receive any
notice of any proceedings of the Company, except as provided in the Warrant
Agreement.
The Warrants represented hereby may be redeemed at the option of the
Company, at a redemption price of $.05 per Warrant at any time, provided the
Market Price (as defined in the Warrant Agreement) for the Common Stock shall
exceed 300% of the then current Exercise Price (the "Target Price") for the 20
consecutive trading days ending on the fifth trading day prior to the date of
the notice of redemption (the "Target Period) and subject to adjustment as set
forth in the Warrant Agreement and a registration statement covering the Warrant
Shares filed under the Securities Act of 1933, as amended, has been declared
effective and remains effective on the date fixed for redemption of the
Warrants. Notice of redemption shall be given not later than the thirtieth day
before the date fixed for redemption, all as provided in the Warrant Agreement.
The Warrants represented hereby are also subject to redemption on 10 days'
notice if the Common Stock achieves the Target Price for the Target Period prior
to __________, 2000 and there is no effective registration statement covering
the resale of the Warrant Shares on the terms and subject to the conditions set
forth in the Warrant Agreement. On and after the date fixed for redemption, the
Registered Holder shall have no rights with respect to the Warrants represented
hereby except to receive the $.05 per Warrant upon surrender of this Warrant
Certificate.
Prior to due presentment for registration of transfer hereof, the Company
may deem and treat the Registered Holder as the absolute owner hereof and of
each Warrant represented hereby (notwithstanding any notations of ownership or
writing hereon made by anyone other than a duly authorized officer of the
Company) for all purposes and shall not be affected by any notice to the
contrary.
This Warrant Certificate shall be governed by and construed in accordance
with the laws of the State of New York.
[the remainder of this page intentionally left blank]
G-16
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed, manually or in facsimile by two of its officers thereunto duly
authorized and a facsimile of its corporate seal to be imprinted hereon.
HEALTHWATCH, INC.
Dated: _________, 2000
By: _____________________________________
Name: Paul W. Harrison
Title: President and Chief Executive
Officer
By: _____________________________________
Name:
Title:
[seal]
G-17
ANNEX H
Certificate of Designation, Preferences and Rights of the Series P
Preferred Stock of HealthWatch, Inc.
HEALTHWATCH, INC.
RESOLUTIONS ADOPTED BY UNANIMOUS WRITTEN
CONSENT (IN LIEU OF MEETING) OF THE DIRECTORS OF THE CORPORATION
March 22, 2000
The undersigned, being the sole Director of HEALTHWATCH, INC., a Minnesota
corporation (the "Corporation"), hereby consents to and adopts the following
resolutions as of the date hereof pursuant to Section 302A.239 of the Minnesota
Business Corporation Act, which resolutions shall have the same force and effect
as if taken by affirmative vote at a meeting of the Directors of the
Corporation, duly called and held under the Minnesota Business Corporation Act,
and which action shall be in lieu of a special meeting of the Directors of the
Corporation, and direct that this written consent to such action be filed with
the minutes of the proceedings of the Directors of the Corporation:
AMENDMENTS TO THE CERTIFICATE OF DESIGNATION AND STOCKHOLDERS' AGENT AGREEMENT
BY THE SERIES P PREFERRED STOCK SHAREHOLDERS
WHEREAS, the Corporation deems it advisable to make certain modifications
to the Certificate of Designation, Preferences, Rights and Limitations of the
Series P Preferred Stock of HealthWatch, Inc. and to the Stockholders' Agent
Agreement dated October 1, 1998 as an inducement to Commonwealth Associates,
L.P. to move forward with the private placement of the Corporation's 8% Series D
Preferred Stock; and
WHEREAS, the Corporation deems it advisable to call a Special Meeting of
the Series P Preferred Stock shareholders for the purpose of considering two
amendments to the Certificate of Designation, Preferences, Rights and
Limitations of the Series P Preferred Stock of HealthWatch, Inc. and two
amendments to the Stockholders' Agent Agreement dated October 1, 1998; and
WHEREAS, a majority of the holders of the Corporation's Series P Preferred
Stock, at a special meeting of the Series P Preferred Stock shareholders, duly
called and held on the 21/st/ day of March, 2000, have approved amendments to
the Certificate of Designation, Preferences, Rights and Limitations of the
Series P Preferred Stock of HealthWatch, Inc. to (i) reduce the dividend rate to
8% per annum of the Stated Value (as defined in the Certificate of Designation)
retroactive to the effective date of the Certificate of Designation and
continuing until the Series P Preferred Stock has been converted into common
stock of the Corporation and (ii) provide that dividends may be paid in cash or,
at the option of the Corporation, in common stock of the Corporation.
Additionally, the holders of the Corporation's Series P Preferred Stock have
approved amendments to the Stockholders' Agent Agreement dated October 1, 1998,
to (i) extend the "Restriction Period" from eighteen (18) months to twenty-four
(24) months, resulting in the amended "Restriction Period" running from November
1, 1998 to November 1, 2000 and (ii) amending the number of shares that can be
traded during the "Restriction Period" from 100,000 during any 30 days of the
"Restriction Period" to 20,000 during any 30 days of the "Restriction Period."
NOW, THEREFORE, BE IT RESOLVED, that pursuant to the authority granted to
and vested in the Board of Directors of this Corporation in accordance with the
provisions of its Articles of Incorporation, as amended, and in accordance with
the consent of a majority of the holders of the Series P Preferred Stock given
at a special meeting of the Series P Preferred Stock Shareholders on March 21,
2000, the Certificate of the Designation, Preferences, Rights and Limitations
of the Series P Preferred Stock, which have a stated value of Ten Dollars
($10.00) per share ("Stated Value") (hereinafter referred to as the "Series P
Preferred Stock"), is hereby amended and restated, in its entirety, as follows:
1. Dividends
(a) Subject to the following, the holders of shares of Series P Preferred
Stock shall be entitled to receive dividends at the rate of 8% per
annum of the Stated Value (as adjusted for any stock dividends,
combinations or splits with respect to such shares) from the date of
issuance to until such shares shall be converted into the
Corporation's Common Stock in accordance with Section 4 hereof. Such
dividends shall commence upon issuance and shall be payable in
preference to any dividend to any shares of Common Stock, and shall be
cumulative. Dividends earned after February 1, 1999 shall be paid
semi-annually on June 30 and December 31, commencing June 30, 1999,
and in every case shall be paid to holders of record as of the close
of business five business days before the dividend payment date.
Dividends shall be paid in cash or, at the option of the Corporation,
in shares of the Corporation's Common Stock, the value of such stock
for the purpose of any such payment to be equal to the average five-
day closing bid price for the Common Stock for the five-day period
immediately preceding the record date for such payment.
(b) No dividends (other than those payable solely in the Common Stock of
the Corporation) shall be paid on any shares of Common Stock of the
Corporation during any fiscal year of the Corporation until dividends
on the Series P Preferred Stock shall have been paid or declared and
set apart during that fiscal year and any prior year in which
dividends accumulated but remain unpaid. Following any such payment or
declaration, the holders of any shares of Common Stock shall be
entitled to receive dividends, payable out of funds legally available
therefor, when, as and if declared by the Board of Directors.
In the event the Corporation shall declare a distribution payable in
securities of other persons, evidences of indebtedness issued by the Corporation
or other persons, assets (excluding cash dividends) or options or rights to
purchase any such securities or evidences of indebtedness, then, in each such
case the holders of the Series P Preferred Stock shall be entitled to a
proportionate share of any such distribution as though the holders of the Series
P Preferred Stock were the holders of the number of shares of Common Stock of
the Corporation into which their shares of Series P Preferred Stock were then
convertible as of the record date (assuming for this provision that there was no
limitation on the right of conversion of the Series P Preferred Stock) fixed for
the determination of the holders of Common Stock of the Corporation entitled to
receive such distribution.
2. Liquidation Preference
(a) In the event of any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, the holders of the
Series P Preferred Stock shall be entitled to receive, prior and in
preference to any distribution of any of the assets or surplus funds
of the Corporation to the holders of shares of Common Stock by reason
of their ownership thereof, the amount of $10.00 per share (as
adjusted for any stock dividends, combinations or splits with respect
to such shares), plus all accrued or declared but unpaid dividends on
such shares for each share of Series P Preferred Stock then held by
them. If upon the occurrence of such events, the assets and funds thus
distributed among the holders of the Series P Preferred Stock shall be
insufficient to permit the payment to such holders of the full
aforesaid preferential amount, then the entire assets and funds of the
Corporation legally available for distribution shall be distributed
ratably among the holders of the Series P Preferred Stock and
holders of any other shares of Preferred Stock of the Corporation in
proportion to the preferential amount each such holder is otherwise
entitled to receive.
(b) After payment to the holders of the Series P Preferred Stock of the
amounts set forth in Section 2(a) above, and the payment to the
holders of any other series of Preferred Stock of the Corporation
of any liquidation preferences for such additional series of Preferred
Stock, the entire remaining assets and funds of the Corporation
legally available for distribution, if any, shall be distributed among
the holders of the Common Stock in proportion to the shares of Common
Stock
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then held by them.
(c) Whenever the distribution provided for in this Section 2 shall be
payable in securities or property other than cash, the value of such
distribution shall be the fair market value of such securities or
other property as determined in good faith by the Board of Directors.
3. Voting Rights
Unless and except to the extent otherwise required by law, the holders of
the Series P Preferred Stock shall have no voting power; provided that if any
dividends on the Series P Preferred Stock declared by the Board of Directors in
accordance with Section 1 hereof have not been paid for a period of one year or
more, the holders of Series P Preferred Stock shall, until such dividends have
been paid, be entitled, with the holders of the Common Stock, voting as a class,
to vote or act by written consent for the election of directors, with the number
of votes per share of Series P Preferred Stock in such election to be equal to
ten shares of Common Stock (as adjusted for any stock dividends, combinations or
splits with respect to such shares). Unless and except to the extent otherwise
required by law, the holders of the Series P Preferred Stock shall have no right
to vote as a class with respect to any matter. Should the Series P Preferred
Stock be entitled to vote on any matter pursuant to a requirement of law, each
holder of such stock shall be entitled to one vote in respect to each share of
such stock held of record in respect to such matter, unless some other vote is
required by law.
4. Conversion of Series P Preferred Stock into Common Stock
(a) Subject to the following conversion rights being approved by the
holders of a majority of a quorum of the shares of the Corporation's
Common Stock and the provisions of this Section 4, the holder of
record of any share or shares of Series P Preferred Stock and the
Corporation shall have the right, at his or its option, as the case
may be, at any time after issuance, to convert or to cause the
conversion of each said share or shares of Series P Preferred Stock
into ten (10) (as adjusted for any stock dividends, combinations or
splits with respect to such shares) fully-paid and non-assessable
shares of Common Stock, $.01 par value (herein referred to as "Common
Stock"), of the Corporation. The Corporation shall not be required to
issue fractional shares in connection with the conversion of any of
the Series P Preferred Stock and shall, in lieu thereof, pay to the
holder requesting conversion, an amount equal to the value (determined
by the Corporation's Board of Directors) of such fractional share.
(b) Any holder of a share or shares of Series P Preferred Stock desiring
to convert such Series P Preferred Stock into Common Stock, shall
surrender the certificate or certificates representing the share or
shares of Series P Preferred Stock so to be converted, duly endorsed
(if required by the Corporation) to the Corporation or in blank, at
the office of any Transfer Agent for the Series P Preferred Stock (or
such other place as may be designated by the Corporation), and shall
give written notice to the Corporation at said office that he elects
to convert the same as provided above, and setting forth the name or
names (with the address or addresses) in which the shares of Common
Stock are to be issued.
(c) Conversion of Series P Preferred Stock shall be subject to the
following additional terms and provisions:
(1) As promptly as practicable after the surrender for conversion of
any Series P Preferred Stock, the Corporation shall deliver or
cause to be delivered at the principal office of the Transfer
Agent for the Series P Preferred Stock (or such other place as
may be designated by the Corporation), to or upon the written
order of the holder of such Series P Preferred
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Stock, certificates representing the shares of Common Stock
issuable upon such conversion issued in such name or names as
such holder may direct. Shares of the Series P Preferred Stock
shall be deemed to have been converted as of the close of
business on the date of the surrender of the Series P Preferred
Stock for conversion, as provided above, and the rights of the
holders of such Series P Preferred Stock shall cease at such
time, and the person or persons in whose name or names the
certificates for such shares are to be issued shall be treated
for all purposes as having become the record holder or holders of
such Common Stock at such time; provided, however, that any such
surrender on any date when the stock transfer books of the
Corporation shall be closed shall constitute the person or
persons in whose name or names the certificate for such shares
are to be issued as the record holder or holders thereof for all
purposes at the close of business on the next succeeding day on
which such stock transfer books are open.
(2) The Corporation shall pay all dividends accrued on the shares of
Series P Preferred Stock surrendered for conversion, such payment
to be made in cash, or at the option of the Corporation, in
shares of the Corporation's Common Stock, the value of such stock
to be determined as set forth in Section 1(a) hereof.
(3) The Corporation shall at all times reserve and keep available
solely for the purpose of issuance upon conversion of Series P
Preferred Stock, as herein provided, such number of shares of
Common Stock as shall be issuable upon the conversion of all
outstanding Series P Preferred Stock.
(4) Prior to March 31, 2000, the holders of Series P Preferred Stock
shall not be entitled to convert nor shall the Corporation have
the right to require conversion of the Series P Preferred Stock
held by such holders to the extent that such conversion would
result in such holders beneficially owning (as determined in
accordance with Section 13(d) of the Securities Exchange Act of
1934 and the Rules thereunder) in the aggregate in excess of
forty-five percent (45%) of the then issued and outstanding
shares of the Corporation's Common Stock.
(d) The issuance of certificates for shares of Common Stock upon
conversion of the Series P Preferred Stock shall be made without
charge for any tax in respect of such issuance. However, if any
certificate is to be issued in a name other than that of the holder of
record of the Series P Preferred Stock so converted, the person or
persons requesting the issuance thereof shall pay to the Corporation
the amount of any tax which may be payable in respect of any transfer
involved in such issuance, or shall establish to the satisfaction of
the Corporation that such tax has been paid or is not due and payable.
5. General
(a) In the event that the Corporation shall at any time prior to
conversion either (a) subdivide the outstanding shares of Common Stock
into a greater number of shares, (b) combine the outstanding shares of
Common Stock into a smaller number of shares, (c) change the
outstanding shares of Common Stock into the same or a given number of
shares of any other class or classes of stock, (d) declare on or in
respect of the Common Stock a dividend payable in shares or other
securities of the Corporation, then the holders of the Series P
Preferred Stock shall be entitled to receive the same number of shares
or other securities of the Corporation, or shall be entitled to
subscribe for and purchase at the same price that the shares or
securities are offered to holders of Common Stock, the number of such
shares or the amount of such securities as will represent the same
proportion of the outstanding Common Stock prior to such increase or
decrease as they would
H-4
have been entitled to receive or subscribe for, as the case may be,
had they been holders of the number of shares of Common Stock into
which their shares of Series P Preferred Stock were convertible on the
record date (assuming for the purposes of this provision that there
was no limitation on the right of conversion of the Series P Preferred
Stock) for any such dividend or subscription. The Board of Directors
shall determine what adjustments shall be made in the Stated Value in
order to appropriately reflect and account for any such change.
(b) In the event the Corporation at any time while any of the shares of
Series P Preferred Stock are outstanding shall be consolidated with or
merged into any other corporation or corporations, or shall sell or
lease all or substantially all of its property and business as an
entirety, lawful provision shall be made as part of the terms of such
consolidation, merger, sale, or lease so that the holder of any shares
of Series P Preferred Stock may thereafter receive in lieu of such
shares of Common Stock otherwise issuable to him upon conversion of
his shares of Series P Preferred Stock (assuming for the purpose of
this provision that there was no limitation on the right of conversion
of the Series P Preferred Stock), but at the conversion rate which
would otherwise be in effect at the time of conversion as hereinbefore
provided, the same kind and amount of securities or assets as may be
issuable, distributable, or payable upon such consolidation, merger,
sale, or lease, with respect to shares of Common Stock of the
Corporation. The Board of Directors shall determine what adjustments
shall be made in the Stated Value in order to appropriately reflect
and account for any such change.
(c) Nothing herein shall be deemed to require the Corporation in the event
of any such subdivision, combination, reclassification,
recapitalization, consolidation, merger or sale of assets, or
liquidation, dissolution or winding up, to issue or distribute
fractional interests in shares of capital stock or any other security
of the Corporation or another issuer, and the Corporation may make
such arrangements as the Board of Directors of the Corporation shall
approve with respect to any such event for settlement in lieu of
issuance of a fractional interest in a share of capital stock or other
security of the Corporation or another issuer to any holder of the
Series P Preferred Stock.
(d) The shares of Series P Preferred Stock shall not be subject to the
operation of a purchase, retirement or sinking fund.
(e) The issuance of additional shares of Series P Preferred Stock shall
not be subject to any restrictions as to issuance, nor shall the
holders of the Series P Preferred Stock be entitled to any restriction
with respect to the issuance of shares of any other series of the
Corporation's Common Stock or Preferred Stock, or as to the powers,
preferences or rights of any such other series; provided that no
series of additional shares of Preferred Stock shall have any
liquidation or other similar rights in preference to the Series P
Preferred Stock."; and
FURTHER RESOLVED, that the Chairman of the Board and President of the
Corporation be, and they hereby are, authorized and directed to file the Amended
and Restated Certificate of Designation, Preferences, Rights and limitations of
the Series P preferred Stock of HealthWatch, Inc. embodying the foregoing
resolution and to cause the same to be filed with the Secretary of State of the
State of Minnesota in accordance with the laws of the State of Minnesota; and
FURTHER RESOLVED, that the officers of the Corporation be, and they hereby
are, authorized, empowered and directed to take, or cause to be taken, any and
all other such acts and actions and to prepare, execute and deliver, or cause to
be prepared, executed and delivered, any and all such other documents or
instruments as, with the advice of counsel, they may deem necessary, desirable
or appropriate to amend and revise the Stockholders Agent Agreement dated
October 1, 1998 in accordance with and to otherwise carry out the full intent
and purpose of the foregoing resolutions.
H-5
WITNESS the consent of the Directors, effective as of the date first set
forth above.
/s/ Paul W. Harrison
--------------------
Paul Harrison, Sole Director
H-6
ANNEX I
Article 13 of the Georgia Business Corporation Code
ARTICLE 13
DISSENTERS' RIGHTS
PART 1
RIGHT TO DISSENT AND OBTAIN PAYMENT FOR SHARES
14-2-1301. Definitions.
As used in this article, the term:
(1) "Beneficial shareholder" means the person who is a beneficial owner of
shares held in a voting trust or by a nominee as the record shareholder.
(2) "Corporate action" means the transaction or other action by the corporation
that creates dissenters' rights under Code Section 14-2-1302.
(3) "Corporation" means the issuer of shares held by a dissenter before the
corporate action, or the surviving or acquiring corporation by merger or share
exchange of that issuer.
(4) "Dissenter" means a shareholder who is entitled to dissent from corporate
action under Code Section 14-2-1302 and who exercises that right when and in the
manner required by Code Sections 14-2-1320 through 14-2-1327.
(5) "Fair value," with respect to a dissenter's shares, means the value of the
shares immediately before the effectuation of the corporate action to which the
dissenter objects, excluding any appreciation or depreciation in anticipation of
the corporate action.
(6) "Interest" means interest from the effective date of the corporate action
until the date of payment, at a rate that is fair and equitable under all the
circumstances.
(7) "Record shareholder" means the person in whose name shares are registered in
the records of a corporation or the beneficial owner of shares to the extent of
the rights granted by a nominee certificate on file with a corporation.
(8) "Shareholder" means the record shareholder or the beneficial shareholder.
14-2-1302. Right to dissent.
(a) A record shareholder of the corporation is entitled to dissent from, and
obtain payment of the fair value of his shares in the event of, any of the
following corporate actions:
(1) Consummation of a plan of merger to which the corporation is a party:
(A) If approval of the shareholders of the corporation is required for the
merger by Code Section 14-2-1103 or 14-2-1104 or the articles of incorporation
and the shareholder is entitled to vote on the merger; or
(B) If the corporation is a subsidiary that is merged with its parent under Code
Section 14-2-1104;
(2) Consummation of a plan of share exchange to which the corporation is a party
as the corporation whose shares will be acquired, if the shareholder is entitled
to vote on the plan;
(3) Consummation of a sale or exchange of all or substantially all of the
property of the corporation if a shareholder vote is required on the sale or
exchange pursuant to Code Section 14-2-1202, but not including a sale pursuant
to court order or a sale for cash pursuant to a plan by which all or
substantially all of the net proceeds of the sale will be distributed to the
shareholders within one year after the date of sale;
(4) An amendment of the articles of incorporation that materially and adversely
affects rights in respect of a dissenter's shares because it:
(A) Alters or abolishes a preferential right of the shares;
(B) Creates, alters, or abolishes a right in respect of redemption, including a
provision respecting a sinking fund for the redemption or repurchase, of the
shares;
(C) Alters or abolishes a preemptive right of the holder of the shares to
acquire shares or other securities;
(D) Excludes or limits the right of the shares to vote on any matter, or to
cumulate votes, other than a limitation by dilution through issuance of shares
or other securities with similar voting rights;
(E) Reduces the number of shares owned by the shareholder to a fraction of a
share if the fractional share so created is to be acquired for cash under Code
Section 14-2-604; or
(F) Cancels, redeems, or repurchases all or part of the shares of the class; or
(5) Any corporate action taken pursuant to a shareholder vote to the extent that
Article 9 of this chapter, the articles of incorporation, bylaws, or a
resolution of the board of directors provides that voting or nonvoting
shareholders are entitled to dissent and obtain payment for their shares.
(b) A shareholder entitled to dissent and obtain payment for his shares under
this article may not challenge the corporate action creating his entitlement
unless the corporate action fails to comply with procedural requirements of this
chapter or the articles of incorporation or bylaws of the corporation or the
vote required to obtain approval of the corporate action was obtained by
fraudulent and deceptive means, regardless of whether the shareholder has
exercised dissenter's rights.
(c) Notwithstanding any other provision of this article, there shall be no
right of dissent in favor of the holder of shares of any class or series which,
at the record date fixed to determine the shareholders entitled to receive
notice of and to vote at a meeting at which a plan of merger or share exchange
or a sale or exchange of property or an amendment of the articles of
incorporation is to be acted on, were either listed on a national securities
exchange or held of record by more than 2,000 shareholders, unless:
(1) In the case of a plan of merger or share exchange, the holders of shares of
the class or series are required under the plan of merger or share exchange to
accept for their shares anything except shares of the surviving corporation or
another publicly held corporation which at the effective date of the merger or
share exchange are either listed on a national securities exchange or held of
record by more than 2,000 shareholders, except for scrip or cash payments in
lieu of fractional shares; or
I-2
(2) The articles of incorporation or a resolution of the board of directors
approving the transaction provides otherwise.
14-2-1303. Dissent by nominees and beneficial owners.
A record shareholder may assert dissenters' rights as to fewer than all the
shares registered in his name only if he dissents with respect to all shares
beneficially owned by any one beneficial shareholder and notifies the
corporation in writing of the name and address of each person on whose behalf he
asserts dissenters' rights. The rights of a partial dissenter under this Code
section are determined as if the shares as to which he dissents and his other
shares were registered in the names of different shareholders.
PART 2
PROCEDURE FOR EXERCISE OF DISSENTERS' RIGHTS
14-2-1320. Notice of dissenters' rights.
(a) If proposed corporate action creating dissenters' rights under Code Section
14-2-1302 is submitted to a vote at a shareholders' meeting, the meeting notice
must state that shareholders are or may be entitled to assert dissenters' rights
under this article and be accompanied by a copy of this article.
(b) If corporate action creating dissenters' rights under Code Section 14-2-
1302 is taken without a vote of shareholders, the corporation shall notify in
writing all shareholders entitled to assert dissenters' rights that the action
was taken and send them the dissenters' notice described in Code Section 14-2-
1322 no later than ten days after the corporate action was taken.
14-2-1321. Notice of intent to demand payment.
(a) If proposed corporate action creating dissenters' rights under Code Section
14-2-1302 is submitted to a vote at a shareholders' meeting, a record
shareholder who wishes to assert dissenters' rights:
(1) Must deliver to the corporation before the vote is taken written notice of
his intent to demand payment for his shares if the proposed action is
effectuated; and
(2) Must not vote his shares in favor of the proposed action.
(b) A record shareholder who does not satisfy the requirements of subsection
(a) of this Code section is not entitled to payment for his shares under this
article.
14-2-1322. Dissenters' notice.
(a) If proposed corporate action creating dissenters' rights under Code Section
14-2-1302 is authorized at a shareholders' meeting, the corporation shall
deliver a written dissenters' notice to all shareholders who satisfied the
requirements of Code Section 14-2-1321.
(b) The dissenters' notice must be sent no later than ten days after the
corporate action was taken and must:
I-3
(1) State where the payment demand must be sent and where and when certificates
for certificated shares must be deposited;
(2) Inform holders of uncertificated shares to what extent transfer of the
shares will be restricted after the payment demand is received;
(3) Set a date by which the corporation must receive the payment demand, which
date may not be fewer than 30 nor more than 60 days after the date the notice
required in subsection (a) of this Code section is delivered; and
(4) Be accompanied by a copy of this article.
14-2-1323. Duty to demand payment.
(a) A record shareholder sent a dissenters' notice described in Code Section
14-2-1322 must demand payment and deposit his certificates in accordance with
the terms of the notice.
(b) A record shareholder who demands payment and deposits his shares under
subsection (a) of this Code section retains all other rights of a shareholder
until these rights are canceled or modified by the taking of the proposed
corporate action.
(c) A record shareholder who does not demand payment or deposit his share
certificates where required, each by the date set in the dissenters' notice, is
not entitled to payment for his shares under this article.
14-2-1324. Share restrictions.
(a) The corporation may restrict the transfer of uncertificated shares from the
date the demand for their payment is received until the proposed corporate
action is taken or the restrictions released under Code Section 14-2-1326.
(b) The person for whom dissenters' rights are asserted as to uncertificated
shares retains all other rights of a shareholder until these rights are canceled
or modified by the taking of the proposed corporate action.
14-2-1325. Offer of payment.
(a) Except as provided in Code Section 14-2-1327, within ten days of the later
of the date the proposed corporate action is taken or receipt of a payment
demand, the corporation shall by notice to each dissenter who complied with Code
Section 14-2-1323 offer to pay to such dissenter the amount the corporation
estimates to be the fair value of his or her shares, plus accrued interest.
(b) The offer of payment must be accompanied by:
(1) The corporation's balance sheet as of the end of a fiscal year ending not
more than 16 months before the date of payment, an income statement for that
year, a statement of changes in shareholders' equity for that year, and the
latest available interim financial statements, if any;
(2) A statement of the corporation's estimate of the fair value of the shares;
(3) An explanation of how the interest was calculated;
I-4
(4) A statement of the dissenter's right to demand payment under Code Section
14-2-1327; and
(5) A copy of this article.
(c) If the shareholder accepts the corporation's offer by written notice to the
corporation within 30 days after the corporation's offer or is deemed to have
accepted such offer by failure to respond within said 30 days, payment for his
or her shares shall be made within 60 days after the making of the offer or the
taking of the proposed corporate action, whichever is later.
14-2-1326. Failure to take action.
(a) If the corporation does not take the proposed action within 60 days after
the date set for demanding payment and depositing share certificates, the
corporation shall return the deposited certificates and release the transfer
restrictions imposed on uncertificated shares.
(b) If, after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it must send a new
dissenters' notice under Code Section 14-2-1322 and repeat the payment demand
procedure.
14-2-1327. Procedure if shareholder dissatisfied with payment or offer.
(a) A dissenter may notify the corporation in writing of his own estimate of the
fair value of his shares and amount of interest due, and demand payment of his
estimate of the fair value of his shares and interest due, if:
(1) The dissenter believes that the amount offered under Code Section 14-2-1325
is less than the fair value of his shares or that the interest due is
incorrectly calculated; or
(2) The corporation, having failed to take the proposed action, does not return
the deposited certificates or release the transfer restrictions imposed on
uncertificated shares within 60 days after the date set for demanding payment.
(b) A dissenter waives his or her right to demand payment under this Code
section and is deemed to have accepted the corporation's offer unless he or she
notifies the corporation of his or her demand in writing under subsection (a) of
this Code section within 30 days after the corporation offered payment for his
or her shares, as provided in Code Section 14-2-1325.
(c) If the corporation does not offer payment within the time set forth in
subsection (a) of Code Section 14-2-1325:
(1) The shareholder may demand the information required under subsection (b) of
Code Section 14-2-1325, and the corporation shall provide the information to the
shareholder within ten days after receipt of a written demand for the
information; and
(2) The shareholder may at any time, subject to the limitations period of Code
Section 14-2-1332, notify the corporation of his own estimate of the fair value
of his shares and the amount of interest due and demand payment of his estimate
of the fair value of his shares and interest due.
I-5
PART 3
JUDICIAL APPRAISAL OF SHARES
14-2-1330. Court action.
(a) If a demand for payment under Code Section 14-2-1327 remains unsettled, the
corporation shall commence a proceeding within 60 days after receiving the
payment demand and petition the court to determine the fair value of the shares
and accrued interest. If the corporation does not commence the proceeding within
the 60 day period, it shall pay each dissenter whose demand remains unsettled
the amount demanded.
(b) The corporation shall commence the proceeding, which shall be a nonjury
equitable valuation proceeding, in the superior court of the county where a
corporation's registered office is located. If the surviving corporation is a
foreign corporation without a registered office in this state, it shall commence
the proceeding in the county in this state where the registered office of the
domestic corporation merged with or whose shares were acquired by the foreign
corporation was located.
(c) The corporation shall make all dissenters, whether or not residents of this
state, whose demands remain unsettled parties to the proceeding, which shall
have the effect of an action quasi in rem against their shares. The corporation
shall serve a copy of the petition in the proceeding upon each dissenting
shareholder who is a resident of this state in the manner provided by law for
the service of a summons and complaint, and upon each nonresident dissenting
shareholder either by registered or certified mail or statutory overnight
delivery or by publication, or in any other manner permitted by law.
(d) The jurisdiction of the court in which the proceeding is commenced under (b)
of this Code section is plenary and exclusive. The court may appoint one or more
persons as appraisers to receive evidence and recommend decision on the question
of fair value. The appraisers have the powers described in the order appointing
them or in any amendment to it. Except as otherwise provided in this chapter,
Chapter 11 of Title 9, known as the "Georgia Civil Practice Act," applies to any
proceeding with respect to dissenters' rights under this chapter.
(e) Each dissenter made a party to the proceeding is entitled to judgment for
the amount which the court finds to be the fair value of his shares, plus
interest to the date of judgment.
14-2-1331. Court costs and counsel fees.
(a) The court in an appraisal proceeding commenced under Code Section 14-2-1330
shall determine all costs of the proceeding, including the reasonable
compensation and expenses of appraisers appointed by the court, but not
including fees and expenses of attorneys and experts for the respective parties.
The court shall assess the costs against the corporation, except that the court
may assess the costs against all or some of the dissenters, in amounts the court
finds equitable, to the extent the court finds the dissenters acted arbitrarily,
vexatiously, or not in good faith in demanding payment under Code Section 14-2-
1327.
(b) The court may also assess the fees and expenses of attorneys and experts for
the respective parties, in amounts the court finds equitable:
(1) Against the corporation and in favor of any or all dissenters if the court
finds the corporation did not substantially comply with the requirements of Code
Sections 14-2-1320 through 14-2-1327; or
I-6
(2) Against either the corporation or a dissenter, in favor of any other party,
if the court finds that the party against whom the fees and expenses are
assessed acted arbitrarily, vexatiously, or not in good faith with respect to
the rights provided by this article.
(c) If the court finds that the services of attorneys for any dissenter were of
substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the corporation, the court may
award to these attorneys reasonable fees to be paid out of the amounts awarded
the dissenters who were benefited.
14-2-1332. Limitation of actions.
No action by any dissenter to enforce dissenters' rights shall be brought more
than three years after the corporate action was taken, regardless of whether
notice of the corporate action and of the right to dissent was given by the
corporation in compliance with the provisions of Code Section 14-2-1320 and Code
Section 14-2-1322.
I-7
ANNEX J
Second Amendment to the Agreement and
Plan of Merger by and Among Halis, Inc.,
HealthWatch Merger Sub, Inc. and HealthWatch, Inc.
dated as of January 31, 2001
SECOND AMENDMENT TO THE
AGREEMENT AND PLAN OF MERGER BY AND AMONG, HALIS, INC.,
HEALTHWATCH MERGER SUB, INC. AND HEALTHWATCH, INC.
This SECOND AMENDMENT TO THE AGREEMENT AND PLAN OF MERGER BY AND AMONG,
HALIS, INC., HEALTHWATCH MERGER SUB, INC. AND HEALTHWATCH, INC. ("Amendment"),
dated as of January 31, 2001 is made and entered into by and among (i) Halis,
Inc. ("Halis"), a Georgia corporation, (ii) HealthWatch Merger Sub, Inc.("Merger
Sub"), a Georgia Corporation and (iii) HealthWatch, Inc. ("HealthWatch"), a
Minnesota corporation.
WHEREAS, Halis, Merger Sub and HealthWatch have entered into that certain
Agreement and Plan of Merger dated as of June 29, 2000, as amended by the
parties on September 29, 2000 (the "Agreement"), in which HealthWatch will
acquire Halis upon the merger of Halis with and into Merger Sub, a wholly-owned
subsidiary of HealthWatch, upon the terms and conditions included in the
Agreement; and
WHEREAS, the parties desire to extend the date provided in Section 7.1(b)
and Section 5.1(d) of the Agreement to allow the additional time required to
satisfy the conditions to closing the merger.
THEREFORE, for good and valuable consideration, the receipt and sufficiency
of which hereby are acknowledged, the parties, intending to be legally bound, do
hereby agree as follows:
1. Section 7.1(b) of the Agreement shall be deleted in its entirety and
replaced with the following:
"(b) by either the Board of Directors of Halis or the Board of Directors of
HealthWatch: (i) if the Merger shall not have been consummated by March 31,
2001, unless such termination right has been expressly restricted in
writing by the Board of Directors of Halis or HealthWatch, as the case may
be; provided, however, that the right to terminate this Agreement pursuant
to this Section 7.1(b)(i) shall not be available to any party whose failure
to perform any of its obligations under this Agreement results in the
failure of the Merger to be consummated by such time; (ii) if the
HealthWatch Stockholder Approval shall not have been obtained at a
HealthWatch Stockholders' Meeting duly convened therefor or at any
adjournment or postponement thereof; (iii) if the Halis Stockholder
Approval shall not have been obtained at a Halis Stockholders' Meeting duly
convened therefor or at any adjournment or postponement thereof; (iv) if
any Restraint having any of the effects set forth in Section 6.1(d) shall
be in effect and shall have become final and nonappealable, or if any
Governmental Entity that must grant a Requisite Regulatory Approval has
denied approval of the Merger and such denial has become final and
nonappealable; provided, that the party seeking to terminate this Agreement
pursuant to this Section 7.1(b)(iv) shall have used commercially reasonable
efforts to prevent the entry of and to remove such Restraint or to obtain
such Requisite Regulatory Approval, as the case may be; or (v) if the
financial advisor opinion required by Section 6.1(g) or (h) is not received
because the advisor indicates that it does not deem the transaction fair as
stated in such Sections."
2. Section 5.1(d) of the Agreement shall be deleted in its entirety and
replaced with the following:
"(d) Halis and HealthWatch will use commercially reasonable efforts to hold
the HealthWatch Stockholders' Meeting and the Halis Stockholders' Meeting
on the same date and as soon as reasonably practicable after the date
hereof, but not later than March 31, 2001."
3. Except as modified by this Amendment, all terms and conditions of the
Agreement are hereby reaffirmed.
[the remainder of this page intentionally left blank]
J-2
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the
effective date mentioned above.
HALIS, INC.
By: /s/ Joel Greenspan
-------------------------------------
Its: Member of Board of Directors
------------------------------------
Attest: /s/ Marilyn May
---------------------------------
Its: Asst. Secretary
------------------------------------
[CORPORATE SEAL]
HEALTHWATCH, INC.
By: /s/ Thomas Ridenour
-------------------------------------
Its: Chief Financial Officer
------------------------------------
Attest: /s/ Marilyn May
---------------------------------
Its: Asst. Secretary
------------------------------------
[CORPORATE SEAL]
HEALTHWATCH MERGER SUB, INC.
By: /s/ Paul W. Harrison
-------------------------------------
Its: President
------------------------------------
Attest: /s/ Marilyn May
---------------------------------
Its: Asst. Secretary
------------------------------------
[CORPORATE SEAL]
J-3
ANNEX K
Third Amendment to the Agreement and
Plan of Merger by and Among Halis, Inc.,
HealthWatch Merger Sub, Inc. and HealthWatch, Inc.
dated as of January 16, 2001
THIRD AMENDMENT TO THE
----------------------
AGREEMENT AND PLAN OF MERGER BY AND AMONG, HALIS, INC., HEALTHWATCH MERGER
--------------------------------------------------------------------------
SUB, INC. AND HEALTHWATCH, INC.
-------------------------------
This THIRD AMENDMENT TO THE AGREEMENT AND PLAN OF MERGER BY AND AMONG,
HALIS, INC., HEALTHWATCH MERGER SUB, INC. AND HEALTHWATCH, INC. ("Amendment"),
dated as of February 16, 2001 is made and entered into by and among (i) Halis,
Inc. ("Halis"), a Georgia corporation, (ii) HealthWatch Merger Sub, Inc.("Merger
Sub"), a Georgia Corporation and (iii) HealthWatch, Inc. ("HealthWatch"), a
Minnesota corporation.
WHEREAS, Halis, Merger Sub and HealthWatch have entered into that certain
Agreement and Plan of Merger dated as of June 29, 2000, as amended by the
parties on September 29, 2000 and January 31, 2001 (the "Agreement"), in which
HealthWatch will acquire Halis upon the merger of Halis with and into Merger
Sub, a wholly-owned subsidiary of HealthWatch, upon the terms and conditions
included in the Agreement; and
WHEREAS, the parties desire to extend the lock-up period provided in
Section 5.13 of the Agreement to allow the parties the benefits of the lock-up
provision as contemplated by the parties when the Agreement was first executed
on June 29, 2000.
THEREFORE, for good and valuable consideration, the receipt and sufficiency
of which hereby are acknowledged, the parties, intending to be legally bound, do
hereby agree as follows:
1. Section 5.13 of the Agreement shall be deleted in its entirety and
replaced with the following:
"SECTION 5.13 LOCK-UP. Substantial Halis Stockholders (defined as
directors, officers and Halis Shareholders owning 5% or more of Halis
Common Stock) and Affiliates will be required to agree not to sell,
transfer or otherwise dispose of any HealthWatch Common Stock prior to
December 31, 2001 (the "Lockup Period"); if HealthWatch undertakes a public
offering within the Lockup Period, Halis Stockholders shall agree not to
sell, transfer or otherwise dispose of the HealthWatch Common Stock for
such period of time after completion of such public offering (not to exceed
one year). In addition, Halis shall use its best efforts to obtain similar
lock-up agreements from other Halis Shareholders that the parties shall
reasonably determine to be in the best interest of all of the parties in
carrying out the transactions contemplated by this Agreement.
2. Except as modified by this Amendment, all terms and conditions of the
Agreement are hereby reaffirmed.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the
effective date mentioned above.
HALIS, INC.
By: /s/ Joel Greenspan
------------------------------
Its: Director
------------------------------
Attest: /s/ Marilyn May
---------------------------
Its: Asst. Secretary
------------------------------
[CORPORATE SEAL]
HEALTHWATCH, INC.
HEALTHWATCH MERGER SUB, INC.
By: /s/ Thomas C. Riderour
-----------------------------
Its: Chief Financial Officer
-----------------------------
Attest: /s/ Marilyn May
--------------------------
Its: Asst. Secretary
-----------------------------
[CORPORATE SEAL]
By: /s/ Paul W. Harrison
------------------------------
Its: President
------------------------------
Attest: /s/ Marilyn May
---------------------------
Its: Asst. Secretary
------------------------------
[CORPORATE SEAL]
2
ANNEX L
Fairness Opinion of Houlihan Lokey
[Letterhead of Houlihan Lokey Howard & Zukin financial Advisors, Inc.]
February 3, 2001
Special Committee of the Board of Directors
HealthWatch, Inc.
1100 Johnson Ferry Road
Suite 670
Atlanta, GA 30342
To the Special Committee of the Board of Directors:
We understand that HealthWatch, Inc. (the "Company") has entered into an
Agreement and Plan of Merger (the "Merger Agreement") to acquire the remaining
75% of Halis, Inc. ("Halis") not currently owned by the Company in a stock
transaction. As of December 31, 2000, the Company was the single largest
shareholder, owning approximately 25 percent of the outstanding common stock of
Halis. Such transaction and other related transactions disclosed to Houlihan
Lokey are referred to collectively herein as the "Transaction." It is our
understanding that the Company has formed a special committee (the "Committee")
to consider certain matters relating to the Transaction. The Committee has
requested that Houlihan Lokey render an opinion as to the fairness, from a
financial point of view, to the public stockholders of the Company of the
acquisition of Halis.
You have requested our opinion (the "Opinion") as to the matters set forth
below. The Opinion does not address the Company's underlying business decision
to effect the Transaction. We have not been requested to, and did not, solicit
third party indications of interest in acquiring all or any part of the Company.
Furthermore, at your request, we have not negotiated the Transaction or advised
you with respect to alternatives to it. A number of the terms of the
Transaction have not been finalized as of the date of our opinion. Our Opinion
is based on the terms of the Transaction as contemplated as of the date of our
opinion. If there are any changes in the terms of the Transaction between the
date of our Opinion and the consummation of the Transaction, it could have a
material impact on the conclusions reached herein.
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
. reviewed HealthWatch's SEC Forms 10-KSB and audited financial
statements for the fiscal years ended June 30, 1998 through 2000, and
Forms 10-Q and unaudited interim financial statements for the periods
ending September 30, 1999 and 2000, which HealthWatch management has
identified as the most recent financial statements available;
. reviewed HealthWatch's preliminary SEC Form S-4 Registration Statement
filing dated December 29, 2000;
. reviewed HealthWatch's SEC Schedule 14A Preliminary Proxy Statement
dated May 9, 2000;
. reviewed Halis's SEC Form 10-KSB and audited financial statements for
the fiscal years ended December 30, 1998 and 1999, and Forms 10-Q and
unaudited interim financial statements for the periods ending
September 30, 1999 and 2000, which HealthWatch management has
identified as the most recent financial statements available;
. reviewed copies of the following documents: Letter of Intent from
HealthWatch, Inc. to the Board of Directors of Halis, Inc., dated
March 8, 2000, and Agreement and Plan of Merger By and Among Halis,
Inc., HealthWatch Merger Sub, Inc. and HealthWatch, Inc. dated June
29, 2000;
. reviewed a Draft Confidential Private Placement Memorandum for
HealthWatch, Inc. dated March 8, 2000;
. reviewed certain other agreements and contracts of HealthWatch and
Halis (the "Companies") including the Business Collaboration Agreement
and Amendment dated September 20, 2000;
. reviewed minutes of the HealthWatch, Inc. Board of Directors meetings
for 1999 and 2000;
. met with certain members of the senior management of HealthWatch and
Halis to discuss the information regarding operations, financial
condition and the Transaction;
. visited the business offices of HealthWatch and Halis;
. reviewed certain publicly available financial data for certain
companies that we deem comparable to the Company and Halis including
prices and premiums paid in other transactions that Houlihan Lokey
considered similar to the transaction; and
. conducted such other studies, analyses and inquiries as we have deemed
appropriate.
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably prepared
and reflect the best currently available estimates of the future financial
results and condition of the Company, and that there has been no material change
in the assets, financial condition, business or prospects of the Company since
the date of the most recent financial statements made available to us.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to the Company and do not assume any
responsibility with respect to it. We have not made any physical inspection or
independent appraisal of any of the properties or assets of the Company. Our
opinion is necessarily based on business, economic, market and other conditions
as they exist and can be evaluated by us at the date of this letter.
Based upon the foregoing, and in reliance thereon, it is our opinion that the
Transaction is fair to the Public Stockholders of the Company from a financial
point of view.
/s/ HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
Annex M
Fourth Amendment to the
Agreement and Plan of Merger by and Among, Halis, Inc.,
Healthwatch Merger Sub. Inc. and Healthwatch, Inc.
FOURTH AMENDMENT TO THE
-----------------------
AGREEMENT AND PLAN OF MERGER BY AND AMONG, HALIS, INC.,
--------------------------------------------------------
HEALTHWATCH MERGER SUB, INC. AND HEALTHWATCH, INC.
-------------------------------------------------
This FOURTH AMENDMENT TO THE AGREEMENT AND PLAN OF MERGER BY AND AMONG,
HALIS, INC., HEALTHWATCH MERGER SUB, INC. AND HEALTHWATCH, INC. ("Amendment"),
dated as of March 28, 2001 is made and entered into by and among (i) Halis, Inc.
("Halis"), a Georgia corporation, (ii) HealthWatch Merger Sub, Inc.("Merger
Sub"), a Georgia Corporation and (iii) HealthWatch, Inc. ("HealthWatch"), a
Minnesota corporation.
WHEREAS, Halis, Merger Sub and HealthWatch have entered into that certain
Agreement and Plan of Merger dated as of June 29, 2000, as amended by the
parties on September 29, 2000, January 31, 2001 and February 16, 2001 (the
"Agreement") in which HealthWatch will acquire Halis upon the merger of Halis
with and into Merger Sub, a wholly-owned subsidiary of HealthWatch, upon the
terms and conditions included in the Agreement; and
WHEREAS, the parties desire to extend the date provided in Section 7.1(b)
and Section 5.1(d) of the Agreement to allow the additional time required to
satisfy the conditions to closing the merger.
THEREFORE, for good and valuable consideration, the receipt and sufficiency
of which hereby are acknowledged, the parties, intending to be legally bound, do
hereby agree as follows:
1. Section 7.1(b) of the Agreement shall be deleted in its entirety and
replaced with the following:
"(b) by either the Board of Directors of Halis or the Board of Directors of
HealthWatch: (i) if the Merger shall not have been consummated by April 30,
2001, unless such termination right has been expressly restricted in
writing by the Board of Directors of Halis or HealthWatch, as the case may
be; provided, however, that the right to terminate this Agreement pursuant
to this Section 7.1(b)(i) shall not be available to any party whose failure
to perform any of its obligations under this Agreement results in the
failure of the Merger to be consummated by such time; (ii) if the
HealthWatch Stockholder Approval shall not have been obtained at a
HealthWatch Stockholders' Meeting duly convened therefor or at any
adjournment or postponement thereof; (iii) if the Halis Stockholder
Approval shall not have been obtained at a Halis Stockholders' Meeting duly
convened therefor or at any adjournment or postponement thereof; (iv) if
any Restraint having any of the effects set forth in Section 6.1(d) shall
be in effect and shall have become final and nonappealable, or if any
Governmental Entity that must grant a Requisite Regulatory Approval has
denied approval of the Merger and such denial has become final and
nonappealable; provided, that the party
seeking to terminate this Agreement pursuant to this Section 7.1(b)(iv)
shall have used commercially reasonable efforts to prevent the entry of and
to remove such Restraint or to obtain such Requisite Regulatory Approval,
as the case may be; or (v) if the financial advisor opinion required by
Section 6.1(g) or (h) is not received because the advisor indicates that it
does not deem the transaction fair as stated in such Sections."
2. Section 5.1(d) of the Agreement shall be deleted in its entirety and
replaced with the following:
"(d) Halis and HealthWatch will use commercially reasonable efforts to hold
the HealthWatch Stockholders' Meeting and the Halis Stockholders' Meeting on the
same date and as soon as reasonably practicable after the date hereof, but not
later than April 30, 2001."
3. Except as modified by this Amendment, all terms and conditions of the
Agreement are hereby reaffirmed.
[the remainder of this page intentionally left blank]
M-2
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the
effective date mentioned above.
HALIS, INC.
By: /s/ Joel Greenspan
Its: Director
Attest: /s/ Marilyn May
Its: Vice President
[CORPORATE SEAL]
HEALTHWATCH, INC.
By: /s/ Thomas C. Ridenour
Its: Chief Financial Officer
Attest: /s/ Marilyn May
Its: Vice President
[CORPORATE SEAL]
HEALTHWATCH MERGER SUB, INC.
By: Paul W. Harrison
Its: Chief Executive Officer
Attest: /s/ Marilyn May
Its: Vice President
[CORPORATE SEAL]
M-3
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
The Minnesota Business Corporation Act (the "MCBA") permits a corporation's
board of directors to grant indemnification to directors and officers in terms
sufficiently broad to permit such indemnification under certain circumstances
for liabilities (including reimbursement for expenses incurred) arising under
the Securities Act of 1933. HealthWatch's Articles of Incorporation provide for
indemnification of its directors, officers and employees to the maximum extent
permitted by the MCBA. In addition, HealthWatch's Articles of Incorporation
provide that if the MCBA is amended to permit further elimination or limitation
of liabilities, then the liability of a director or officer of HealthWatch
shall be indemnified to the fullest extend authorized under the MCBA.
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits
Exhibit
No. Description
------- -----------
2.1 Agreement and Plan of Merger by and among Halis, Inc., HealthWatch
Merger Sub, Inc. and HealthWatch, Inc. dated as of June 29, 2000
(1).
2.2 Amendment to the Agreement and Plan of Merger dated as of
September 29, 2000 (2).
2.3 Letter of Intent between HealthWatch, Inc. and Halis, Inc. dated
March 8, 2000 (3).
2.4 Amendment to the Financing Option between HealthWatch, Inc. and
Halis, Inc. dated July 28, 2000 (3).
2.5 Second Amendment to the Agreement and Plan of Merger dated as of
January 31, 2001 (10).
2.6 Third Amendment to the Agreement and Plan of Merger dated as of
February 16, 2001 (11).
2.7 Fourth Amendment to the Agreement and Plan of Merger dated as of
March 28, 2001 (13).
3.1 Articles of Incorporation of HealthWatch, Inc., dated June 10,
1983 (3).
3.2 Certificate of Amendment of Articles of Incorporation of
HealthWatch, Inc., dated October 20, 1987 (3).
3.3 Articles of Amendment of Articles of Incorporation of HealthWatch,
Inc., dated December 5, 1989 (3).
3.4 Articles of Amendment of Articles of Incorporation of HealthWatch,
Inc., dated December 8, 1999 (3).
3.5 Bylaws of HealthWatch, Inc. (3).
3.6 Articles of Incorporation of Halis, Inc., dated November 15, 1982
(3).
3.7 Articles of Amendment to the Articles of Incorporation of Halis,
Inc., dated May 14, 1987 (3).
3.8 Articles of Amendment to the Articles of Incorporation of Halis,
Inc., dated November 18, 1996 (3).
3.9 Articles of Amendment to the Articles of Incorporation of Halis,
Inc., dated November 18, 1996 (3).
3.10 Bylaws of Halis, Inc., adopted August 5, 1997 (3).
3.11 Articles of Incorporation of HealthWatch Merger Sub, Inc. (3).
3.12 Bylaws of HealthWatch Merger Sub, Inc. (3).
II-1
Exhibit
No. Description
------- -----------
3.13 Certification of Designation, Preferences, Rights and Limitations
of the 6% Series A Convertible Preferred Stock of HealthWatch,
Inc., dated June 9, 1998 (3).
3.14 Amended and Restated Certification of Designation, Preferences,
Rights and Limitations of the Series P Preferred Stock of
HealthWatch, Inc., dated March 22, 2000 (4).
3.15 Certification of Designation, Preferences, Rights and Limitations
of the Series C 8% Convertible Preferred Stock of HealthWatch,
Inc., dated March 20, 2000 (5).
3.16 Certification of Designation, Preferences, Rights and Limitations
of the Series D 8% Convertible Preferred Stock of HealthWatch,
Inc., dated March 20, 2000 (6).
5.1 Opinion of Gambrell & Stolz, L.L.P. (3).
8.1 Tax Opinion of Gambrell & Stolz, L.L.P. (3).
8.2 Tax Opinion of Gomel & Davis, L.L.P. (3).
10.1 Business Collaboration Agreement dated as of October 10, 1997
between HealthWatch, Inc. and Halis, Inc. (3).
10.6 Form of Warrant Certificate of HealthWatch, Inc. (7).
10.8 Amended and Restated Agency Agreement between Commonwealth
Associates, L.P. and HealthWatch, Inc., dated February 7, 2000
(3).
10.9 HealthWatch, Inc. 2000 Stock Option Plan, adopted as of May 8,
2000, approved by HealthWatch stockholders on July 14, 2000 (3).
10.10 Form of Stock Option Agreement (8).
10.11 Amendment to the Business Collaboration Agreement dated September
20, 2000 between Halis, Inc. and HealthWatch, Inc. (3).
10.12 Finders Agreement between HealthWatch, Inc. and Commonwealth
Associates, L.P., dated March 21, 2000 (3).
16.1 Letter from Silverman Olson Thorvilson & Kaufman, LTD re change in
accountants (3).
16.2 Letter from Arthur Andersen, LLP re change in accountants (3).
21.1 Subsidiaries of HealthWatch, Inc. (3).
21.2 Subsidiaries of Halis, Inc. (3).
23.1 Consent of Tauber & Balser, Independent Auditors (with respect to
HealthWatch, Inc. and Subsidiaries Financial Statements) (3).
23.2 Consent of Tauber & Balser, Independent Auditors (with respect to
Halis, Inc. and Subsidiaries Financial Statements) (3).
23.5 Consent of New York Capital Corporation (3).
23.6 Consent of Houlihan Lokey Howard & Zukin Financial Advisors, Inc.
(3).
27.1 Financial Data Schedule (EDGAR filing only) (3).
99.1 Opinion of New York Capital Corporation (9).
99.2 Proxy Card for HealthWatch Special Meeting of Stockholders (3).
99.3 Proxy Card for Halis Special Meeting of Stockholders (3).
99.4 Opinion of Houlihan Lokey Howard & Zukin Financial Advisors, Inc.
(12).
--------
(1) Included as Annex A to the joint proxy statement/prospectus included as
part of this Registration Statement.
II-2
(2) Included as Annex B to the joint proxy statement/prospectus included as
part of this Registration Statement.
(3) Filed herewith.
(4) Included as Annex H to the joint proxy statement/prospectus included as
part of this Registration Statement.
(5) Included as Annex E to the joint proxy statement/prospectus included as
part of this Registration Statement.
(6) Included as Annex F to the joint proxy statement/prospectus included as
part of this Registration Statement.
(7) Included as Annex G to the joint proxy statement/prospectus included as
part of this Registration Statement.
(8) Included as Annex C to the joint proxy statement/prospectus included as
part of this Registration Statement.
(9) Included as Annex D to the joint proxy statement/prospectus included as
part of this Registration Statement.
(10) Included as Annex J to the joint proxy statement/prospectus included as
part of this Registration Statement.
(11) Included as Annex K to the joint proxy statement/prospectus included as
part of this Registration Statement.
(12) Included as Annex L to the joint proxy statement/prospectus included as
part of this Registration Statement.
(13) Included as Annex M to the joint proxy statement/prospectus included as
part of this Registration Statement.
(b) Financial Statement Schedules
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements, management's discussion and analysis or notes thereto.
(c) Reports, Opinions and Appraisals
The opinion of New York Capital Corporation (attached as Annex D to the
joint proxy statement/prospectus filed as part of this Registration Statement)
and the opinion of Houlihan Lokey Howard & Zukin Financial Advisors, Inc.
(attached as Annex L to the joint proxy statement/prospectus filed as part of
this Registration Statement).
Item 22. Undertakings
(1) Insofar as the indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(2) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 4 to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, on
the 9th day of April, 2001.
HEALTHWATCH, INC.
/s/ Paul W. Harrison
By: _________________________________
Paul W. Harrison, Chairman,
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 4 to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated:
Signature Capacity Date
--------- -------- ----
/s/ Paul W. Harrison Chairman, President and April 9, 2001
____________________________________ Chief Executive Officer
Paul W. Harrison
/s/ David M. Engert Chief Operating Officer and April 9, 2001
____________________________________ Director
David M. Engert
/s/ Thomas C. Ridenour Chief Financial Officer April 9, 2001
____________________________________
Thomas C. Ridenour
* Director April 9, 2001
____________________________________
John Gruber
* Director April 9, 2001
____________________________________
Harold Blue
* Director April 9, 2001
____________________________________
Robert Tucker
Director April 9, 2001
____________________________________
John R. Prufeta
/s/ Paul W. Harrison
*By: __________________________
Paul W. Harrison
Attorney-in-fact
II-4
Exhibit Index
Exhibit
No. Description
------- -----------
2.1 Agreement and Plan of Merger by and among Halis, Inc., HealthWatch
Merger Sub, Inc. and HealthWatch, Inc. dated as of June 29, 2000 (1).
2.2 Amendment to the Agreement and Plan of Merger dated as of September
29, 2000 (2).
2.3 Letter of Intent between HealthWatch, Inc. and Halis, Inc. dated
March 8, 2000 (3).
2.4 Amendment to the Financing Option between HealthWatch, Inc. and
Halis, Inc. dated July 28, 2000 (3).
2.5 Second Amendment to the Agreement and Plan of Merger dated as of
January 31, 2001 (10).
2.6 Third Amendment to the Agreement and Plan of Merger dated as of
February 16, 2001 (11).
2.7 Fourth Amendment to the Agreement and Plan of Merger dated as of
March 28, 2001 (13).
3.1 Articles of Incorporation of HealthWatch, Inc., dated June 10, 1983
(3).
3.2 Certificate of Amendment of Articles of Incorporation of HealthWatch,
Inc., dated October 20, 1987 (3).
3.3 Articles of Amendment of Articles of Incorporation of HealthWatch,
Inc., dated December 5, 1989 (3).
3.4 Articles of Amendment of Articles of Incorporation of HealthWatch,
Inc., dated December 8, 1999 (3).
3.5 Bylaws of HealthWatch, Inc. (3).
3.6 Articles of Incorporation of Halis, Inc., dated November 15, 1982
(3).
3.7 Articles of Amendment to the Articles of Incorporation of Halis,
Inc., dated May 14, 1987 (3).
3.8 Articles of Amendment to the Articles of Incorporation of Halis,
Inc., dated November 18, 1996 (3).
3.9 Articles of Amendment to the Articles of Incorporation of Halis,
Inc., dated November 18, 1996 (3).
3.10 Bylaws of Halis, Inc., adopted August 5, 1997 (3).
3.11 Articles of Incorporation of HealthWatch Merger Sub, Inc. (3).
3.12 Bylaws of HealthWatch Merger Sub, Inc. (3).
3.13 Certification of Designation, Preferences, Rights and Limitations of
the 6% Series A Convertible Preferred Stock of HealthWatch, Inc.,
dated June 9, 1998 (3).
3.14 Amended and Restated Certification of Designation, Preferences,
Rights and Limitations of the Series P Preferred Stock of
HealthWatch, Inc., dated March 22, 2000 (4).
3.15 Certification of Designation, Preferences, Rights and Limitations of
the Series C 8% Convertible Preferred Stock of HealthWatch, Inc.,
dated March 20, 2000 (5).
3.16 Certification of Designation, Preferences, Rights and Limitations of
the Series D 8% Convertible Preferred Stock of HealthWatch, Inc.,
dated March 20, 2000 (6).
5.1 Opinion of Gambrell & Stolz, L.L.P. (3).
8.1 Tax Opinion of Gambrell & Stolz, L.L.P. (3).
8.2 Tax Opinion of Gomel & Davis, L.L.P. (3).
10.1 Business Collaboration Agreement dated as of October 10, 1997 between
HealthWatch, Inc. and Halis, Inc. (3).
10.6 Form of Warrant Certificate of HealthWatch, Inc. (7).
10.8 Amended and Restated Agency Agreement between Commonwealth
Associates, L.P. and HealthWatch, Inc., dated February 7, 2000 (3).
Exhibit
No. Description
------- -----------
10.9 HealthWatch, Inc. 2000 Stock Option Plan, adopted as of May 8, 2000,
approved by HealthWatch stockholders on July 14, 2000 (3).
10.10 Form of Stock Option Agreement (8).
10.11 Amendment to the Business Collaboration Agreement dated September 20,
2000 between Halis, Inc. and HealthWatch, Inc. (3).
10.12 Finders Agreement between HealthWatch, Inc. and Commonwealth
Associates, L.P., dated March 21, 2000 (3).
16.1 Letter from Silverman Olson Thorvilson & Kaufman, LTD re change in
accounts (3).
16.2 Letter from Arthur Andersen, LLP re change in accountants (3).
21.1 Subsidiaries of HealthWatch, Inc. (3).
21.2 Subsidiaries of Halis, Inc. (3).
23.1 Consent of Tauber & Balser, Independent Auditors (with respect to
HealthWatch, Inc. and Subsidiaries Financial Statements) (3).
23.2 Consent of Tauber & Balser, Independent Auditors (with respect to
Halis, Inc. and Subsidiaries Financial Statements) (3).
23.5 Consent of New York Capital Corporation (3).
23.6 Consent of Houlihan Lokey Howard & Zukin Financial Advisors, Inc.
(3).
27.1 Financial Data Schedule (EDGAR filing only) (3).
99.1 Opinion of New York Capital Corporation (9).
99.2 Proxy Card for HealthWatch Special Meeting of Stockholders (3).
99.3 Proxy Card for Halis Special Meeting of Stockholders (3).
99.4 Opinion of Houlihan Lokey Howard & Zukin Financial Advisors, Inc.
(12).
--------
(1) Included as Annex A to the joint proxy statement/prospectus included as
part of this Registration Statement.
(2) Included as Annex B to the joint proxy statement/prospectus included as
part of this Registration Statement.
(3) Filed herewith.
(4) Included as Annex H to the joint proxy statement/prospectus included as
part of this Registration Statement.
(5) Included as Annex E to the joint proxy statement/prospectus included as
part of this Registration Statement.
(6) Included as Annex F to the joint proxy statement/prospectus included as
part of this Registration Statement.
(7) Included as Annex G to the joint proxy statement/prospectus included as
part of this Registration Statement.
(8) Included as Annex C to the joint proxy statement/prospectus included as
part of this Registration Statement.
(9) Included as Annex D to the joint proxy statement/prospectus included as
part of this Registration Statement.
(10) Included as Annex J to the joint proxy statement/prospectus included as
part of this Registration Statement.
(11) Included as Annex K to the joint proxy statement/prospectus included as
part of this Registration Statement.
(12) Included as Annex L to the joint proxy statement/prospectus included as
part of this Registration Statement.
(13) Included as Annex M to the joint proxy statement/prospectus included as
part of this Registration Statement.